THE latest IMF assistance sums up decades of economic mismanagement in the country. Chronic under-investment due to terrorism, energy crisis, etc. have left the country with a limited export base to support growth, while failure to improve tax collection has pushed public debt to elevated levels. The latest IMF package requires economic adjustment not too dissimilar to what was agreed upon in the past and not delivered. And with debt levels now much higher and bilateral loans taking on an important role in the country’s macroeconomic fundamentals, the IMF wants to ensure its lending standards remain strict.
Safeguarding economic stability in the strategically important country is no small matter. An IMF program will at least help in that goal- even if it doesn’t meet all of the past conditions repeated this time, and limit the country’s growing over dependence on loans. With economic growth already set to slow sharply this year, the adjustment will be unpopular- something past governments shied away from. But it could give Imran Khan’s ruling Tehreek-e-Insaf (PTI) party a chance to deliver on at least some of its election promises to help the poor and boost investment- sans misgovernance, mismanagement, corruption and myopic political scoring.
Tough times are ahead of us, the PM has already sounded off candidly, amid our state of denial, and clamor, gossips, speculations, etc. in the media.
The IMF executive board is likely to approve the program in early July, pending parliamentary approval of PM Khan government’s first annual budget. Pakistan has received about $22 billion in investments over the past six years through the Belt and Road Initiative, but IMF agreements require its loans to be repaid before those from other partiesJames Schwemlein, nonresident scholar at the Carnegie Endowment for International Peace and a former U.S. State Department official
At $6 billion, the IMF package agreed in principle this week is around half the amount economists estimate Pakistan needs to plug its external shortfall. It is smaller than the 2013 bailout, though the current account deficit has increased by a factor of four in US dollar terms, external debt has ballooned and foreign exchange reserves are depleted.
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The $7.2bn pledged by China, the United Arab Emirates and Saudi Arabia since Mr Khan came to power last August helped firefighting- it was not meant to roll a hit or miss to the IMF. But the loans were timely and tactically sound- much to the dismay of fence-sitters.
Diversifying its financing may have allowed Pakistan to reduce its reliance on the IMF, but does not reduce the need to adhere to its targets- by and large repeated since early 2000s.
A well-documented system, broadening of tax base to name a few will unleash stronger economy fundamentals as practiced in the international arena. A more dynamic private sector will benefit all creditors. The seal of approval from an IMF program will facilitate a quicker return to market-based financing and a lowering of financing costs. Such as the World Bank, Asian Development Bank, etc. Strict IMF targets (this time) wants to ensure the country has sufficient capacity to repay, and help allay concerns in the West (read Washington) over the fund’s financing being used to repay all creditors.
Pakistan has a “serious debt problem, but not a China debt problem” as hinted by Washington.
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The required subsidy cuts and reform of ailing state-owned enterprises will be unpopular and, alongside exchange rate liberalization, will push inflation higher and hurt living standards in the short term. But if it complies with the targets, Pakistan will have an opportunity to finally reform its economy- the political capital needed for such a move was squandered away by its predecessors.
Mr Khan has pledged this will be the last time that Pakistan turns to the IMF. This seems unlikely, given the record, but even partial reforms and honest, courageous implementation of recalibrating rules of business and governance by Mr. Khan and his team will matter for the country, and help avert economic turbulence.
‘Twice bitten once shy’, the IMF expects (even though it may be politically incorrect) consummation of similar commitments this time as was previously made and not delivered- ironically they are in the country’s best interest, because it wants to be a part of the rules-based global financial system. That sprint was however squandered. There’s now no more hit or miss with or without IMF, as things stand.