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Economic notes

October 9, 2018

IMF and the PM

Opinion

October 9, 2018

The visiting IMF mission has concluded its assessment of the economy and issued a statement before its departure. The statement has three messages: “(i) Pakistan is facing significant economic challenges, with declining growth, high fiscal and current account deficits, and low levels of international reserves; (ii) recent policy measures are steps in the right direction, but not yet sufficient; decisive policy action and significant external financing will be needed to stabilise the economy; and (c) once stabilisation is beginning to take hold, increasing focus is warranted on critical reforms to foster sustained and inclusive growth and strengthen institutions”.

IMF says not approached by Pakistan for assistance

It is hard to understand why an IMF mission was needed to know what was already known to all economy-watchers for at least six months: the macroeconomic framework of the country had broken down, and that the repair work was not taken in hand for one political reason or the other.

The Ministry of Finance also issued a statement on the following day endorsing the findings of the mission and expressing a resolve to undertake the necessary corrective adjustment to restore stability and growth. However, the statement also mentioned that: “it was acknowledged by the mission [that] the government has inherited a fragile economy since critical economic decisions were delayed by the previous government in an election year. Prompt decisions on monetary, exchange rate and fiscal policies could have averted the economic downturn that Pakistan is facing today”.

It is terrible to realise that precious time has been lost even on the watch of this government. This time would have been sufficient to lay the foundations of normal recovery. It is not clear, even now, when the government will formally request the Fund for a mission to negotiate the programme. Newspaper reports are not very promising in this regard.

In a long press conference on Sunday, the prime minister has explained the strand of thought that is guiding the government’s plans to stabilise the economy. He said that the country is facing unsustainable debt and prices will have to be increased to lower the burden. But he wanted to avoid this strategy. For this purpose, he explained, he was looking for the support of some friendly countries to place sizeable deposits with the SBP that can help build reserves.

Alternatively, he further elaborated, the government was coming down hard on those who have looted the country and shipped its wealth abroad. The recovery of the looted wealth will provide the necessary resources needed to pay off the debts.

In response to a volley of questions, the prime minister acknowledged that there may be a possibility of going to the Fund also. This will be inevitable if support from friendly countries isn’t forthcoming.

Evidently, there is still confusion on whether and when the government will act decisively on this critical decision. The lack of clarity and resolution are hurting the government and making the correction process harder.

We have utmost sympathy with the ideas and reasoning expounded by the prime minister during his press conference. Unfortunately, these ideas don’t square up with the ground reality. The resources to balance the external account are needed today – and not tomorrow. It would be too much to expect the assets-recovery efforts to generate significant resources in a short period of time. Meanwhile, with every passing day, the hole is expanding and plugging it will require more painful corrections.

The friends of Pakistan haven’t come forward so far and future prospects aren’t very promising. More importantly, even if friendly support were to come, it wouldn’t have been a substitute for the kind of rigorous discipline an IMF programme brings on the table. The country needs it urgently. The last thing that should come in the way of making a right decision is a past rhetoric that would have condemned IMF programmes or likened them with a begging bowl. We have to move forward by taking solace in making the right decisions rather than confounding a difficult state by excluding the right decisions.

Let’s also point out that our economic challenges are multiplying by the day. The world economy is heading toward turmoil amid US sanctions on Iran. Oil prices have crossed the $85 mark and predictions are that they will soon climb to $90 when Iranian sanctions go into effect on November 4, 2018. The unprecedented era of quantitative easing (QE), which led to a flood of liquidity at a near-zero interest rate, is finally over.

After maintaining the interest rate at 0.25 percent for nearly a decade, the Fed has started increasing the rate and has set it at 2.25 percent in its last meeting on September 28. The rising interest rates are making the dollar stronger vis-a-vis other currencies. Emerging market (EM) currencies are facing spiralling losses in the values of their currencies.

The excessive borrowings made on low interest rates are now unsustainable while the underlying values of collateral are declining, triggering a sell-off that incurs losses – which, in turn, poses new requirements for capital, and further divestment to meet those capital requirements. An increasing number of analysts are predicting that the next global financial crisis is just around the corner.

Viewed in this backdrop, one is constrained to say that our economy is not prepared to face such a shock as we are unable to put our house in order. The stock market is down to its real lows, reserves are depleting fast, and the twin deficits are keeping demand high, thereby exacerbating pressures on both interest rates and exchange rates. Not surprisingly, the mission has pointed out that significant adjustments in interest rates and exchange rates are warranted. Under the circumstances, there is no time to waste. The government must act decisively to lay down a programme for economic revival, which would be credible enough to win IMF support.

The writer is a former finance secretary. Email: [email protected]

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