To Pakistan’s relief, led by Nathan Porter, the Mission Chief, the resident staff of the International Monetary Fund (IMF) has finally started discussing with Pakistan’s representatives the possibilities for issuing any next Extended Fund Facility to safeguard the country’s economy of $350 billion from collapsing. Pakistan intends to revel in the IMF patronage – prolonged and hefty – to escape sovereign default on external payments.
This time, however, the IMF aired a caveat: “Downside risks remain exceptionally high. While the new government has indicated its intention to continue the SBAs [Stand-by Agreements], political uncertainty remains significant.” The statement was mentioned in the IMF’s staff report appeared on May 10, ahead of the talks. Through the statement, the IMF is trying to say that the financial donors may be ready to bail Pakistan out of the existing economic turmoil, but the underlying political uncertainty is prohibitory. The IMF expects that, after taking harsh measures to restructure the economy, the government would be left with little space to defuse a public reaction simmering around. Apparently, the caution has offset Pakistan’s expectations to engage the IMF. This is how a panic button is supposed to have been pressed: how to appease the IMF and how to reconcile political differences with political dissidents influencing Pakistan’s economic future. Talks with the IMF are underway before Pakistan finalizes the annual budget scheduled for June 6-7 for the next financial year. The budget is expected to introduce taxes which would raise the cost of living, besides the strife to survive financially. The government sector is bound to recede its position of being the biggest job donor. To the IMF, the government sector has to express the intent of shrinkage, both in the size and the range of spending. In its reduction would reside the rise of the private sector. That is, privatization is not possible if the government sector does not diminish its influence. Not only would the power be deregulated but also the law be derestricted. This is a thorny area. Countries habitual of running on the model of centralization are found indisposed to relinquishing their sway effortlessly. In such countries, the private sector loses the initiative to contribute to the economy. Expectedly, after June, Pakistan would enter a rough patch. There are ample chances that the rupee would be devalued further, thereby making the import of luxury goods more costly, as opposed to the policy of discouraging imports by increasing taxes on selected items. That is, this is a consistent policy of the IMF that the import bill be slashed through currency devaluation instead of introducing selective import prohibition.
Reportedly, compared to April 2023 when inflation was around 40 percent, in April this year inflation was around 20 percent, proving the stance of the IMF correct that hyperinflation is not bound to last long. Instead, when left on its own, hyperinflation has to come down to strike a balance between demand and supply. Nevertheless, the Pakistanis generally abhor this proposition because they are inured to spending high even when it is unnecessary. Extravagance is part of their way of life rooted in the Asian culture of show and splendor. Expenditure more than earnings is still considered a necessary evil – both at society and the government level. In society, seeking loan from a bank to buy a costly luxury vehicle is a norm, which was duly exploited by the banks to run their businesses after the year 1999. In fact, the then Finance Minister Shaukat Aziz played on the Asian weakness and pushed the economy to the direction of banks in an effort to circulate wealth in society. The government’s policies of wilfully promoting the culture of high spending to extract money through indirect taxes has brought the country to this pass.
In 2024, Pakistan stands at the fag end of this practice. Hyperinflation is the order of the day. The only tool available is to apply restraint in spending, and this is where the rub lies. One arm of the executive asks the government to slash funds of the other arm first. All arms of the executive – be it civil or the army – are vying to secure more funds and reduce less. Nevertheless, under the oversight of the IMF, Pakistan has to reduce its expenditure under the rubric of expenditure rationalization. As per an estimate, fiscal adjustment of at least 1.5 percent of GDP (amounting to about Rs 1.5 trillion) be would made in the coming budget through the double-edged sword of reducing expenditure and enhancing income. Discussing with the IMF’s mission, the only comfort Pakistan has been enjoying is that the country completed a short-term $3 billion program for nine months to stave off sovereign default. The program is the major stepping stone to reach a longer and bigger loan-seeking program. It would be difficult for the IMF to rebuff Pakistan’s request of doling out at least $6 billion for three years under the 24th program. Nevertheless, the IMF may be apprehensive of Pakistan’s past which is fraught with violating the agreed path. Hence, the forthcoming budget would test the waters.
Precisely, the IMF wants to oversee the process of budget for the financial year 2024-25. Moreover, the IMF intends to ensure the implementation of policies that meet the IMF’s primary demands such as reforming the taxation system, broadening the tax net, abolishing subsidies, doing away with exemptions, and loosening the government’s control over the economy. Taken together, if the forthcoming budget expresses these aspects, Pakistan would be on a path different from the one set in 1999.
Nevertheless, one thing is certain, Pakistan’s incumbent government has to take measures to cool down the political temperature and ease down political complexities to pacify the IMF to dole out funds after June.
Dr Qaisar Rashid
The writer is a freelance columnist. He can be reached at qaisarrashid@yahoo.com
