Staying afloat

Those who keep an eye on Pakistan’s affairs know for a fact that our economy’s flirtation with default is not going anywhere in the short or medium run. Debt service payments due over the next three years alone would test our economy, as would the colossal reconstruction effort necessitated by last year’s cataclysmic monsoon flooding. Then there are tasks like healing the market disruptions caused by this natural disaster and building resilience in the face of any future cataclysmic weather events. Knowing our economy was broken even before the 2022 monsoon disaster (or the Russian invasion of Ukraine), it is easy to believe keeping it afloat in the next few years will be a herculean task, and one that will require outside help. Moody’s concern about how Pakistan’s economy will weather the next fiscal year without IMF help comes as a confirmation that Pakistan has weathered the current fiscal with the Fund’s fist clenched shut. The fate of the current IMF programme is very much up in the air with $2.7 billion worth of assistance stuck in the pipeline.

This state of affairs has been brought on by what some government officials have dubbed as dilly-dallying by the IMF but what the Fund staff may consider prudential diligence undertaken with a view to future proofing the economic reform undertaken as part of the Extended Fund Facility (EFF) programme. It would seem the Fund staff were looking for guarantees enshrined in the next fiscal budget. For the mandarins getting down to the business of budget making about now, the Fund is suddenly dangling a $2.7 billion carrot – to encourage Pakistan to maintain fiscal discipline through the next fiscal. No departure from the energy pricing regime brought in as part of the EFF, no deviation from the rupee free-float, no potentially disruptive petroleum cross-subsidy, and so forth. This means Pakistan can hope to gain access to the stuck-up IMF financing soon after a budget done right passes the National Assembly. The prospect of a new IMF programme at this juncture can further sweeten the deal – and hopefully help Pakistan deepen its economic reform.

The Fund’s concern is understandable not only in light of Islamabad’s track record of stop-go policies, but also considering that the next fiscal will be an election year. Dar is part of a political coalition expected to be pressed hard in the upcoming general election, and he will be sorely tempted to create a feel-good bubble through cosmetic, short-term measures. If this is what the Fund staff were trying to guard against, their concern must be lauded. With governments always focused on the here and now, ad hocism and short-termism have been the bane of Pakistan’s economy going back decades. Economic decision-making based on political expediency is the reason why our economy is where it is today, and we should go to all lengths to avoid such conduct going forward. Not only should the reform programme stay on track, but the government should also deepen and broaden it with a view to achieving lasting macroeconomic stability, without which no nation can hope or claim economic sovereignty. There is yet another way to look at the situation: If Pakistan can weather the rest of the current fiscal without the Fund help, that gives us hope that the country can do the same the next fiscal. That, in turn, should give Finance Minister Ishaq Dar some desperately needed leverage vis-a-vis the IMF. How he uses that rudimentary leverage remains to be seen, but we will know soon enough. The federal budget for FY2022-23 will have it writ large all over it.