Dec 01 - 07, 2008

It seems that the ruling junta had made up its mind to follow the easier path of borrowing from the International Monetary Fund (IMF), rather than taking pains to come up with a program of its own to overcome the immediate problems facing the country. First they kept on avoiding taking some unpopular decisions to intensify the gravity of the situation and then telling the nation that key issues haunting the economy cannot be resolved without the IMF assistance.

With the passage of each passing day the quantum of funds required is increasing but no measures have been taken to overcome some of the most obvious problems. The ruling junta is fully aware of the two contentious issues facing the country, ballooning budget deficit and mounting current account deficit. However, the extravaganzas are resulting in further increase in borrowing. Similarly, no measures have been taken to contain the trade deficit. No measures have been taken to boost exports and contain imports.

Rather than plan to borrow as much as possible is being followed to avert the default. This could make the life of ruling junta 'problem free' but plunge the country into the mess, from which it may not succeed to come out for decades. The plan continues and the evidence is that the nation is being told that a US$ 7.6 billion IMF bailout package is not sufficient and in fact the country needs US$ 13 billion for the stabilization of the economy. And this statement has come from nothing less than the executive board of the IMF.

Borrowing from the IMF is not considered sufficient and other options are also solicited that include begging from 'Friends of Pakistan' negotiating deferred oil payment facility from friendly Muslim oil producing countries, Islamic Development Bank etc. or virtually all the conceivable multilateral donors and international financial institutions.

Soon after approval of the US$ 7.6 billion bail out plan by the IMF Executive Board it was announced that the country needs a comprehensive bailout plan out US$ 13 billion. The IMF Deputy Managing Director Takatoshi Kato said, "By providing large financial support to Pakistan, the IMF is sending a strong signal to the donor community about the country's improved macroeconomic prospects". Under this program Pakistan will be required to reduce its fiscal deficit to 3.3% of the GDP and bring down inflation to 6%. However, experts and analysts fail to understand, how the ruling junta could achieve the two stipulated targets.

According to the IMF, the program aims to restore the confidence of domestic and foreign investors with a tightening of fiscal and monetary policies, while maintaining social stability through targeted spending. It was also said that most of the adjustments for reducing fiscal deficit would come from eliminating fuel and electricity subsidies and from eliminating exemptions on income and agriculture taxes.

To please the lender, the government asked the central bank to increase the discount rate prior to signing of the assistance agreement. The impression was also given that his hike was necessary for containing double digit inflation in the country. This announcement has come despite very loud resentment of the business community and the economists. They have been saying that tight monetary policy has failed in containing inflation but more disappointingly discouraging fresh investment in the country.


Receipt of US$3.1 billion will certainly improve Pakistan's foreign exchange reserves, which had gone down as low as US$ 6.6 billion. Funding requirement is not complete and the IMF expects other donors to step up and meet remaining gap. As stated by the IMF the disbursement by the Fund is insufficient to meet the entire funding gap created by the current account deficit. Some of the analysts agree with the IMF assessment based on overall projections for FY09 for exports (up 15% YoY) and imports (up 7% YoY) and remittances and current transfers (up 15%YoY).

About US$3.8 billion of this gap will be met through assistance from the ADB, the WB and the IDB and billion should be met through FDI. Accounting for approximately US$4 portfolio outflows and debt repayments this leaves approximately US$ 1-1.5bn of funding still required for the current fiscal year. The IMF expects other donor countries to step up and provide for this remaining amount.

This does create the risk of an additional depreciation bias in the exchange rate parity should this amount expected from other donor countries does not come through. However, usually an IMF program gives comfort to other donors of a framework and stabilization plan within which to work and Pakistan may have more success receiving financial aid going forward than it has in the last few months.

The other point of concern is that the Fund Focus heavily on fiscal discipline. The first quarter review has been set for March 2009. While exact conditions have not been specified, the Fund has alluded to the following:

BUDGET DEFICIT: commitment to rationalizing expenditure, prioritizing development projects and improving tax administration to bring down budget deficit towards 4.2% of GDP by end FY09. The IMF has not specified any changes on the expenditure front of the budget but has given the GOP the flexibility to decide which areas need rationalization.

GOVERNMENT BORROWING: This specifically has to be curtailed November 2008 onwards with the government looking to raise money from the commercial banks and/or other sources. This implicitly means that rates on government paper will have to be raised to make these rates more attractive for commercial banks implying a further hike in the discount rate.

TAX REFORMS: The IMF has expressed a condition to raise the tax to GDP ratio by 0.5% as of end FY09 and to 15% by 2013. The FY09 conditionality will focus on improvements in tax administration and part of this increase can be met by the 1% hike in GST rates already committed in the FY09 annual budget. Longer term, while the IMF program will not (hopefully) still be in place as of 2013, new forms of taxes on previously exempt sectors will be the prime focus of IMF conditions in FY10. This is the key risk factor to loan disbursement of the remaining amount.

THE BIGGER PICTURE: The funds received over FY09 will provide good immediate term support to the Rupee which will help 1) control imported inflation; 2) revive investor confidence and 3) rationalize Pakistan's foreign debt obligations in Rupee terms.


Over the next six months, it will be the government's task to reign in profligate spending on the fiscal account and control central bank borrowing. This means a serious prioritization of development and current spending towards productive and value add projects. Reducing SBP related borrowing may require an additional raise in the discount rate by1-2% in next couple of months.

The economy is already slowing to a 3.5-4% growth in FY09 and the rate hike will result in further declines especially in the manufacturing sector. This clearly means more unemployment and a greater proportion of the populace pushed into the poverty zone. The success of poverty alleviation and social support measures will depend on how effectively they are able to target the right income groups and also how much fiscal space is really available in this regard. For a fledgling democratic government it will require a very fine balancing act to avoid social and political unrest in this regard.

On the whole, analysts expect further domestic demand destruction over the remainder of this fiscal, but this should be matched by lower inflation coming from the end of the subsidy removal cycle. These two stabilizing aspects if matched by fiscal prudence will put the country back onto a more stable track by September 2009, paving the way for a modest recovery onwards.

The only point of concern is that the IMF conditions do not equate to real reform. While the IMF program has the potential to pull Pakistan out of the current crisis, but it will be up to the government and people of Pakistan to amass the will, resources and vision to push Pakistan away from the IMF helpdesk for good. Pakistan will have to learn to harness its strengths effectively through further investments in agriculture, manufacturing and above all the abundant labor force. Overall increases in output, worker productivity, education and internal resource generation are required so that the structural imbalances on both the internal and external front are corrected.

Though, many analysts hope improvement in the financial condition of the country, many suspected that it would be a short-lived phenomenon. Advisor to the prime minister on finance claimed that the IMF has provided the fund to Pakistan based on its own program and no harsh conditions were agreed upon by Pakistan.

It seems Pakistan has decided to raise additional 100 billion rupees in tax revenue. One can easily understand that this additional revenue would be squashed out of masses. The people would have to bear the load of increase in electricity and gas bills.

The government has refused to clamp any sort of taxation on agriculture. It is also being said that the IMF has demanded reduction in government jobs that provide pension. Analysts and opposition leaders warned that Pakistan's decision to borrow from the Fund to stabilize its economy would attract a lot of public criticism.

It is also being said that seeking the IMF assistance shows that all the claims of breaking the begging bowl, doing away with IMF forever and carrying forward the economy to the take-off level were misleading and deceptive.

The advisor claimed that IMF package would help augmenting the foreign reserves and the money would not be used for stock market stabilization or any other social sector development work. However, it remains to be seen how the borrowed money is utilized. First of all the government should announce policy to rein in its own expenditures and trim down its borrowing from the State Bank of Pakistan.

Most of the analysts have criticized the government for approaching the IMF. They are of the view that nations don't progress on the basis of borrowing and begging. They blame the government of the present crisis. Some financial gurus have also showed their doubt that it might be a temporarily relieve but Pakistan could not bank on this and because life of masses cannot be improved. For a long time analysts have been emphasizing on long term planning to steer the country of the turmoil.