FeaturedNationalVOLUME 17 ISSUE # 24

IMF’s tougher conditions

After several rounds of tough negotiations, Pakistan and the International Monetary Fund (IMF) have agreed on new parameters to work together. These include an extension of the stalled bailout programme by up to one year and an increase in the loan size to $8 billion, giving breathing space to the new government.

The two sides discussed the possibility of unlocking about $1.8 billion World Bank lending that too had stuck up because of either lack of fulfillment of actions promised by the last government or because of the bureaucratic snags.

It may be recalled here that the ousted PTI-led government and the IMF had signed a 39-month Extended Fund Facility (July 2019 to September 2022) with a total value of $6 billion. However, the PTI government failed to fulfil its commitments as a result of which the programme remained stuck and $3 billion was not disbursed.

But before things move, Islamabad would have to formulate the budget strategy for the next fiscal year 2022-23 in consultation with the IMF.

At the same time, it would need to undo some of the policies of the former regime which were in violation of the commitments it had given to the IMF Board in January this year.

According to some analysts, the decision to stay in the IMF programme for longer than the original period would stabilize the jittery markets and restore the confidence of investors. On the successful conclusion of talks, the technical staff of Pakistan and the IMF would start engagement to see the budget position in light of the irresponsible decisions made by the previous government.

However, before formally securing the IMF approval for increasing the programme size and the cash limit, the government will have to show that it is sincere about making the needed tough policy decisions. For instance, the IMF has asked Pakistan to withdraw fuel and electricity subsidies that former premier Imran Khan had announced on February 28, in total disregard of fiscal prudence and to regain popular support lost due to double-digit inflation in the country.

Finance Minister Miftah Ismail said last week that the government was giving Rs21 per litre subsidy on petrol and Rs51.54 per litre on high-speed diesel that in the month of April alone would cost the taxpayers Rs68 billion. These subsidies would have to be withdrawn to revive the programme. The Petroleum Division has estimated that another Rs192 billion would be needed to pay for the May-June fuel subsidies, according to the energy ministry’s summary for the Economic Coordination Committee (ECC).

It has also been agreed between the two sides that the IMF staff would look at the actual fiscal numbers of the ongoing fiscal year as against the targets agreed with the global lender in December 2021. The PTI government had committed with the IMF that it would ensure a primary budget surplus to the tune of Rs25 billion. However, the finance ministry has now estimated that there could be a primary deficit of Rs1.3 trillion by the end of June.

During discussions with the IMF, the issues of Pakistan’s debt sustainability, curtailing imports, growing current account deficit and increasing foreign exchange reserves were also taken up. But no details are available as to what decisions were taken to tackle these perennial challenges to the national economy.

Herein lies the rub. Going to the IMF is no solution to our problems. In fact, experience shows that an IMF programme creates a debt dependence syndrome from which a country cannot extricate itself. In many countries in Latin America this has happened.

According to experts, countries like Pakistan would be better off developing indigenous solutions to their economic woes. The first step towards this would be to gradually move towards reducing the debt burden. And the debt burden can be reduced only by increasing our export income. For this, a new package of incentives should be offered to increase agricultural and industrial productivity for which there is immense potential.

At the same time, new measures should be taken to curtail current expenditure and increase revenue to minimize fiscal and current account deficits. Another urgent need is to attract foreign investment without which the economy cannot be revived. It is equally important to launch a new initiative to persuade overseas Pakistanis to send more remittances to bolster a tottering economy.