The International Monetary Fund (IMF) and Pakistan have reached an agreement on a $6b bailout package. Under the programme, Pakistan will implement an ambitious structural reform agenda over a period of 39 months with upfront policy actions worth over Rs600b. Economists fear the programme may not be able to achieve its objective of economic stabilisation amid slowing growth.
Under the programme, Pakistan will have to adjust its expenditure according to its capacity, stop the continuous bleeding of public sector enterprises, reduce subsidies to the rich and generate more taxes. In a statement, the IMF said, “the forthcoming budget for FY2019-20 is a first critical step in the authorities’ fiscal strategy that will aim for a primary deficit of 0.6pc of Gross Domestic Product (GDP) supported by tax policy revenue mobilisation measures to eliminate exemptions, curtail special treatments and improve tax administration. It means the government will have to generate additional revenues worth about Rs600b (1.3pc of GDP) to bring down the primary deficit from 1.9pc to 0.6pc of GDP. The government has agreed to increase energy prices, generate more taxes, introduce a market-determined exchange rate, allow complete operational independence to the State Bank of Pakistan (SBP) and focus on inflation instead of growth. The provinces will have to create more cash surpluses to support the federal government’s fiscal stability.
Pakistan will have to generate additional revenues of about Rs600b, raise about Rs100b from higher-end power consumers, privatise at least two power LNG plants worth over Rs280b and stop haemorrhaging of other public sector entities in the first year beginning on July 1. The three big agenda items would provide about a Rs1 trillion fiscal adjustment during the first year, including a one-time recovery of about Rs280b from the sale of two LNG plants in Punjab. The government plans to recover Rs98b at a rate of under Re1 per unit from consumers using more than 300 units a month. However, additional subsidy of Rs52b would be earmarked in the budget to protect low-end consumers using less than 300 units a month, raising the total power sector subsidy to Rs216b. The government also plans to bring down circular debt to zero by Dec 31, 2020. The IMF programme would also help revive flow of $2-3b per annum from the World Bank and the Asian Development Bank, improve Pakistan’s debt situation and send a positive signal to world markets.
However, the opposition claims the government has mortgaged Pakistan to the IMF by signing the deal. Pakistan Peoples Party (PPP) Chairperson Bilawal Bhutto Zardari said past governments in Pakistan had negotiated with the IMF for bailout packages, but it was the first time the IMF talked to itself. Eminent economist Dr Kaiser Bengali endorses his view. “The IMF programme is a joke because it is the product of the IMF talking to the IMF with the government as a spectator. Why didn’t Finance Adviser Hafeez Sheikh and his colleagues take any of the steps in their previous stints in power? At the end of the day, I believe the team is here for one task only: to privatise the state owned companies,” he told a news channel.
Experts fear that the three-year structural adjustment programme will further add to rising inflation and utility tariffs. “The basic focus of the programme is stabilisation now and growth later. But history tells us that at the end of these programmes, Pakistan’s average growth rate remained the lowest in South Asia since 1988,” Shahid Hasan Siddiqui, a Karachi-based economist, told a Turkish news agency. “This is because of the artificial stabilisations that eventually disturbed the growth rate,” Siddiqui said. He said another key condition of the latest IMF programme was to reduce the budget deficit by meeting tax collection targets, which seemed to be difficult to achieve for various political reasons. To bridge the gap, he observed, the cash-strapped government would go for indirect taxes and raising utility tariffs, which would directly impact the general public. Farrukh Saleem, an Islamabad-based economist, shared a similar view. “This package is yet to be approved. It will only be approved if Pakistan meets some key IMF conditions, mainly related to cooperation with the Financial Action Task Force (FATF) and the forthcoming budget,” he said.
Analysts view the rising imports as a major threat to the country’s $300 billion economy. Pakistan’s annual imports currently total around $60 billion compared to a mere $24 billion worth of exports. Grappling with a colossal $18 billion current account deficit, Islamabad’s current external debt stands at nearly $100 billion — the bulk of it borrowed from the World Bank, IMF, Asian Development Bank, Islamic Development Bank, the US, China, France and other countries. Recently, Saudi Arabia and the United Arab Emirates also announced bailout packages of $6 billion each for Pakistan.
Most economists view the IMF package as a temporary relief to Pakistan’s economy. However, it will give the country some time to fill the balance-of-payments gap and pave the way for more loans from other institutions. Under the agreement, the government will no longer control the value of the dollar against the rupee. Instead, it will be dealt with by the open market. The government will start withdrawing exemptions on various taxes amounting to around Rs350 billion in the 2019-20 budget. The rupee devaluation will increase the country’s exports and reduce the rising imports, but a hike in power and gas tariffs would increase the cost of production and ultimately neutralise the devaluation benefit. The currency devaluation will also increase the cost of raw materials which Pakistan imports for its export output.
Experts say the IMF package may be good for Pakistan’s economy, but it will be harsh on its people. A hike in gas and power tariff and the rupee devaluation will further increase prices of essentials, which have already gone through the roof in the nine months of the Pakistan Tehreek-i-Insaf (PTI) government.