After the IMF deal

It should be clear that despite the agreement with the IMF, the economy is in trouble

After the IMF deal


he government of Pakistan has finally secured a staff-level agreement with the International Monetary Fund just in the nick of time. After months of wait, Nathan Porter, who led the IMF staff team, has announced that a $3 billion Stand-By Arrangement (SBA) has been signed. The IMF board will convene in mid-July to endorse this accord.

It will be good to keep in mind that one, the amount Pakistan will receive from the IMF under the arrangement is only a fraction of the funds it needs to meet its debt servicing obligations this year, and two, that the country will likely need to remain engaged with the IMF for several years.

The public should brace themselves for a surge in inflation, energy costs and fuel prices. The recent raise in diesel oil prices (Rs 7.5 a litre) following the SBA agreement is merely the beginning. It is high time for the key stakeholders to brainstorm and hold a meaningful dialogue. They must either sign a charter of economy or develop a long-term strategy framework.

Considering this, it is important to determine whether the Pakistan Democratic Movement (PDM) can utilise this IMF deal as an opportunity to transition from short-term relief to long-term recovery.

Dealing with inflationary trends, low foreign reserves and shaky macroeconomic stability is no walk in the park. It is a real uphill battle that requires a lot of blood, sweat and tears and serious fiscal discipline.

The annual inflation rate rose to an unprecedented 38 percent in May. However, for several years, the people of Pakistan have shown an extraordinary capacity for perseverance in the face of mounting challenges. Pakistan is one of the ten countries in the world suffering the most from climate change. Last year’s severe flooding resulted in widespread devastation, including loss of crops, food stockpiles, homes and livelihoods. Let’s start by addressing the factors that led to these problems first and then move on to brainstorming potential remedies.

The last two decades have been a real rollercoaster in terms of our economic situation. We have had some serious issues including poor governance and fiscal indiscipline. Let’s not forget about the uninviting investment climate.

To make matters even worse, we have had instances where our monetary policy has been loose even as our exchange rate has been tightly controlled. These factors have come together to create some major macroeconomic imbalances. This has been a wild ride. Navigating through the rough patch will now be like finding a needle in a haystack. Having a solid plan for structural reform is crucial to steer clear of a never-ending crisis and tackling the underlying issues causing our current economic woes.

Unfortunately, many of the popular leaders in Pakistan have painted an ugly image of the IMF for their constituencies instead of fairly explaining its objectives.

Considering our balance of payments and external debt repayment issues are long-term problems, the next government will likely need to negotiate another long-term Extended Fund Facility (EFF) programme with the IMF.

The risk of the next government not having the same commitment to the IMF agreement as the current one cannot be ignored. The incumbents should therefore

empower and mandate the governor of the State Bank of Pakistan (SBP) to make certain decisions in the monetary and fiscal policy areas.

Secondly, restructuring public debt and implementing the government’s ambitious reform agenda are the key ingredients in Pakistan’s economic recovery and rebound. The PDM government appears to be committed to some crucial structural reforms. These reforms should include steps to stabilise, such as increased revenue mobilisation, improved tax administration, cost-recovery-based energy pricing, ensuring the soundness of the financial sector and enhancing the social safety net to aid the most vulnerable.

Moreover, the government must standardise Pakistan’s trade and investment environment to improve productivity and competitiveness. It is time to unleash the power of enterprise and rein in corruption. Almost 90 percent of the country’s small farmers are working with a plot of land smaller than 12.5 acres. This should be an important consideration in planning.

Encouraging commercial banks to promote weather index-based crop insurance mechanisms for small farmers in Pakistan can be a game-changer. It will provide the farmers a much-needed lifeline to weather the storm when climate shocks and natural catastrophes come knocking on their doors, wreaking havoc on their crops and livelihoods.

It is high time we pulled out all stops to win the trust and support of the global lending community. It should be clear that despite the recent agreement with the IMF, the economy is still in deep trouble. If the current or the successor government drops the ball on their pledges to the global lending organisations, we will be in much more trouble.

The writer heads the business finance programme at the Birmingham City University, UK. He tweets @HafizUsmanRana

After the IMF deal