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March 3, 2019

An IMF deal

Editorial

 
March 3, 2019

There seem to be positive signs on the IMF front for Pakistan, now with Fitch Solutions too saying that it expects the country to reach a bailout agreement soon. However, all is not hunky dory, as Pakistan is expected to be pushed to pursue greater austerity measures. The expected $12 billion bailout deal will be twice the last bailout agreement, and is likely to come with severer conditions than before as the IMF will attempt to ensure that Pakistan does not return to it with a begging bowl in the near future. It does bear repeating that the existing IMF conditions are making life hard for the Pakistani public without improving the overall condition of the economy. While there has been some progress on reducing the current account deficit, Pakistan’s fiscal spending deficit has only increased, despite the hikes in interest rates and gas and electricity tariffs. One must wonder how much hardship is fair to bear, especially if the IMF deal is going to lead to a slowdown in economic growth, which is unlikely to improve Pakistan’s balance of payments situation much in the coming years.

The optimism from Fitch about the deal comes from its assessment of the meeting between PM Imran Khan and the IMF Chief Christine Lagarde in Dubai last month. It believes that the IMF will target Pakistan’s fiscal and debt dynamics, in the hope of narrowing the budget deficit and bringing down the debt-to-GDP ratio. The budget deficit will need to be reduced from 6.6 percent last year to around 4 percent in the next three years. The deficit target for the current year is around 4.9 percent. However, the latest SBP figures have confirmed that it is likely to be missed significantly. Public debt in Pakistan currently stands at 71.4 percent of GDP, which is an unsustainable amount. What should be worrying is that the last IMF deal aimed to bring the debt-to-GDP ratio down from 63.9 percent in 2013 to 60.5 percent in 2016. Instead, the debt-to-GDP ratio hit 67.6 percent in 2016.

Can we reasonably expect a different outcome this time around? Some key differences in the changes proposed by the IMF suggest that the outcome could, in fact, be worse. The IMF had pushed Pakistan to bring down the inter-bank interest rate, and remained non-committal on currency devaluation in its last bailout package. Now, it is pushing through a set of policies that could work on paper, but in reality, could push the country deeper into economic dependency by the time the bailout ends. With the already reduced public spending set to be reduced even further and subsidies set to be brought down from 0.9 percent of GDP to 0.4 percent, much pain lies ahead once the government is done patting itself on the back for securing an IMF bailout. There is no easy road ahead.