Market fears

The political repercussions of Sunday’s by-poll win for former prime minister Imran Khan and his PTI will take time to play out, but the word from the markets is already in. The stocks recorded a precipitous 1.69 per cent slide, and the rupee faced a similar bloodbath against the greenback. Dollar at the interbank touched record highs, closing at Rs215.19, marking a gain of Rs4.24. In the open market, the greenback gained Rs5 to reach a record high of Rs216.50. The markets are acting on the fears that the new round of political uncertainty may derail Pakistan’s multibillion-dollar IMF bailout again. The increased political uncertainty in the wake of the Punjab by-poll could impact the economic decision-making of the present government. These fears are largely based on the past actions of Khan, whose government derailed the IMF programme, choked other sources of financing, and ate into the country’s forex reserves months before his ouster. The omissions and commissions of his administration weakened the rupee, piled up foreign debt, and caused the current account deficit to balloon. On top of it all, his anti-American narrative tended to push foreign investment away.

Pakistan’s IMF programme has been on the rocks since February 2022 precisely because the past government was unable or unwilling to take the decisions timely. Any hiccup in the IMF programme, however, sends the economy in a tailspin. When Prime Minister Shehbaz Sharif took over in April, his work was cut out for him: economic stabilization. The process that subsequently put the country’s economy back on an even keel was both time consuming and painful. Only last week, Finance Minister Miftah Ismail announced his government’s success in averting default. Now those gains seem set to erode. Any change in the political setup should not derail economic stability. There should be no doubt that the IMF can hold talks with any government – including a caretaker government. However, Pakistan has to meet all IMF conditions upfront, and with the IMF board due to meet in the last week of August to approve the revival of Pakistan’s Extended Fund Facility (EFF), Islamabad cannot afford any delays in implementing the agreed prior actions.

The implementation of Pakistan’s economic reform agenda under the IMF programme requires political ownership, and how eager the Sharif administration can be to provide that ownership after losing the Punjab by-polls is anybody’s guess. The bottom line is that Pakistan is stuck with the IMF for now. It is immaterial if Sharif is in the hot seat or a succeeding or caretaker prime minister. For a country teetering on the brink of default, the only thing that matters is that the reforms agreed with the Fund are implemented in letter and spirit and on the dot. Any attempts to stall or delay an agreed prior action will push Pakistan towards sovereign default – and averting that again may not be easy or even possible. Any misadventure of un-budgeted subsidies for political gains could again be a recipe for disaster.