Feb 20 - 26, 20

The International Monetary Fund (IMF) in its latest report has described Pakistan's economy as highly vulnerable predicting about seven per cent budget deficit and further fall in foreign exchange reserves and in rupee value followed by further inflation. The IMF's country report notes that our recent export performance has been weak which may lead to a more difficult situation for the country. The IMF has waned Pakistan over its widening fiscal deficit and slow growth saying "economy remains deeply at risk to both internal and external shocks".

The IMF unveiled its critical observations after its executive board Article IV consultation on Pakistan in its head office in Washington last week. According to the press release issued after the meeting, a deterioration in the current account balance continued difficulties in attracting external financing and the beginning of repayments will add further pressure on the balance of payment this year.

The accumulative impact of all these factors is projected to cause a sharp decline in the foreign exchange reserves by end FY 2011-12. Moreover, according to the IMF, there are considerable downside risks to this already difficult baseline, particularly in the context of an increasingly difficult global environment and concerns about policy weakening ahead of elections in the country.

According to the source in the IMF local office in Islamabad, Pakistan will remain under continuous surveillance of the IMF under its Post Program Monitoring as the Fund's outstanding credit for Islamabad exceeds by 200 percent of the quota threshold. Pakistan failed in the post program monitoring after the ex Finance Minister Shaukat Tareen decided to avail maximum resources from the IMF up to the level of $11.3 billion from the initial package of $7.6 billion loan under the Stand-by Arrangement program that prematurely ended in May last year owing to the country's failure to achieve key economic and structural reforms-the conditions attached to the loan package. Otherwise, the arrangements made by the then finance minister, Shaukat Tareen who had left by then-were in the best interest of the country. Pakistan had decided not to seek a new program because it was unwilling to meet the conditions of economic and taxation reforms.

According to independent economists, this decision of the economic managers of the country was not correct and they were fully aware of it. It had been taken under pressure of the incumbent government for political reasons. According to them, it was more a political decision and not an economic one.

Pakistan's economy is presently in a desperate situation due to the looming balance of payment crises as foreign inflows - barring export proceeds and remittances - are dwindling fast. The government is struggling to prevent a sharp slide in the foreign exchange reserves that slipped from $18 billion level last year.

The current account deficit has swelled to $2.15 billion during the first half of the current fiscal against the surplus of $8 million in the corresponding year last year. The trade deficit increased by about 39 percent to $11.47 billion in July-December 2011 against $8.28 billion in the corresponding period last year

Under the circumstances, a new accord with the IMF, of course on much harsher terms than the previous one, seems imminent. With decline all around on the economic front, the government of Pakistan has been left with no other option but to sign a new accord with the IMF and accept much harsh terms and a more though economic reforms agenda including substantial cut in defense and government expenditures and broadening the tax net through withdrawing all exceptions including the income from agriculture and controlling rampant tax evasions and corruption in the tax collecting system.

It may be relevant to recall here that the government of Pakistan had secured $7.6 billion loan from IMF in 2008-which was later revised up to $11.3 billion-but failed to get the remaining $3.7 billion due to slippages in the performance criteria leading to the suspension of the program since May 2010. The program was extended for nine months until Sep.30, but disbursement was not resumed owing to continuous non-observance of agreed reforms measures.

The IMF is generally considered to be an easy source of financial assistance for developing countries at the time of financial crises in meeting internal and external obligations of the governments. If approached again the IMF may again come to help but this time they would like to have foolproof guarantees. Apart from other measures to drastically cut unproductive expenditure and effectively check rampant corruption and tax evasion, the IMF may demand enactment of a federal legislation for imposition of tax on agriculture and property sector to reduce the budget deficit, curtail government's reckless borrowing besides tame stubborn inflation.

All these terms and conditions would not be easy to meet and these conditions would prove to be a tough task for the government. But, at the same time there is no other way out to save the economy from total collapse.