As expected, the IMF and Pakistan have reached a staff-level agreement (SLA) over the second and final review of the $3 billion Stand-By Arrangement (SBA) signed last July. The nine-month stabilization programme straddling the transition from the previous elected government to the incumbent has thus served its purpose and is set to conclude successfully in about a month. The news comes as a vindication of the hard-nosed policy direction set by Prime Minister Shehbaz Sharif’s previous government and followed to the hilt by the caretaker government and an affirmation that all the economic hardship suffered by the Pakistani populace through these months was not in vain. It is also a dead giveaway that the incumbent government remains wedded to the same tough approach to economic reform. The success of the review paves the way for the release of the final tranche of SBA funding of around $1.1 billion following the formal approval of the IMF executive board, expected in late April. However, the markets have responded to the news right on cue, leading Pakistan’s two-year bonds to surge to a two-year high, and putting an accent on how important it is for Pakistan to stay on the right side of the IMF.
The SBA was designed from the beginning as a stepping stone for the country to a longer-term Fund programme with stronger political ownership, and the Fund’s mission chief aptly put the state of play in perspective in his end-of-mission statement by acknowledging Pakistan’s interest in a medium-term programme. And, given how deep in doldrums Pakistan’s economy is, a four-year programme is the least Finance Minister Muhammad Aurangzeb needs to clean up the Augean stables of an economy riddled with deep systemic distortions like a narrow tax base, an ailing energy sector, a host of cash-bleeding state-owned enterprises (SOEs), unbridled inflation, and an anaemic revenue capacity. Worst of all, he is taking the reins of his portfolio at a time when all engines of the economy are stalling.
To kickstart economic activity at a near standstill would be a challenge under the best of circumstances, but he has to achieve it at a time when the circumstances could scarcely be worse this side of a total bust. Then, too, he has to negotiate a bleak geostrategic environment and strong global headwinds. The only thing going for the finance minister at this point is the backing of a broad-based political coalition government headed by the same hard-boiled prime minister who architected the original policy that took Pakistan through the SBA.
From the public’s point of view, a lot of the reform on the government’s agenda will be inflationary. The SBP is expected to stick with its tight-fisted monetary policy for the foreseeable future to bring inflation and inflation expectations back to manageable proportions. Energy sector reform will inevitably entail investment in distribution and transmission, which, combined with the imperative of cost-recovery energy prices to at least freeze the circular debt, will fuel inflation. Casting the tax net wider will also put an additional burden on the common Pakistani - even without considering the political difficulty of making the rent-seeking farm and retail sectors pull their weight. Then there is the matter of SOEs, weighing down on the economy like so many millstones in its neck. The strain of populism running right through the country’s political spectrum will inevitably hinder progress towards unloading their unbearable burden on the country’s economy, but this too is a measure that has to be pushed through to rid the country of the terrible drain on its precious resources. On top of it all is the arduous task of managing the unsustainably high debt burden, starting with foreign debt. The government’s policy mainstay through these troubled waters should be meaningful fiscal consolidation, careful investment in targeted safety nets, and keeping a tight lid on waste and pilferage - no doubt each a tough ask, especially for a coalition government lacking cohesion as its components jostle for political advantage among themselves. Fortunately or unfortunately, however, forward is the only direction out of this mess.