Talks with the IMF

The Pakistan government faces difficult choices in the next three weeks as a new round of talks with the International Monetary Fund (IMF) is set to begin. Another way of looking at the situation is that ordinary Pakistanis need to prepare for tougher times. The impasse between the IMF and the PTI government lies on a number of key issues: implementing a free-floating exchange rate, increasing electricity tariffs by 22 percent, full disclosure of CPEC financing details, increasing the tax target and curtailing the budget deficit further. In the next three weeks, the PTI government is expected to show compliance on all of these issues; however, it has only accepted the condition of hiking electricity tariffs to curtail circular debt in the power sector. The government has continued to put up limited resistance on each of the other points of disagreement, its rationale falling in the category of ‘we can’t do this,’ rather than ‘we do not agree with this.’

This is the key crisis at the centre of the economic policy of the current PTI government. Its belief in market fundamentalism does not match up to the political and economic realities of Pakistan. For example, there is no knowing when the fall in the Pakistani rupee will end if the currency was allowed to free float, with virtually zero demand for the currency in the global market.

Other points of disagreement are simpler to understand. The FBR has refused to increase its target higher from the revised target of Rs4,455 billion to above Rs4,550 billion. Already facing a tax collection deficit of around Rs150 billion till December, increasing the tax collection above the IMF target will require a wide range of tax hikes and new taxes. On the issue of budget deficit, the PTI is in a tough bind. Having slashed development spending by around 40 percent within its first few weeks before talking to the IMF, the government thought it would be in a stronger bargaining position. Instead, the IMF is asking for cuts on the government’s public spending plan, which leaves it in another tough bind: slashing the defence budget or the development budget even more? What would be left of the development budget if it were to be slashed further is a question worth pondering another time. For now, it is important to focus on what the real cost of the IMF bailout is going to be, whether it is a cost worth paying and whether it will work. There are serious concerns about the IMF’s proposed intervention in the Pakistani economy. What our policymakers must ask themselves is why, despite almost three decades of IMF-led economic policymaking, Pakistan has only sunk deeper into the hole. As the next round of talks approaches, the weight of this question will only get heavier.