Next IMF tranche


Just as feared, the IMF bailout program has hit a snag with the PM’s relief package, and the going is not nearly as smooth as the government was expecting. The Fund’s not convinced about the financing of the package all the way to the budget, for one thing, and it’s concerned about growth prospects in view of the major cut in the development budget, for another. It also wants serious guarantees that the social sector would not be hurt by the cuts, and wants specifics that the finance ministry is never big on; hence, the delay in winding up the seventh review of the Extended Fund Facility (EFF). So now, the government must present a detailed breakdown of its plan, and how it will be financed, before the next tranche of $955 will be released to the state bank.
The government’s claims notwithstanding, it’s not too difficult to understand why its homework is not complete this time. The so-called relief package was a spur-of-the-moment reaction, of sorts, from the PM in light of the (then) coming no-confidence motion. And petrol prices were cut by Rs10/litre less than a fortnight after they were raised by Rs12/litre, so there could not be much preparation for it. The finance ministry is insisting that the next tranche should be released based on end-December targets, which were met, but the Fund claims that it must still be very clear about the government’s ability to maintain economic growth as well as fiscal policies for the duration of the whole program; which makes a lot of sense from the donor’s point of view.
The way this particular bailout program has progressed so far ought to give policymakers a lot to think about. Despite depending very heavily on this aid money, the government still ignored policy requirements time and again, and even tried to stand the whole program on its head first with the expansionist fiscal policy in the budget, much of which had to be rolled back, and now with this surprise package. Every time, such initiatives have led to uncertainty and eventually more fiscal tightening. But it doesn’t seem that any lessons have been learnt so far. And while it’s likely that IMF will eventually be convinced enough to give us the next tranche, how long it will take, and at what price, remains to be seen.