Towards the end of this very month last year, the IMF invited a select group of Pakistani economists to its headquarters in Washington, DC for an informal roundtable discussion. The timing was significant. Elections were two months away and the emergence of a non-traditional political party as winner was widely predicted. The economy had picked up growth but signs of serious external and internal imbalance were becoming visible.The IMF staff felt that "the continued erosion of economic stability poses challenges for the period ahead and will require an adequately calibrated policy response to guide stabilisation efforts. In parallel, there will be a need to address structural constraints, including many longstanding ones."

With the experience of 22 past engagements at its disposal, the IMF understands full well the historic truth that each political transition in Pakistan lands up the economy in the IMF’s lap. Unsurprisingly, therefore, Pakistan’s return to the IMF was taken as a given. The focus of the discussion was on how to overcome longstanding obstacles to sustained reform. With Imran Khan’s victory imminent, and based on his public pronouncements, I challenged the presumption that Pakistan would approach the IMF, as a member of the group. On the contrary, given the US posturing, the IMF Board was waiting for Pakistan to apply so as to gain access to CPEC credits information and strategic thrusts. As for the obstacles to reform, my view was that in our context, a reform first, disburse later approach might work.

If not for CPEC, the last PML-N Finance Minister, or even the caretakers supported by the miltablishment, would have approached the IMF. Instead, they started doing what the IMF would have wanted them to do, but without an IMF programme. The rupee depreciation, in gross violation of Ishaq Dar’s article of faith, epitomised this approach. Asad Umer, PTI’s finance minister, continued with this approach with far greater vigour, supplementing a depreciating rupee with higher interest rates and energy prices. In administering the IMF medicine without the IMF, he was respecting his leader’s public pronouncements and following the party line. It was a strategy of muddling through while keeping engaged with the IMF for a just-in-case scenario. Constantly fed by economists’ donors-speak, the family panicked just as the patient was coming out of the ICU.

There was a sudden change of guards and the patient was taken back to the ICU. A strong dose prescribed by the IMF was agreed in no time and administered at lightning speed. Not a cent has been disbursed out of the meanest size of the programme, but the dollar has been hitting the rupee out of the ground, scoring a century and a half. While imports have declined, exports have declined, too! So the effect on trade deficit and the current account deficit is not very perceptible. There are problems with the structure of exports as well as imports and their responsiveness to price changes is not significant. In the State Bank’s view, the falling rupee does not indicate volatility; it "reflects the continuing resolution of accumulated imbalances of the past."

As the rupee falls and imports become expensive, the newly ordained autonomy of the State Bank has been reflected in a high jump of the policy rate from 10.75 to 12.25 percent. The current account deficit and fiscal deficit are contributing to higher core inflation and the utility price adjustments and rising oil prices are fuelling headline inflation. Based on expectations, the inflation target for the current year is in the range of 6.5-7.5 per cent and higher for next year.Higher interest rates are assumed to contain inflation by reducing aggregate demand. Private sector borrowing is about half of the government borrowing and personal loans constitute a very small portion of the private sector borrowing. Rather than containing inflation, higher interest rate will add to the cost of doing business, discourage investment and, hence, depress growth. As for the government borrowing, more than half is from the State Bank, which is inflationary. Shifting it to the commercial banks is a prior condition. The resulting shift will raise cost, but it is unlikely to deter government borrowing and reduce its contribution to aggregate demand.

Fiscal deficit touched an historic high in the first nine months of the current year. A most important prior condition is for the government to restrict primary deficit to 0.6 per cent of GDP, or the gap between non-interest expenditure and revenue. Before getting any money from the IMF, the government will have to reflect this requirement in the next year’s budget. Development expenditure, it is understood, is allowed at current year’s level. Social spending, including the Benazir Income Support Programme (BISP) has actually been granted an enhancement.

On the expenditure side, the major burden of adjustment is on defence expenditure. As this is not a condition, and civilian governments traditionally do not take the bait, the main burden of adjustment will fall on the revenue side. This, according to the IMF, includes "revenue mobilisation measures to eliminate exemptions, curtail special treatments, and improve tax administration". Reinforcing these economic policies will be structural reform related to rebalancing of the NFC award, public enterprises, institutions and governance, and anti-money laundering efforts.

Also read: Expectations from the budget

As is clear to a discerning eye, affirmative action is prescribed for key players. For the Ministry of Finance, "The forthcoming budget for FY2019/20 is a first critical step in the authorities’ fiscal strategy." Provinces "are committed to contribute to these efforts by better aligning their fiscal objectives with those of the federal government," implying running of substantial surpluses. An operationally independent State Bank will "focus on reducing inflation, which disproportionately affects the poor" and a "market-determined exchange rate" for "better resource allocation."

The proposed 39-month Extended Fund Arrangement for about US$6 billion will materialise after the above set of prior actions and confirmation of international partners’ financial commitments to supplement the funding have been technically reviewed by the IMF management and cleared for submission to the Executive Board, the final approving authority. This is a body of stakeholders, led by the United States, who wield political and strategic power in proportion to their financial stakes. Ernesto Ramirez Rigo, the IMF staff team leader, put it curtly: "The Pakistani authorities and the IMF team have reached a staff level agreement on economic policies that could be supported by a 39-month Extended Fund Arrangement (EFF) for about US$6 billion." Notice the keywords - "could be supported."

There are many a slip between the cup and the lip. But the clinical execution by the technocrats who know the script suggests that the operation is likely to be successful. Whether the patient survives or not, only time can tell. Examples of high-growing post operation economies are few and far between.