Crucial Discussions

With the dollar price finally touching the Rs200 mark on Wednesday, market sentiment is perhaps at its lowest since the new government came into power. The Imran Khan government was ousted on the back of promises to take urgent corrective steps for the economy, but the new allied government has been unable to make a concrete decision on this after over a month in power.
New Finance Minister Miftah Ismail has often highlighted the importance of going back to the IMF, and how that will require the hard decisions to be made. Key among them remains rolling back the fuel subsidies and increasing power tariffs, but the political cost of this sudden inflationary jump for the general public has led to the new cabinet dragging its feet over this crucial problem.
Positive contacts with the US, allied countries and other international lending agencies in the last month or so indicate that there is interest to bail out Pakistan—but all of this is predicated on whether the IMF gives the green signal. With the formal talks with the IMF official kicked off in Doha, the first day saw the FM commit to a complete ban on as many as 30 luxury items, and an increase on fuel and power prices; by how much is still unclear. As far as the ban goes, while it might sound extreme, an end to costly imported items is extremely important going forward. Our import balance needs to be corrected, but it must also be remembered that luxury goods form a very small part of this equation.
Interestingly, the government’s move to increase the fund’s disbursement by $2 billion alongside a one-year extension will only come if steps are taken to longstanding long-standing imbalances in both policymaking and outflows from the national exchequer. The release of extra funds could essentially entail giving NEPRA the power to determine energy tariffs going forward. This would effectively take away the power of this and future governments to try and stem the tide of inflation through managing power tariffs, or offsetting the costs by waiving increases for domestic consumers.
Another important change that the government will have to take—for the better—is to finally show progress on offloading burdensome state-owned entities. But as we have seen, successive governments have come and go, but this promise remains unfulfilled.
Ultimately, none of what is being discussed in this huddle comes as too much of a surprise. The new government had made it clear that it would be asking for additional funds from the get-go, while the corrective measures demanded by the IMF are not novel either. The question as ever, remains one of implementation and delivery; if the new government agrees to the IMF’s demands, will it practice the fiscal discipline required to stay in the programme?

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