Biggest Ever IMF Package Likely

Reportedly Fitch Solutions in its latest report on Pakistan’s economy has revealed that Pakistan and the IMF will soon reach an agreement over a potential bailout size of about $12 billion which will be the highest loan by any Pakistani government in its history from the fund. The agency noted, “The conditions and targets will focus on key areas such as fiscal consolidation and debt management, a review of monetary and exchange rate policy, financial and banking sector reforms, as well as the implementation of key structural reforms. The 2013 package improved Pakistan’s macroeconomic fundamentals over the three year time-frame before fiscal and monetary management started to slip again in late-2016 and 2017. We would expect similar measures to be implemented in the event of a package being signed.”

In view of the massive and snow-balling current account and budgetary deficit that the PTI government inherited, attributable more to the political instability fomented by PTI itself than the much trumpeted flawed economic policies pursued by the PML-N government, it was quite evident that the rulers would have to go the IMF for 13th time with the begging bowl. The finance minister kept claiming that if at all the government had to go to the IMF it would be doing so on its own terms. However, the managing director of IMF Lagarde in a statement after meeting Prime Miniser Imran Khan had called for ‘decisive policies and a strong package of economic reforms’. Prime Minister Imran Khan himself admitted that his government will sign onto a programme of deep structural reforms. That exploded the myth of repeated government claims that it would negotiate the extended loan facility by the IMF on its own terms.

It is perhaps pertinent to mention that almost all the countries of the world obtain loans to fund their social and development plans as well as tiding over their balance of payment position and the lending institutions like the IMF, World Bank, Asian Development Bank and other international financing entities before extending loan facility to a client do make sure that the country has the ability to utilise those loans productively and also be in a position to repay them within the stipulated period. So they always extend this facility on the terms that they perceive will realise those objectives. There is nothing wrong with seeking loans from international agencies provided they are productively invested. Unfortunately, the preset loan is being sought to actually repay the previous loans and for off-setting the negative fallout of the current account deficit. The conditions imposed by IMF invariably include phasing out the tariff deferential subsidy, sustained improvement in tax collection as well as a significant widening of tax base and more equitably shared tax burden, phasing out of all existing statutory regulatory orders (SROs) and other steps that grant special rates and tax exemptions.

Fulfilling those obligations would also require deep expenditure cuts without which the burden will fall on revenue mobilisation which would entail substantial hike in taxes in the short term. There is no escaping this reality now, so the biggest priority worth holding on to would be to protect the poor and vulnerable from the impact of this adjustment. The PTI ran on a platform of profound change, FBR reforms and providing relief to the poorer sections of the society by changing their economic situation. It will have to deliver on those promises.

It is an irrefutable reality that things have not gone the way the government promised and the poorer section expected from the proponents of change for the better. Increase in oil prices and hike in the tariff on gas and electricity and their impact on other areas has made life of the people miserable. The repeated claims by the prime minister and his team that things will take a turn for the better in the near future do not seem to be as much credible as they would like the people to believe.

The predictions by the international lending and rating agencies also present a very dismal picture about the state of our economy in the next two years. The IMF has lowered its 2019 economic growth forecast for Pakistan and the region by 0.3 percentage points to 2.4 percent before recovering to about 3 percent in 2020. Fitch has downgraded Pakistan’s rating from B to B negative in Decembers 2018 and its predictions for future revealed last week are also not very encouraging. It has predicted that the SBP will have to devalue rupee against US dollar again in the coming months as the currency will remain under depreciatory pressures with weaker external finances. It has warned Pakistan of larger economic distortions and greater pain in future for seeking unconventional funding sources to avert the balance of payment crisis and little appetite for austerity and economic reforms. The SBP in its first quarterly report has also admitted that the country may not be able to achieve the projected growth rate 0f 6.4 percent and has accordingly trimmed its forecast to 4-4.5 percent citing under performance by the industrial sector, slashed spending on development projects and high rate of inflation which has badly affected consumer industries due to decline in the purchasing power of the consumers.

The mini-budget or the reforms package presented by finance minister provided very little relief to the poorer sections

The mini-budget or the reforms package presented by finance minister provided very little relief to the poorer sections and most of the economists dubbed it as friendly to the business class. An eminent economist Waqar Masood Khan commenting on the mini-budget said, “It has taken the country further away from economic stability. The strategy of the government, it seems, is to skirt the challenges and ease the payments pressure by using support from friendly countries. This is a myopic strategy, good perhaps for a government which may have only a year in office.”

It is pertinent to mention that Imran Khan and his party stalwarts have been criticising and reviling the PML-N government for excessive borrowing and failing to provide relief to the masses. Ironically after assuming power the PTI government is also pursuing the same course with increased velocity. According to reliable sources the PPP government borrowed an average of Rs5 billion a day for five years between 203-2018. The PML-N government borrowed at an average of Rs7.7 billion per day. The PTI government during the last five months has been borrowing at an average of Rs15 billion per day. The economists fear that during the current financial year the government may be forced to pay 50pc of all the taxes collected by FBR which would be a record in the financial history of the country. Evidently the proponents of change are not in a position to deliver on their promises.

(Published in Monthly Tribute International on 01-03-2019)