Why was the IMF Tranche Delayed?

Originally appeared on The Morning

By Dhananath Fernando

There is some uncertainty in the market regarding the reasons for the delay in the IMF’s second tranche. The simple reason is that although we have made some progress, given the depth of the crisis, our speed of reforms is inadequate for a swift recovery, particularly in revenue collection.

A shortfall in revenue collection, expected to be about 15% compared to initial projections by the year end, has been cited as a key reason. Secondly, until we finalize debt restructuring, especially external debt restructuring, the risk factors remain high in achieving our desired debt-to-GDP ratio. Even after the expected debt restructuring, in 10 years, our debt-to-GDP ratio will still be above 90% according to estimates.

Thirdly, the Central Bank’s reserve collection has slowed down. Consequently, with our macroeconomic indicators sending mixed signals, it can not be assured that the economic recovery is still on the right path. Furthermore, at the press briefing held on the 27th of September IMF officials reiterated that more work needs to be done to sustain the reform momentum.

It is crucial to identify the reasons for the delay in reforms. Our framework for driving reforms is not well-established. The current structure, where the President acts in the capacity of the Minister of Finance, appoints committees, and delegates tasks, is flawed. Some tasks are interconnected, and the entire drive must come from the Finance Minister alone.

Further, these two roles can have contradictory interests. The Finance Minister holds an unpopular job, requiring revenue increases through taxation and expenditure reduction. Conversely, when the President, a politician expecting re-election, occupies the role, there’s a natural tendency to make popular decisions, deviating from essential reforms.

Our reform process is highly complicated, demanding direct involvement of the Finance Minister in debt negotiations with external creditors in several categories, namely multilateral, bilateral, and private creditors. This task alone is equivalent to a few full-time jobs. Additionally, structural reforms are expected to focus on State-Owned Enterprises, where considerable trade union influence will come into play with appointments made by fellow cabinet ministers. Thus, driving such unpopular yet critical reforms becomes nearly impossible, especially when the finance minister is also the President or vice versa. More importantly, for key appointments such as the Central Bank Monetary Board and Governance Board, the President nominates with the Minister of Finance’s approval and the Constitutional Council’s endorsement. When the President and the Finance Minister are the same, the objective of checks and balances significantly diminishes.

In the case of India’s reforms in the 1990s, it was Dr. Manmohan Singh who spearheaded reforms. He had Dr. Montek Singh Alhuwalia as the Chairman of the National Planning Committee to drive reforms. With his experience working with the IMF and a keen understanding of the Indian perspective, the reforms initiated in the 1990s continue to fuel India’s growth, making it one of the countries with the highest economic growth rate.

The IMF Governance Diagnosis report, subsequently released, provided numerous recommendations out of which approximately 16 recommendations have been prioritized, mainly focusing on governance and transparency.

One reason this column advocates moving beyond IMF reforms is that corruption cannot be curtailed solely through governance structures. The size of the government must be limited in conjunction with effective governance structures. Aligning governance structures with the vast expanse of the government is nearly impossible.

Furthermore, the IMF primarily brings stability; the responsibility for growth lies in our hands. We must unlock our growth potential through necessary reforms, extending beyond the IMF program. This underscores the urgency of accelerating comprehensive reforms and establishing a dedicated team to drive these changes. Regrettably, what we observe is mere enactment of legislation without robust mechanisms to execute and ensure continuity of the process, and this leading to delays in the IMF’s second tranche.