The IMF challenge

Most of the financial mess left behind by the ousted PTI government comes from its sitting on the fence while taking make-or-break decisions for lack of shrewd leadership. The Imran Khan government was dealing with the IMF without paying any heed to the frightening economic ground realities. Had it approached the lender of last resort at the right time, it would have perhaps struck a better deal, avoiding many bitter steps ultimately taken by them. Miftah Ismail, the new finance minister, apparently does not want to waste any time. He is an experienced economist and an astute politician. This is a significant combination because a purely technocratic approach to Pakistan’s economy is not going to help. Ismail is in Washington to meet IMF officials for the revival of a stalled loan agreement the previous government grossly mismanaged. The deal stalled because the last government chose power over economic stability and growth.

This critical deal, which was derailed by the Khan government before losing the power game to the opposition, must be put back on track to prevent the country from getting bogged down by a balance of payments crisis. The economy is in a precarious situation and the new government's top priority should be to secure the next tranche of a billion dollars from the IMF. Without factoring in this money, preparation of the next budget won't be less than a near impossible task. The new government has assumed power in the last quarter of the fiscal year that every government spends in an extensive budget-making exercise. Two quarterly reviews are also due, compounding the challenge for the new finance minister. Perhaps the best option for Miftah Ismail is not to rely solely on the IMF. There are other venues too from where the country has been getting help in dire straits. During the last months of the PTI government, Pakistan’s relations with the European Union and with the US were particularly strained. We need to mend fences with the countries where most of our remittances come from.

Of course, the IMF would like Pakistan to do away with the subsidies announced by the previous government with or without taking into account the financial constraint the country would face. Certainly, the government would like to take some relief measures, but in the given circumstances, that may be next to impossible. The previous government’s last-ditch efforts to stay in power were populist in nature and it had little understanding of the challenges ahead. No lender likes to see its conditions violated by borrowers. The subsidies went against Pakistan’s commitments to the IMF for the six-billion-dollar extended fund facility. When a country agrees to a series of conditions, involving fiscal adjustments, it must either comply with them or become financially strong enough to not borrow. It appears inevitable now that the IMF will press for an increase in fuel prices. There is a need to streamline the process of tax restoration and a review of amnesty schemes is also in order. Favouring a couple of industries at the cost of some others was not a wise decision and needs reconsideration. There is also a perennial challenge of circular debt that needs reduction – if not elimination. While tackling these hard tasks, the government has to also keep the interest of the people in mind, in particular the way inflation has wreaked havoc in homes. The finance minister has a long and probably thankless job ahead of him as he first tries to navigate the IMF's reservations.