News Analysis: What does the IMF lifeline mean?

After months of delay, Pakistan finally has reached an agreement with the International Monetary Fund (IMF). While the Extended Fund Facility (EFF) fell victim to the finance minister’s stare, the lender of last resort is going to provide a $3 billion lifeline to Islamabad through a Stand-by Arrangement (SBA). In the coming days, the IMF’s Executive Board is expected to approve the SBA, thereby ensuring that Pakistan can avoid default – at least for the time being.

Much like everything else these days, the SBA and what it means has also fallen victim to polarization: if you are part of Team PDM, then this is the best thing ever, but if you are on the side of those who must not be named anymore, then this is just further evidence of how terrible the current government is. The truth, however, lies somewhere in the middle.

The good news is that the SBA will provide some much-needed breathing room to the economy and reduce near-term uncertainty. In addition, this deal will also pave the way for additional inflows of dollars, including from friendly countries and other multilateral creditors who had linked additional support to the conclusion of an agreement with the IMF.

The nine-month agreement also means that an incoming government – assuming that elections are held per the constitution – will have enough time to negotiate a new EFF with the IMF. This is good, for it provides an on-ramp for a future government to take immediate measures that signal a commitment to reforms and engage in negotiations with the IMF and other creditors through the end of 2023.

But this is where the good news ends, and the bad news begins. Pakistan’s economic prospects remain bleak, primarily because not much has been done to resolve the underlying structural issues that are driving this ongoing crisis. To get the SBA done, the government had to change its own budget, increase the Petroleum Development Levy (PDL), increase interest rates, and signal a commitment to hiking energy tariffs. In addition, the government has “committed to ensuring the full market determination of the exchange rate”, which is something the current finance minister has been reluctant to do.

As a result, the rest of the year will be spent in austerity mode. The incoming caretaker setup, along with the newly elected government, will have to continue following macroprudential policies – meaning that the ‘relief’ that every political leader wants to provide to the people will be impossible to deliver.

Taxes will have to be increased. Energy tariffs will go up. And the government will have to rein in its expenses, or risk making a terrible situation even worse.

In addition, someone must hold the finance minister accountable for the damage that his stubbornness has done to the country. After all, everything that has been agreed to with the IMF could have been done months ago. But he was a man on a mission, trying to stare into the IMF’s eyes to get a better deal. In the process he sabotaged the economy and destroyed whatever was left of his party’s credibility. And while the prime minister’s direct intervention led to a breakthrough, ultimately the buck stops with him. The time lost, the damage caused, and the uncertainty generated by Ishaq Dar has inflicted unimaginable trauma on millions of ordinary citizens.

Moving forward, things remain tricky for Pakistan’s economy and bleak for its ordinary citizens. Successive governments have failed to recognize that the status quo – a kleptocracy that has extracted immense wealth from the people – can no longer be maintained. The adjustments made to the budget at the behest of the IMF are evidence that the ruling elites are unwilling and unable to change course. That the IMF referred to these measures as “some steps to broaden the tax base and increase tax collection from undertaxed sectors” is laughable as well. It also implicates the institution as being in bed with ruling elites who continue to burden ordinary citizens, while they themselves get fat on over $17.5 billion of annual subsidies and perks provided to them by the people.

In conclusion, while the SBA provides some much-needed breathing room to the economy, the fact is that Pakistan remains stranded at sea. The next twelve months are yet another opportunity for the ruling elites to get their act together. Unfortunately, their own pronouncements – across the political and institutional aisle – signal that they are not willing to change course, at least for the time being.

However, there are three things that may signal a major shift and increase optimism that perhaps this time is different: sustained efforts to broaden the tax base by bring in traders and real estate into the tax net, major cuts to government spending by rationalizing the size of the federal government, and an honest conversation that informs the people that opening trade with India is critical to improving the country’s economic prospects.

So long as elites are unwilling to do the above, this author at least will continue to believe that the country’s ruling elites are not serious about changing their ways.