Negotiated a much better deal with the IMF in 2019, says Younus Dagha


ISLAMABAD: While harshly criticizing various clauses of the controversial 2021 SBP Amendment Bill, former Finance Secretary Younus Dagha made a startling revelation that they had negotiated a much better deal with the IMF in Washington in February 2019, but that everything was reversed with the replacement of the entire team.

Regarding the State Bank of Pakistan (SBP) Amendment Bill 2021, he said it should remain under the control of the federal government, just like on models of other regulators such as the National Electric. Power Regulatory Authority (NEPRA) or the Oil and Gas Regulatory Authority (OGRA), however, the central bank should have functional autonomy related to the formulation of monetary policy and the management of its other affairs.

He opposed an amendment to place restrictions on federal government borrowing from the central bank and suggested that a limit be placed on central government borrowing to ensure financial discipline.

In his in-depth online interview with The News on Saturday, former Finance Secretary Younus Dagha, who is known as one of the brilliant bureaucrats, first explained how Pakistan found itself trapped for making a bad deal. agreement with the IMF and said that the then economic team negotiated a much better deal with the supported IMF in February 2019, that the Fund’s program would run smoothly over the next three years.

“The IMF was convinced to keep the interest rate at 10.5% and the exchange rate was going to be adjusted gradually, but then the whole economic team was replaced and everything reversed. Then the new economic team accepted everything that the IMF had not even asked for in the previous negotiations, ”said former bureaucrat Younus Dagha.

It is relevant to mention here that the PTI-led government replaced the entire economic team exactly as IMF staff was heading to Islamabad to finalize the $ 6 billion package in 2019. First, Asad Umar was replaced as he handed in his offer. resignation. When IMF staff were negotiating with Pakistan, then Finance Secretary Younus Dagha and former Pakistan State Bank governor Tariq Bajwa were bluntly sacked, apparently because both strongly resisted the IMF’s demands.

He said then the interest rate rose to 13.25% while the exchange rate depreciated to Rs 165 against the dollar. These two stages, he said, caused a storm of price hikes and inflation. He recalled that at one point, the exchange rate had been brought down to almost Rs 152 against the dollar, but that the damage was already done because it had caused an increase in inflationary pressures.

He pointed out some blatant conflicting goals in economic policy making and said the government introduced two bills in parliament because the SBP amending bill envisioned the central bank’s goal of controlling the economy. inflation while the 2021 Supplementary Finance Bill removed GST exemptions and increased other taxes that would fuel inflation. The goals of policy making should be clear, he argued.

Regarding the autonomy of the SBP, he said that an impartial point of view should be taken as monetary policy and financial stability require an independent central bank. He said that when the PTI came to power and the decision was made to depreciate the rupee by Rs 4 against the dollar and this correction was done independently without getting anyone’s advice. He cited another example: Recently the Minister of Finance said that the bank rate should not be increased, but the State Bank of Pakistan increased the bank rate by 1%. It shows that the SBP already enjoyed the required autonomy. These two episodes show that the SBP made its decision independently.

He said the IMF and WB demanded SBP reforms and the central bank was granted autonomy with the passage. It was not the same SBP that could be advised over the phone to set interest rates or even exchange rates. There is now a strong banking system, as the country has granted the necessary autonomy to the SBP to manage its affairs. “We did not remain static and moved towards reforms because the required autonomy was already granted to the SBP,” he added.

Focusing on different clauses of the 2021 SBP amendment bill, he said the government would not be able to design its economic policy to conduct monetary and fiscal policies in tandem. He said monetary policy would have a direct impact on our fiscal policies, as fiscal space shrinks if monetary policy tightens and interest rates rise. It eats away at Rs 100-200 billion, so fiscal space has eroded, he argued.

Almost two-thirds of total bank loans obtained by the federal government to finance its yawning budget deficit, he said and added that interest rates have been raised to keep inflation under control, but this has resulted in fact resulted in increased inflation. The SBP should be placed under the domain of government and parliament, he added.

He raised another very relevant question and said that after joining the IMF program Pakistan’s budget deficit increased, so what was the benefit of entering the Fund program. He said Pakistan was facing challenges from twin deficits including the budget deficit and current account deficit and that the country’s current account deficit had again reached a level where it started two years ago then. that the budget deficit had worsened further. “How our economy has benefited from the current IMF program. I can’t understand, “he added. The budget deficit, he said, had even reached 9% during those years.

He said all other spending, including defense, was capped while development spending was cut, but the budget deficit continued to grow because debt service swelled mainly due to the hike. discount rates.

Asked about the SBP Amending Bill’s proposal to abolish the Monetary and Fiscal Policy Coordination Board (MFPCB), he said it was a very moderate arrangement because the SBP governor was not listening usually not because he always claimed it was the domain of monetary policy. Policy Committee (MPC) and this was not the forum to make such a decision.

However, it was said at the MFPCB meeting that this was only a suggestion that should be submitted to the MPC. Whenever the MPC is briefed by the finance secretary, Dagha said, he said the MPC always makes its own decision. Sharing his own experience, he said he had always found that the MPC always remained under the control of the SBP governor and cited an example that when the IMF started or even before the Fund’s program, the interest rate was increased but no one in the MPC raised any objection to the development of the economic and fiscal situation at a time when inflation hovered around 8 to 8.5%, but the discount rate was increased to 13.25%. “The MPC should have more autonomy by removing the control of the SBP governor,” he suggested. Appointments of MPC members should be made by a third party and there should be no role of SBP management in this regard, he proposed.

He praised the SBP amendment bill 2021 according to which the SBP board and the appointment of its members were proposed as the domain of the federal government and added that the functional autonomy of the SBP should be granted but should remain under the control of the federal government. He cited examples of NEPRA and OGRA and said that NEPRA was run independently under the last government. It should be the power of the elected government to keep SBP under its control.

He said it had never been seen that the government would be unable to approach the lender of last resort as the central bank was being considered and that it would not be appropriate for the federal government not to be able to access its credit. , however, a limit should be imposed to ensure financial discipline. In the event of restrictions on federal government borrowing, he said this led to a cartelization of banks to provide funding to the government by offering higher rates on treasury bills and PIBS. Zero recourse is not a good sign and it is wrong to ban government borrowing.

When asked why the Pakistan negotiating team failed to convince the IMF of a good deal, he replied that a good negotiation can only be done when both sides have goals and different goals. Those who negotiated on our behalf had the same thoughts similar to those of the IMF, so they conceded everything the IMF demanded during the negotiations. Thus, the IMF program became a priority and the discount rate and the exchange rate were adjusted massively, which resulted in a rise in prices. Meanwhile, the exchange rate appreciated and hit Rs 152 against the dollar but inflation had already increased.

He was of the view that there should be long-term thinking in policy making as abrupt changes showed inconsistent policies. He said the government provided incentives for the GST through the Export Facilitation Program in 2021, but the 2021 Supplementary Finance Bill was withdrawn a few months later. Carried out haphazardly, this policy, as well as the IMF’s program, would be pointless, he said and concluded that coherence and sustainability are prerequisites for any good policy making.


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