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Living with or without IMF

The economists and analysts seem to be clearly divided into two groups, one demanding immediate negotiations with the lender of last resort and other still living under the illusion that Pakistan can live without the crutched of IMF. While the new Finance Minister is still working hard to negotiate a deal with the IMF, that can give him enough space to carve a home grown plan that could help the ruling coalition in implementation of the political manifesto. To remain a sovereign country, achieving financial stability is a must, offering the right policies to contain fiscal and current account deficit at sustainable levels. However, the monumental task is to overcome ‘confidence deficit’.

There is growing consensus that Pakistan must sign another program with International Monetary Fund (IMF). This will be the thirteenth plan; the country has completed 12 programs since 1988. The signing of yet another program with IMF does not face too many hurdles. The IMF team is currently visiting Pakistan for Article IV review. This offers an excellent opportunity to initiate deliberations and discussion on specific stabilization measures and long term structural reforms prior to submitting a formal Letter of Intent to the Fund for entering another program.

Reiterating possible benchmarks the Fund may set and contrasting the same with the last EFF facility (from Sept’13 to Sept’16). Analysts believe that structural reforms measures are likely to focus on fiscal federalism. Top of the agenda items are likely to be: 1) pressures from IMF to amendments the NFC award, 2) impose fiscal disciple, 3) privatize SOEs and reform 4) trade regime to limit external imbalance. From a macro-perspective, currency adjustments, monetary tightening and curtailed spending are areas of contention which the PTI-led government is primed to tackle.

Currently, an IMF team has arrived in Pakistan for Article IV consultation (a regular process usually conducted annually) with the authorities to assess economic developments. Though not its core agenda, the authorities could likely take the opportunity to initiate discussion for a possible financing facility. In this regard, the widening financing gap (gross external financing gap estimated above US$22 billion) against a dearth of sizable external financing resources is likely to lead the country to enter into an IMF sooner than later. Moreover, any financing facility should immediately focus on stabilization measures and advancing structural reforms in order to address persistent twin deficits. Taking conviction from the previous program, these structural reforms are likely to focus on fiscal federalism, fiscal disciple, privatization of SOEs and reforming the trade regime.


As regards economic indicators, the view is not encouraging and the perception emanates from significant weakness on the external front. Another round of currency adjustment remains likely considering sizable current account deficit, along with low foreign exchange reserves. Analysts also expect currency depreciation of up to 6.5% against the greenback from current levels. Additionally, monetary tightening would remain in place while IMF is likely to push for more aggressive stance to curb price pressures and restore external imbalances. Some of the analysts anticipate a cumulative 275bps hike in benchmark interest rates. The nascent PTI-led economic setup has already presented measures for fiscal tweaks to target deficit at 5.1% of GDP. The government may also be asked to further reduce outlays (possibly below 3% mark) over the course of program.

It is necessary to reiterate that negotiating a bailout program with IMF will not be easy because: 1) Pakistan does not enjoy support of the United States and 2) the funds promised by Islamic Development Bank and Saudi Arabia has not stared following to Pakistan. The foreign exchange loan amounting to US$2 billion has been consumed, at an average foreign exchange reserves held by State Bank of Pakistan has been declining by US$297 million per week. Worst of all the US has also not released amounts pertaining to Coalition Support Fund (CSF). This is not an aid or grant but release of payment pertaining to services performed in the past.

Some of the analysts are of the view that the incumbent government has been asked to hike interest rate by another 100bps; the interim government had also increased the policy rate by 100bps. Raising interest rate by 200bps in such a short span of time could prove highly detrimental for Pakistan. It is necessary to remind Pakistani policy planners and IMF wiz-kids that Pakistan mainly suffers from cost pushed inflation. The combined effect of depreciation of Pak rupee and hike in interest rate can prove too hard a blow. The blow could prove too fatal as crude oil prices are inching towards US100/barrel.

To overcome current account deficit Pakistan should ban import of certain luxury items for a predefined period under intimation to World Trade Organization (WTO). Ironically those unaware of Article 6 of WTO, emerge to be the biggest opponent of imposition of quantitative restrictions on imports. Similarly, there the Government of Pakistan should make all the possible efforts to boost exports. Since Pakistan’s economy is agro based efforts should be made to ensure supply of irrigation water to all the farmers. Growers of red chili in Sindh have become the first victim of shortage of water. The output is likely to reduce to 75,000 tons as compared to 150,000 tons in the previous year. Sugarcane growers are also likely to face similar fate. In fact their miseries have been multiplied because of delay of payment by the mills for the previous crushing season.

The incumbent government must approach IMF, but only after having done complete home work. Only an indigenous program can keep debt servicing at sustainable level. To complete projects under PSDP, the government should embark upon Sukuk flotation program. It will yield twin benefits, deployment of surplus liquidity available with the Islamic banks and attracting fresh deposits.

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