Advice to the new government

August 21,2018

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It has been widely reported in the press that the caretaker government has prepared a detailed strategy paper for handling the economic situation.

The details available are sketchy, but the key elements of the recommendations include: (a) a fiscal adjustment of Rs600 billion (1.5 percent of GDP); (b) policy rate adjustment of 200 bps; and (c) allowing the rupee to depreciate to Rs135/$. The adjustment will largely come from the expenditure side with little or no effort from taxes. Without these measures, it is warned, that forex reserves would fall to the precarious level of $5 billion, sufficient for four months of imports. Once this happens, there will be panic in banks and markets.

In an alternative scenario, heavy taxation (nearly Rs560 billion) has been suggested, including the introduction of a wealth tax. This scenario assumes the country will go to the IMF for a bailout. This will avoid steep expenditure cuts and allow the new government to fund its development projects.

While the strategy paper contains measures required for stabilisation, it is nowhere close to constructing the true picture of a non-IMF scenario. In this article, we lay out the consequences which will flow from the decision of not going for the Fund programme.

First, what kind of message do we want to send out to the world about not approaching the IMF when we are its member and, under the Articles of Agreement, the IMF is mandated to help a member when it faces a balance of payments problem. Do we say we have some ideological differences that are preventing us from seeking its assistance? Such a stance will send a very negative signal to the international financial community, which has invested a great deal in this country. Of the $75 billion that the government of Pakistan owes to the world, more than 85 percent belongs to bilateral and multilateral lenders, with the latter having the largest share. The remaining is owed to commercial banks, euro bonds and Sukuk.

Second, there is already a great deal of scepticism being propagated against CPEC. From US Secretary Of State Mike Pompeo’s statement to an uncalled-for reference in the rating agency Fitch’s recent update on Pakistan, and so many other articles in leading publications, rejecting to work within international norms will reinforce needless suspicions about Pakistan’s financial affairs.

Third, without the IMF certifying our macroeconomic health, both the World Bank and the ADB may be constrained to provide BOP support to Pakistan through concessional policy loans. Such loans are critical both for being economical as well as to build reserves.

Fourth, Pakistan has several market-based loans (Euro Bonds and Sukuk) which will be maturing in 2019 (one bond and one Sukuk totalling $2 billion). They will require refinancing as we will not be able to repay them. In fact, the country will perhaps need additional loans to support an expanding economy. For all these reasons, without having the Fund’s certification, access to such loans will be very difficult.

Fifth, even the friends we may count on for some financial support (which the prime minister has shown an aversion to) will advise that we must work within the international framework. Their ability to help us will be enhanced and they will be able to defend their engagement with Pakistan more effectively once it is working in familiar ways.

Sixth, to survive without a Fund programme, we have to resort to a wide range of controls: import margins, regulatory duties, exchange rate restrictions, removing petroleum imports from the inter-bank market, and frequent interventions in the forex market. All of this will mean harking back to the past. Interest rates will be increased, but banks may still demand higher returns, as they have done recently, by refusing to invest in permanent interest bearing shares (PIBs) and concentrating only on maturities of three months. Continuing uncertainty will be the justification. A disruptive environment will become more disruptive.

Seventh, it will be a folly to do all this for the sake of living with high deficits, as some may suggest to the new government. This option will be a disastrous recipe. It will fuel aggregate demand which in the first place needs to be controlled and tamed. Otherwise, high imports and current account deficit – the bane of the economy – will persist. Accordingly, it will be inescapable to follow a fiscal and debt-management path that has been outlined in the Fiscal Responsibility and Debt Limitation Act (FRDLA), 2005.

In the first year, the deficit has to be brought down to five percent of GDP, which means a two percent reduction. A combination of tax measures and expenditure cuts will be required to achieve this, which will be a herculean task. The hardship and pain it will cause will be worthwhile when returns are high and quick. No such outcome can be guaranteed as we will be charting in unknown waters.

Finally, there is no guarantee that we will escape a situation of default on our foreign obligations, which will be rising in the coming years as the IMF loan repayments become due. Even the more recent borrowings we have done from commercial banks will mature and require greater amount of foreign resources.

In view of the above, it is hardly a viable option to be on our own. Some have suggested that we should wait for six to nine months before going to the Fund. There is really no time to waste, as things will only worsen and weaken our negotiating position with the IMF.

Also, going to the IMF-World Bank-ADB is not like asking a country to give us loans, to which the prime minister has justifiably expressed indignation. These are cooperative organisations where members facing exceptional conditions are provided help. In the article ‘The new IMF programme’ published in these pages on August 14, I discussed that Pakistan is not a chronic IMF-visitor and, therefore, should go there with confidence.

The writer is a former finance secretary. Email:


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