Wednesday July 06, 2022

IMF talks

By Editorial Board
May 18, 2022

Whichever government is in power, it will have to desperately find a fix for the currency crisis that has set the economy on a collapse course, with the most likely way out being revival of a stalled bailout from the International Monetary Fund (IMF). But how? A poorly manned economic front that is devoid of visionary leadership is a bad signal to markets as well as lenders. Pakistan must have them believe it has a homegrown programme that is capable of putting an end to this stalemate on a sustainable basis. The country’s economic managers have now rushed to Doha to convince the IMF to rescue them – in a week-long engagement that starts today. If a consensus evolves, the agreement would be tabled before the Fund’s Executive Board for completion of 7th Review and release of a $1 billion tranche under $6 billion Extended Fund Facility (EFF). The resumption of the suspended IMF programme hinges upon withdrawing the ‘unfunded subsidies’ on fuel and electricity. Inaction on the part of policymakers will multiply the cost of adjustment on the fiscal front. If the government continues to hold on to the current prices of petroleum products and power, then the requirement of adjustment for raising these prices will increase manifold.

Despite remaining under the IMF programme, the country’s twin deficits – fiscal deficit and current account – have been widening, and without taking corrective measures these cannot be bridged. The fiscal deficit is projected to touch Rs5.6 trillion for the current fiscal year so the government will be forced to borrow more to finance its increased budget deficit. Such fiscal expansion will also fuel inflationary pressures with a time lag. A confusing signal on the economic front cannot provide permanent solutions. On the external front, the current account deficit is projected to touch $16-17 billion as it has already crossed the $13 billion mark for the first nine months of the current fiscal year.

The IMF will likely also ask for a viable strategy to build up dwindling foreign currency reserves which had depleted by over $6 billion in the last eight weeks and now touched $10.3 billion held by the State Bank of Pakistan. Usually, there were always pressures of bullet repayments on account of external loans and liabilities in December and June every year and at a time when the foreign currency reserves are decreasing at supersonic speed. The depleting foreign exchange reserves have paved the way for the depreciation of the rupee against the dollar. The steep fall of the rupee will also fuel inflationary pressures. The IMF is expected to also come up with a prescription to present a balanced budget in order to suppress demand for controlling the twin deficits so the government will be asked to tighten fiscal and monetary policies and take additional taxation measures and remove income tax exemptions. There are no easy solutions ahead and the government will have to get its act together to steer the economy out of a perfect storm.