The International Monetary Fund (IMF) staff report about Pakistan’s economic health clearly indicates that national economy is lying in the intensive care unit on a ventilator and requires immediate dollar inflows to avoid default on repayment of its foreign obligations and eruption of balance of payment crisis.
This report is in line with the anticipated decision of the incumbent regime where its economic team considers that there’s no option left but to seek the 22nd bailout package from the lender of the last resort.
With this background, now the stage is set where Prime Minister Imran Khan will have to take crucial decision of either going back to the IMF by picking up the begging bowl in his hands or live without it by tightening the belt.
At time of rapidly depleting foreign currency reserves that nosedived by $627 million just in one week of September 2018 and touched the lowest ebb of last five years, the PTI-led government did not have much time for taking final decision and they must also keep in mind that postponing imminent decisions would simply add to the cost of living for the poor of Pakistan.
The uncertainty is not going to resolve any problem so they must come up with clear and a well-thought-out strategy to save the country from falling into economic meltdown. The government will have to make up its mind whether it wants to go with IMF within next 30 days. The clock is ticking.
Now Finance Minister Asad Umar along with Federal Finance Secretary Arif Ahmed Khan and Governor State Bank of Pakistan Tariq Bajwa is scheduled to attend the annual meeting of Bretton Wood Institutions such as the IMF/World Bank in Bali, Indonesia from Oct 8 to 14. There they would have more opportunities to discuss possibilities about a bailout package with favorable conditions with the IMF management and staff team before taking a formal decision on this subject.
Even with the IMF program, the road for short- to medium-term is quite bumpy as the fund staff had prescribed tough measures for restoring macroeconomic stability including jacking the discount rate up to double digit from 8.5 percent to over 11.5 percent and barring the central bank for allowing further and gradual adjustment of rupee against the US dollar by moving towards free floating exchange rate whereby intervention from central bank in terms of selling dollars in the open market could be done away with immediately. The rapidly depleting foreign currency reserves are also diminishing the capability of the central bank to intervene into exchange rate. The Finance Ministry officials conceded that the last month (September) proved quite heavy in which the foreign currency reserves slipped at a more accelerated pace posing increased vulnerabilities for the economy in weeks and months ahead.
Now the IMF has assessed that Pakistan’s GDP growth was projected to slow down and could fall below 5 percent of the GDP during the current fiscal year.
The inflationary pressures are expected to rebound and on average the CPI-based inflation will be hovering around 6 to 7 percent. The IMF mission has termed the Federal Board of Revenue’s (FBR) envisaged target of Rs4,398 billion as unrealistic and projected the revenue shortfall in the range of Rs150 billion. So the fixed target is highly unlikely to be achieved. Thus the budget deficit target is expected to exceed and can cross 6 percent of the GDP against the set target of 5.1 percent envisaged by the PTI through supplementary budget 2018-19.
The current account deficit is projected close to 5 percent of the GDP whereby the IMF assessed that Pakistan requires $10 to $12 billion to avert balance of payment crisis. The IMF, if Pakistan decided to request for a bailout package, would be requested to increase quota by three to five times keeping in view higher requirement of dollar inflows and also provide a front-loaded program by giving $2 to $3 billion instantly after granting approval to the program.
How much the economic managers will succeed in this regard is yet to be seen because there are dangers of continuous scarcity of dollar inflows even after an IMF program, so realistic projections need to be made to avoid the IMF program failure.
The Ministry of Finance also admitted that the government largely shares assessments made by the IMF about Pakistan’s economy and is committed to take further corrective measures to restore stability and inclusive growth. As also acknowledged by the mission, the government has inherited an inclusive growth.
The mission also said the government had inherited a fragile economy since critical economic decisions were delayed by the previous government in the election year.
Prompt decisions on monetary, exchange rate, and fiscal policies could have averted the economic downturn that Pakistan is facing today.
Going forward the government is committed to take decisive corrective adjustments to restore the economy on a path of stability and growth. The government is of the view that fiscal and price adjustments alone are not sufficient, and that unless the much-delayed deep structural and institutional reforms are implemented with firm and unflinching resolve, the entrenched imbalances plaguing the economy will keep resurfacing.
The IMF in its own terminology has diagnosed that Pakistan’s economy is facing significant economic challenges, with declining growth, high fiscal and current account deficits, and low levels of international reserves.
This mostly reflects the legacy of an overvalued exchange rate, loose fiscal policy and accommodative monetary policy. The fast rise in international oil prices, normalisation of US monetary policy and tightening financial conditions for emerging markets are adding to the difficulties in this regard. In this environment, economic growth will likely slow down significantly and inflation will rise.
The IMF has welcomed the policy measures implemented since last December. These include 18 percent cumulative depreciation of the rupee, a cumulative increase of 275 bps in the in interest rate, fiscal consolidation through the budget supplement proposed by the minister of finance, a large increase in gas tariffs closer to cost recovery levels, and the proposed increase in electricity tariffs. These measures are necessary steps in the right direction.
Additional decisive policy action, anchored in a comprehensive strategy, and significant external financing will be needed in the near-term. Policies should include more exchange rate flexibility and monetary tightening, further fiscal adjustment grounded in a medium-term consolidation strategy, and strengthening the performance of key public enterprises together with further increases in gas and power tariffs.
Together, these steps would help reduce current account pressures and improve debt sustainability. Importantly, to protect the more vulnerable segments of society, there is a need to further strengthen social protection through the Benazir Income Support Program.
Once stabilisation begins to take hold, the focus should increasingly shift to reforms to foster sustained and inclusive growth and strengthen key institutions.
Priority areas include modernising the tax system and public financial management, strengthening fiscal federalism arrangements, improving governance, eliminating losses of public enterprises, enhancing the State Bank of Pakistan’s autonomy, intensifying AML/CFT efforts, boosting the business climate and anti-corruption efforts, and fostering the economic inclusion of the poor, youth, and women.
This IMF statement has clearly indicated future roadmap for expected bailout program and the PTI-led government will have to undertake a series of reforms to avoid repeating the history where the country was known as “one or two tranche country”.
The writer is a staff member