Back to the IMF?

In negotiations to form a coalition, the new (incoming) government – in all probability led by the PTI – must find a solution to the economic woes facing the country. The PTI would be loathe to take on an IMF bailout within its first year of power, a situation that has looked likely for the last six months. The political ramifications would be significant as it would prove its critics’ point that the PTI never really had a solid economic agenda for the country. This leaves the PTI with the challenge of coming up with a home-grown economic reform plan that can, without exaggeration, perform miracles. Budget deficits and current account deficits are notoriously hard to fix in the short term within a free market economy model. This is a challenge that the PTI has promised it is up to, but for now the talk has been unconvincing. The PTI has showed off its links to Pakistani expats, who it has proclaimed are looking to invest in a progressive Pakistani economy. If the incoming government manages to fulfil this promise in the short term, the injection of foreign capital could provide it breathing room to implement its larger economic programme. If it goes to the IMF, then the PTI will commit to an austerity programme that is unlikely to go down well with those that voted it in.

One of the great myths that national economists believe in is that somehow the long list of statistics they read out every year about economic performance have a relationship with who wins elections. The public is far more attuned to seeing how its everyday life has been impacted by a particular government. Job creation, improvement of social services, and restoring faith in the Pakistani economy will be what the government will have to really deliver. To get there, the government needs around a $8 billion cushion, which could require it to go to China or Saudi Arabia if it wants to avoid the hard conditions that the IMF imposes.

The PTI’s Asad Umar, largely seen as the next finance minister, has hinted that the party is open to going to the IMF, which would not be the best political or economic move. The promises to improve tax collection will need to be fulfilled quickly. This will be made more difficult after the outgoing government raised the taxable limit from Rs0.4 million to Rs1.2 million and reduced the maximum tax rate to 15 percent. Amending these changes would also prove to be unpopular, but the public could digest it if the PTI government is able to use the additional tax revenue to revive the economy. The trick will be to balance fiscal austerity with the right dose of populist spending to restore the public’s belief in their economic future.