Pakistan-IMF deal

At long last, the IMF bailout programme designed to help Pakistan avert default on external obligations is back on track. While now is a good time to acknowledge the hard work that went into achieving this end, it is equally important to realize that this is not time to take a respite. It is also important to recognize that the lion’s share of hard work that went into bringing the Extended Fund Facility (EFF) back to life came from the common folk – who shouldered the burden of runaway inflation arising out of the rollout of energy subsidies, high fossil fuel prices, a struggling rupee, etc. The ruling PDM coalition no doubt played its part in the odyssey – but its part was largely limited to expanding its political capital by making the right albeit unpopular calls.

Just ahead of his ouster, Imran had laid landmines for the succeeding government by strapping the already battered economy with a further unfunded energy subsidy, which was hard to reverse because of the already high inflation and high energy prices. Immediately after his exit, he started an epic political circus that hurt market sentiment and created the perception of heightened political risk. This led the IMF to slow-walk the negotiations in order to be sure that the political ownership of the programme had legs to stand on. The current government did well to keep its nose to the grindstone all along, continuing unbothered on the path it had charted. Despite the PTI’s attempts to scuttle the deal at the eleventh hour, the IMF executive board put its seal of approval on the staff level agreement made with Pakistan in July.

All that is now history. The bourse has surged and the rupee has started to recoup its lost value once more on the news of the revival of the EFF. There is every hope the investment climate will improve and the easing of imported inflation will relieve the headline inflation ever so slightly. The government may be justified in thinking their number one priority right now is to get on with relief and rehabilitation of the tens of millions of Pakistanis battered by historic floods. Expanding and bolstering the safety nets to protect the vulnerable of society is also important in view of the economic hardship squeezing the citizenry. But the government must not forget that the IMF programme’s original and only purpose was to help Pakistan turn around its economy rather than affording it the luxury of instituting patchwork policies to bide its time. Monday’s IMF decision is the starting pistol shot for the structural reforms our economy needs to become solvent. Equally, it is the beginning of the countdown for the repayments on the $34 billion the government raised in financing to support the IMF programme.

One of the foremost challenges facing the government at the moment is staying on-budget in the face of the gigantic calamity that has hit the nation. The only pathway to that will be raising fresh revenues for new expenditures. This will inevitably involve enhancing tax rates, cutting down tax evasion, and imposing new taxes. With the requisite political will, this task can be accomplished so that it furthers the strategic objectives of the economic reform programme supported by the IMF. The rollout of the petroleum levy and the withdrawal of any residual energy subsidies must continue in the interest of the energy sector despite the inflationary pressures these measures are likely to assert. Our ultimate aim here is to put the energy sector firmly on its feet so that it can sustain the nation’s energy security rather than being a liability and a constant drain on the exchequer. Turning to renewables is also important to wean away the economy from imported fuels, which is the greatest drain on our forex reserves. The already tight monetary policy provides a good handle on inflation, which has to remain right for the foreseeable future, although the economic managers will have to remain on their toes in view of the challenging external environment. An imported recession is the last thing we need, especially as the body blow delivered by the floods to the farm sector in four provinces has all but wiped out the growth we were projecting for the current fiscal.

State-owned enterprises and the financial sector have their own problems which must be resolved before our economy can hope to prosper. The former must improve governance and turn profit or be offloaded forthwith. The latter must accept the yoke of greater oversight and meet more stringent capitalisation requirements to guard against any speed bumps. At the end of the day, we must ensure a level playing field for all kinds of business, conducive to the development of a vibrant private sector, which can begin to create jobs and reverse our trade deficit. That is our only road to cutting our yawning current account deficit and hopefully balancing our budget. These are all difficult decisions and will take both technical capacity and political will to execute. Here’s hoping the PDM government either has the requisite technical capacity or can muster it in a timely fashion. As for political will, PM Sharif and Finance Minister Ismail have demonstrated over the last five months that they can be cucumber cool burning political capital. Now is their time to prove they can take on the demons that have haunted our economy for decades – and they may not get a second chance.