KARACHI: The economy of Pakistan is sick again and the International Monetary Fund (IMF) has once again prescribed the treatment based on the philosophy where “like cures like”, which is otherwise known as homeopathy.
The country’s chronic mismanagement of public finances and the borrowing binge is currently being treated with more borrowing from the IMF and then some more from other multilateral donors such as the Asian Development Bank (ADB) and others.
The history of borrowing by Pakistan from the IMF is almost as old as the IMF’s history of lending. It all started in 1958 when Pakistan went knocking the IMF door for the first time to secure a $25,000 loan.
Fast forward now in 2019 when we went there again for the 22nd time to plug an ever-increasing hole in the financial system with a deal which is the most challenging one so far. Not that we don’t have plenty of experience to figure out how IMF deals look like down the road in a nutshell, however, we are very keenly observing the events unfolding in Egypt, which recently borrowed from the IMF under similar circumstances.
While Pakistan has kicked the can a little farther for a while by clinching the IMF deal, the massive interest rate hikes and putting the currency on a free float mode under the IMF programme will have serious social implications.
Although there are some assurances from the State Bank of Pakistan (SBP) and Q-Block that the economy is moving out of the crisis, the long-term effect of this deal on the social fabric is yet to be seen. This is where we have to take cue from the brewing social crisis in Egypt due to severe cuts in salaries, fuel subsidies and job opportunities.
In a report of the World Bank published in April 2019, it was expressed that around 60% of Egypt’s population is either poor or vulnerable and overall living conditions are sliding rapidly.
The effect of the IMF deal is usually reflected at the macro level and gives some breathing space to the government but the benefit of reforms does not percolate down to the common people unless some serious measures are taken by the government.
The situation is more complicated when the government spends more on paying back old debt than spending on social reform programmes promised during the election campaign.
It is obvious that the IMF deal or any other assistance from other donor agencies is just a stopgap arrangement. In the long term, it is essential that the government reduce its expenditures and simulate economic activities to create jobs.
The other pitfall to avoid is the reliance on portfolio investment in short-term treasury bills or stock market to artificially build the foreign currency reserves using the so-called “hot money”.
The recent policy rate hikes to 13.25% have created a very juicy option for the yield-seekers in a rather dried-up market where the Bank of Japan is celebrating 15 years of zero interest rate and the US Fed and emerging markets are turning dovish.
The rent-seeking characteristic of hot money is not something that any emerging economy like Pakistan can rely on in a volatile politico-economic scenario where on the global scale the US-China trade war is playing havoc and on the other hand the fragile situation on both eastern and western borders of Pakistan can cause hot money to quickly evaporate.
Recently issued financial reports from all the industrial sectors have once again confirmed the country’s reliance on the import of raw material and the effect of currency depreciation has badly damaged bottom lines of almost all the major listed companies operating in almost every sector such as auto, pharmaceutical, refinery, cement, steel or other consumer goods manufacturing. Only the upcoming monetary policies will confirm if we are still looking outside to reap short-term benefits of hot money or stimulate economic growth for a long-term and sustainable advancement.
The writer is a financial market enthusiast and attached to Pakistan’s stocks, commodities and emerging technology
Published in The Express Tribune, September 16th, 2019.