Pakistan and the International Monetary Fund (IMF), after considerable deliberation, have agreed on a Staff Level Agreement. The agreement lays the groundwork for resumption of the programme, with an increase in the size of the facility to $7 billion, from theearlier $6 billion. The timing of the agreement is extremely critical given increased recessionary risks across the globe, which will keep emerging markets under pressure. Pakistan is one of the more vulnerable countries in terms of sovereign default given its reliance on imported energy, and food supplies, while perennially navigating a balance of payments crisis. The agreement with the IMF, and the resumption of the programme would signal to other multilateral and sovereign lenders regarding steps that the country will be taking to achieve macroeconomic stability in the short- to mid-term.
Although Pakistan is no stranger to the IMF, being one of its more frequent borrowers, the timing this time around is critical given the recent sovereign default of Sri Lanka in the region, and heightened risk associated with emerging markets. Such heightened risk can be attributed to excessive borrowing by many sovereigns, who would see their funding costs increase as interest rates increase across the board; this will further squeeze capacity to fund infrastructure, and social support programmes – potentially leading to political turmoil. The political and economic cost of a near-default scenario is much higher than its financial cost, as we can see in the case of Sri Lanka.
An increase in interest rates locally along with adjustment in fuel prices to bring it in-line with parity in international markets are some measures that were instrumental in the closure of the agreement. It remains to be seen whether this will be the last IMF programme, and the country is actually able to achieve macroeconomic stability, or whether this will just be yet another band-aid fix, only to be made worse by yet another import-funded consumption binge. Pakistan has had 23 programmes with the IMF during the last 50 years. Some of the reasons why the country constantly stays in fire-fighting mode include a sheer lack of will and the inability to develop a competitive export base or bring greater economic segments under the tax net, along with the perpetually loss-making state-owned enterprises.
The only way to avoid yet another IMF programme in the future is through macroeconomic reforms, which necessitate expansion of the tax base, development of a competitive export base, and elimination of distortive subsidies and pricing mechanisms that create one circular debt crisis after another. Importantly, a more fiscally prudent approach which doesn’t crowd out private-sector lending remains critical in developing a long-term export-oriented industrial or technology base. Pakistan has potentially averted a default scenario in the near term as liquidity through the IMF, multilaterals, and other sovereigns may shore up our reserves for the time being. We have been provided another opportunity to bring this house in order. But we may not get another chance to undertake critical reforms. The punch bowl may well be taken away one day.