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Likely facts of IMF program and impact on Pakistan

Keeping in view the ongoing discussions with the International Monetary Fund (IMF) team and the recent changes in key government positions, there are hopes that Pakistan may enter into IMF program during June 2019. It is also anticipated that Federal Budget for next financial year (FY20) will be prepared in the light of impending IMF conditionalities. This impression develops because announcement of next budget has been deferred for nearly a month.

Soon after appointment, Dr. Hafeez Shaikh, Adviser to Prime Minister on Finance, has made clear that the focus of the new financial team will be on containing current account and budget deficits. However, analysts have the consensus that following IMF recipe blindly may plunge Pakistan deeper into debt trap. Therefore, coming up with a home grown plan is a must. They also say that IMF has to be a little more considerate and give Pakistan some breathing space, rather than killing prospects of recovery. The country has to develop sustainable strategies, not only to keep on settling debt servicing obligations, but also undertaking initiatives that can help in overcoming twin contentious deficits.

According to a report by one of Pakistan’s leading brokerage houses, tax revenue and budget deficit targets will likely be the sticking points in the ongoing IMF negotiations as 10-month tax revenue collection shows a shortfall of around Rs345 billion (0.9% of GDP), the budget deficit is expected to exceed 7% in FY19 after a gap of 5 years. Given increased taxation measures to shore up revenues, reduction in subsidies and further depreciation of rupee, the brokerage house expects inflation to average in double digits in FY20. It also anticipates policy rates to peak at 12% during 2019.

The IMF program is expected to include key technical benchmarks including Net Domestic Assets (NDA) and Net International Reserves (NIR) targets, which will be aimed at reducing borrowing from central bank and increase foreign exchange reserves respectively. The government will be asked to focus on privatization and restructuring of loss-making state-owned enterprises. Further, energy sector reform and resolution of outstanding circular debt will also likely be part of the IMF program.

To begin with, the demand for another series of structural is beyond comprehension. At the time of entry in every IMF program certain adjustments are agreed, if these are not met analysts have a right to ask, is it the failure of IMF or Government of Pakistan (GoP)? In all the probabilities IMF has to share the blame for not ensuring that the borrower meets all the targets. According to a conspiracy theory, “IMF is not there to bail out the countries and help them come of debt trap – it would not like to lose perennial customers.”

Analysts term IMF support to Pakistan ‘marriage of convenience’. They say, “The Fund keeps its eyes closed when it has to extend support to any country due to ‘geopolitical reasons’. Historically, support to Pakistan by IMF and other multilateral institutions have been driven by ‘US foreign policy agenda’ and in that pursuit not meeting the targets is condoned. Cold war era, move to avert USSR attack and subsequently war against terrorism in Afghanistan are the most blatant examples.” The US often talks about influx of billions of dollars into Pakistan, but completely ignores the colossal damages to Pakistan’s economy due to perusing US foreign policy agenda. They also say, “The current delay is also because of CPEC projects being supported by China.”


The typical IMF recipe comprises of three conditions: 1) raising interest rate, 2) imposing new taxes and 3) withdrawing subsidies. It may be said without any doubt that these conditions are aimed at putting the countries under further pressure and not bringing it out of the prevailing mess. All these measures results in: 1) hiking inflation rate, 2) increasing cost of doing business and 3) rendering local manufacturers uncompetitive in global markets. A closer look at Pakistan economy proves the point beyond any doubt.

Therefore, the single point agenda should be boosting economic activities in the country by restoring ‘confidence deficit’. It should be kept in mind that if local investors are shy, no foreign investor will be keen in investing in Pakistan without receiving undue advantages that will result in creating uneven playing field for the local investors.

For boosting exports, making local manufacturers competitive in the global markets is must. The top item on agenda should be ‘bringing down cost of doing business in the country’. Hike in electricity and gas tariffs not only increase cost of manufacturing, but also provide incentive for pilferage. This not only increases the quantum of circular debt but also adds to the losses of electricity and gas distribution companies. The solution is simple, contain pilferage and boost recovery, but abstain from hike in tariffs.

Many industries in Pakistan produce exportable surplus, but their produce can’t be sold in global markets. Restoring their competitive advantage can make them competitive in the global markets. One should not forget that devaluation of rupee just can’t boost exports. To be exact devaluation increases cost of doing business.

Some groups having vested interest are saying that after Pakistan enters into a deal with IMF, stock market would witness further and substantial decline. For them Pakistan has a long history of living under different IMF programs. The benchmark has index rallied on average by 37% in 12 months post IMF deal based on last 3 IMF programs. Therefore, the improvement in market sentiment during IMF program seems most probable as it will also improve the external account situation on receipt of foreign flows and stabilization on macroeconomic front.

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