After the SBA

The recent standby agreement (SBA) with the IMF has created a wave of optimism among businesses and markets in Pakistan. The Pakistan Stock Exchange witnessed a remarkable milestone as the index soared by 1987 points, or 4.8 per cent, in a single session after the deal was announced.

International agencies have also recognized that the IMF deal has averted Pakistan’s near-term default risk. For example, Barclays has upgraded its rating on Pakistan’s sovereign bonds from “underweight” to “market weight”.

The rupee is also expected to recover briefly against the dollar, as exporters who had withheld their export earnings will now bring them back to Pakistan. Moreover, investors who had hoarded dollars will likely sell them, reversing their previous buying spree.

Pakistan can also expect to receive the delayed inflow of dollars from bilateral and multilateral development partners, including those who pledged aid during the Geneva Conference for the superflood. This will be a direct reward for Pakistan’s adherence to the fiscal discipline under the IMF programme. The IMF’s endorsement of Pakistan’s fiscal discipline is an assurance for development partners that their money will be spent effectively.

Prime Minister Shehbaz Sharif deserves credit for realizing the importance of being in an IMF programme and making every effort to secure it. The IMF is the only option for economies facing situations like Pakistan’s. As I have argued before in this space, the IMF is our only plan right now. Any other plan could have postponed a default by a few months, but could not have taken us out of the critical condition.

However, we should not forget that Pakistan’s economy is still in trouble even after securing the SBA. The deal with the IMF has indeed enhanced the country’s creditworthiness and boosted domestic and international confidence in it. But to maintain this confidence, a lot needs to be done in the next nine months, ideally by the three governments (current, caretaker, and next elected), under the strict supervision of the IMF.

Pakistan has to address the structural weaknesses that have been plaguing its economy for a long time, and pushing it towards the IMF repeatedly. The country’s failure to address those weaknesses resulted in the failure of previous IMF programmes, including the last Extended Fund Facility (EFF) programme that ended on June 30.

The only difference is that this time the ‘twin deficits’ turned Pakistan’s medium-term balance of payment crisis into a ‘balance of payments emergency’. The breathing space it has gained is conditional on certain commitments.

Pakistan will have to demonstrate its seriousness about reducing the fiscal deficit (the gap between income and expenditures). This does not mean merely revising the draft budget, imposing new taxes on existing taxpayers, or cutting some expenditures. It means adopting the spirit of fiscal discipline and fiscal consolidation, even in the run-up to the next elections, when governments are usually tempted to spend more than their means.

Pakistan has agreed with the IMF to adopt a market-determined exchange rate by removing import restrictions that were skewing the currency market. The rupee may depreciate briefly after an initial recovery, as Pakistan will have to clear a backlog of letters of credit (LCs) (some say around $4-5 billion) for imports. However, a functional banking channel and a deliberate effort to curb the parallel currency market will support the inflow of dollars and thus stabilize the value of the rupee.

It also committed to increasing consumer electricity prices (revising the base tariff price) to cover costs and reduce the power sector’s circular debt. This is a sensitive issue, and the current government, after taking a decision in principle, may delegate its backdated implementation to the caretakers after August 12.

Moreover, the government pledged to continue implementing structural reforms, especially in the energy sector, to enhance climate resilience and improve the business environment. Most of these measures will likely cause inflation, which means they will raise the cost of living for ordinary people. To protect low-income earners from this inflationary pressure and to create room for social and development spending, the government has promised to use the created fiscal space to expand the coverage and effectiveness of its social safety net programs, such as BISP. It has also committed to prioritize spending on health, education, and infrastructure.

Implementing these measures in nine months is not an easy task. Pakistan may face multiple challenges in meeting its obligations under the SBA. Especially since these commitments may be met by three different governments – current, interim, and next elected. The critical factors for success are maintaining policy consistency and continuity and ensuring political ownership of SBA commitments by all three prime ministers and finance ministers.

One assumes that most of the difficult decisions will be left to the caretakers, as they don’t have to worry about losing their constituencies. However, the next elected government will have to focus on securing the IMF’s 24th programme as a top priority. The SBA is a short-term arrangement – a bridge financing at best. Pakistan will need to remain under the IMF’s umbrella for another 3-5 years after the SBA to address its structural weaknesses and put its house in order.

It has a history of joining and quitting IMF programmes before completing them or achieving their intended goals. But this time around, Pakistan has an opportunity to break this cycle and use the next two IMF programmes to establish a stable and inclusive economic growth path.

Finally, it is crucial to keep in mind that IMF programmes are not a miraculous solution to Pakistan’s economic challenges. They do carry significance because, without strict IMF surveillance, our successive governments did not implement the course correction measures that they should have in any case regardless of whether the country has an IMF programme or not.

It can be argued that even with IMF oversight, these measures were not properly implemented. Nevertheless, the recent economic crisis served as a close call. The experience of narrowly avoiding economic collapse should have raised our awareness as a society; to what extent will become clearer in the coming months.

The writer heads the Sustainable Development Policy Institute. He tweets @abidsuleri