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May 14, 2019

IMF deal

Editorial

 
May 14, 2019

After much delay, Pakistan has reached a staff-level deal with the International Monetary Fund. The IMF will give Pakistan around $6 billion over three years. The trouble is that the deal is not totally approved yet – the government has a number of pre-conditions left to fulfil. A number of major actions will need to be taken in advance, including Rs600 billion in additional taxation measures, hikes in electricity tariffs and policy rates, as well as allowing exchange rate mobility. The IMF executive board is likely to approve the deal based on the implementation of these measures, which means that there could still be time before the IMF bailout is confirmed. So purely in terms of getting the deal in place, there is work still to be done. The bailout has been talked about for so long that, for many, it is a relief that the IMF and Pakistan have agreed to a basic programme. What the IMF bailout and its terms would do to the Pakistani economy is another matter.

Looking at the reports, it seems that the IMF has set stringent conditions on Pakistan, which will effectively punish the economy and the public in the short term at least. Cutting down government spending will require a clampdown on the development budget, which will push economic growth down. The promise of a flexible exchange rate itself will cause great uncertainty. The government has promised to bring the exchange rate down by around 20-30 percent, but this move is unlikely to spur greater exports at a time when subsidies and support will be removed from exporting industries. The IMF’s language remains vague. It has called for ‘decisive’ policies and reforms, but decisive policies can involve going a separate direction.

The IMF wants Pakistan to reduce its vulnerabilities. But one must ask whether devaluing Pakistan’s currency would not increase its vulnerability to macroeconomic instability. The IMF also wants Pakistan to increase confidence, but opposition parties and economists have wondered whether investors can be confident when the government is reducing its own development budget. The promise is that bailout reforms will put the economy back on a path to sustainable growth, but experts have wondered how such a path can involve curtailing economic growth – and in real terms, shrinking the dollar value of the GDP massively within a couple of years? The question being asked by critics of the programme is: will Pakistan really get out of its economic mess by doing more of what the IMF wants? What about the lessons from the last three decades of IMF-led economic reforms? It would appear that those in charge of governing Pakistan and fixing its economy have no other model to offer. for now, the immediate future seems to carry more pain. One can only hope those at the helm know what they are doing.

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