If naysayers were looking for any more proof that Pakistan’s economy could face a period of uncertainty, they need to go no further than the high offices of the International Monetary Fund (IMF). The international lender has warned that Pakistan could face a ‘continued erosion of macroeconomic stability’. The Fund is worried by two rising deficits – the budget and the current account. The consequences of this is the depletion in foreign exchange reserves. Only last year former finance minister Ishaq Dar had declared that the dark days of Pakistan turning to the begging bowl were over. Most neutral analysts remained sceptical of such statements, especially in view of declining exports and rising import costs. The IMF itself is concerned over Pakistan’s ability to repay its debt to the organisation if the current situation is not stemmed. The IMF is also concerned about the impact of CPEC on the fiscal health of the country’s exchequer, noting that high import costs and an accommodative monetary policy are likely to cause further deterioration. With the current account deficit set to hit $16.6 billion this year, the country’s forex reserves are set to fall by $4 billion to $12.09 billion. The medium-term concerns seem to be justified since there is no way to replenish the reserves.
The IMF’s warnings appear to be sound – but the same cannot be said for its recommendations. It has suggested further depreciation of the Pak rupee, which as we have noted earlier, makes sense only in a climate where Pakistan has a thriving export sector – or at least when its export sector is ready to boom. Currently, the country’s export sector continues to face a number of structural impediments, out of which the already low exchange rate is not the most significant. Technological improvement, continuous power supply and cost reduction should be the first priorities. Moreover, changing the exchange rate would spiral inflation, which the IMF believes is still contained. The high GDP growth of 5.6 percent may look good but is not a cure for the trouble spots in the economy.
In terms of the budget deficit, the IMF is concerned that election-year spending will push the deficit up needlessly. What is strange is how quickly the IMF narrative on a country’s economy changes. In the last two years, the IMF continued to praise Pakistan for nearing macroeconomic stability as long as the country continued to toe its line. Now, it has begun to switch sides, issuing ominous warnings. The trouble is that it is not that the warning signs weren’t there. The issues the Fund has identified now had already appeared some time back. The government, though, appears to still be in denial. It is said that the government is still sitting on the IMF review report and considering whether to release it. Finance Adviser Miftah Ismail has dismissed the IMF report, while promising to keep the budget deficit under three percent for the current year. It currently stands at just above five percent for last year. Moreover, he has suggested another bond issue might be in process, which all but confirms that the fiscal problems are real. The first step is to accept a problem. This means that the government will have to address the budget and current account deficit through policymaking on its own – a task that our governments have not managed to do in decades.