So, will the IMF deal help Pakistan avoid economic meltdown?

After an impasse lasting many long months, the International Monetary Fund (IMF) has reached a staff-level agreement (SLA) with Pakistan at the final hour, and announced a $3 bn standby arrangement for the country. The deal still requires approval by the IMF board which will meet sometime in July. While the SLA has been reached after hectic diplomatic efforts, heavy tweaking in the federal budget, large increases in energy sector tariffs, and revenue collection targets, it is important to understand why there was a delay of eight strenuous months to arrive at this point. Could it not have come sooner?

According to the Fund’s own assessment, reserves had continued to decline to dangerously low levels. The power sector’s liquidity issues remain acute, with circular debt widening in the energy sector. External finances that had to be arranged from friendly countries are taking ages, compounding challenges on the balance of payments’ front, including uncertainty regarding Pakistan honoring its maturing debts. 

The budget which had been announced earlier in June this year, also took the IMF and other development partners by surprise – disappointing the Fund team engaging with Pakistan. Despite an earlier understanding with the Fund, the finance ministry presented a budget which had an expansionary tone – something to appeal to all before the government went to elections. There were tax expenditures and amenities which even some members of the cabinet had warned against. 

Pull-quote: While a $3 bn deal should restore some investor confidence, it is still not sufficient to attract foreign direct investments in local manufacturing or export industries. 

Dr. Vaqar Ahmed

With regards to much deeper reforms, there has been a go-slow approach when it came to taking decisions on privatization and implementation of a state-owned enterprise triage plan – again resulting in large fiscal leakages. Import inflows, the exchange rate, interest rates and trade finance have all been very uncertain – denting the confidence of exporters and diaspora sending remittances through formal channels or investing in assets back home. 

Due to high inflation, it is important to remember that tax collection in real terms has been on the decline and so has the government’s public investment. This continues to have negative implications for allocations necessary to sustain quality spending on sustainable development or even to respond to commitments during flood and other natural or man-made disasters. 

This year could see two more finance ministers take charge once the caretaker setup and next (elected) administration are sworn in. It will be extremely important that this government and the latter two (within this year) resist pressures for un-budgeted spending or tax exemptions and execute the budget as planned and discussed with the fund authorities. 

This will require the caretaker setup and future elected leadership to continue the path of broadening the tax base and going after undertaxed sectors while ensuring timely and targeted social protection to protect the poorest of the poor from high inflation. 

Keeping budgets in line with the commitment i.e., primary surplus of around 0.4 percent of GDP will only be a start. Even the new elected government later this year cannot make an excuse of violating this promise which could in turn jeopardize Pakistan’s chances for the next multi-year program with the fund. One way of walking the line could be to at least develop a consensus within the Pakistan Democratic Movement (PDM) around promises with the fund or as many call it, a ‘Charter of Economy.’ Any such charter will require legal cover or at least respect existing legislation including the Public Finance Management Act. There is no room for ‘look good’ public schemes and their inclusion in federal public sector development program or provincial annual development programs. Pensions’ reforms will also have to be executed on a fast-track basis. The consolidation of the public administration is required to streamline its size at the federal and provincial level. 

Practicing politics on privatization, the reform of state owned enterprises, and high tariffs and non-tariff barriers on trading with neighbors gives rise to ‘bad economics,’ high current account and fiscal deficit, and in turn, stubbornly high levels of inflation. While a $3 bn deal should restore some investor confidence, it is still not sufficient to attract foreign direct investments in local manufacturing or export industries. That will require a multi-partisan consensus on reducing the cost of doing business, slashing regulatory burdens on the private sector, making the trade regime certain, allowing a market determined exchange rate, and ensuring the independence of the central bank when it comes to decisions regarding the policy rate. 

Restoring and strengthening the trust of the global lending community is of the utmost importance. One should be clear that despite the IMF agreement, Pakistan’s economy remains in the ‘red.’ And, if this and the next government is unsuccessful in implementing the promises made to the Fund and multilateral organizations, the impact on the economy during the last two quarters of fiscal year 2023-24 could be far worse, with higher levels of debt accumulation, difficulties in meeting repayment obligations, further weakening of rupee, higher inflation and an even higher jump in interest rates. 

- Dr. Vaqar Ahmed is joint executive director at the Sustainable Development Policy Institute (SDPI). He has served as an adviser to the UN Development Programme (UNDP) and has undertaken assignments with the Asian Development Bank, the World Bank, and the Finance, Planning, and Commerce Ministries in Pakistan.
Twitter: @vaqarahmed​