IMF deal: not beginning of end

While the world is still grappling with the exogenous shocks emanating from the pandemic and then more recently with the Russian invasion of Ukraine, many people back home are still scratching their heads to figure out the rationale behind the brewing home-grown crisis that is now spiralling out of control.

As pointed out in my last article “Economic, financial cost of political chaos” written at a time when economic stability and continuation of long-term policies was a rare and valuable commodity, the politicians traded whatever was left after decades of economic and financial mismanagement for trivial political gains and personal agenda.

The ‘negative’ credit rating outlook for Pakistan announced by Moody’s Investors Service did not come as a surprise as all the indicators were already pointing to the impending doom and gloom since the beginning of the political crisis.

The rout and wealth destruction in the stock market where billions were lost in market capitalisation and Pakistani rupee’s slide against a basket of currencies continue unabated. It was totally naive to expect any positive outcome for the economy or society from the political fiasco, however, the way the whole fiasco is unfolding has spooked even those who initially favoured this transition.

It is sad to see that when the push came to shove, then it is again the common man on the street who has to bear the brunt to please the International Monetary Fund (IMF) for a deal that, if materialised, will be the most regressive and front-loaded programme in the long-drawn borrowing history of Pakistan.

The Consumer Price Index (CPI) data for May, which showed an increase of 13.76% year-on-year, was already historically high and the recent energy price hike will only exacerbate the situation and the number can spiral out of control and may cross 20%.

Also, the recent T-bills auction held on June 1, 2022 has given 15% yield for 12-month tenure, which has further eroded investor’s confidence in the stock market, causing a meltdown of 923 points in the last trading session. It is a wishful thinking on the part of the coalition government that the increase in fuel prices and electricity tariffs is the only tough decision they have to take to survive the term.

They should know that it is not the end, it is not even the beginning of the end but as Churchill once said it is just the end of the beginning. The list of preconditions handed over by an IMF team to Finance Minister Miftah Ismail for the next loan tranche requires continuous belt-tightening, starting with the upcoming budget.

More IMF preconditions will be pushed through the Finance Bill such as producing a primary budget surplus instead of a deficit, increasing tax rate, etc. A further hawkish stance may be expected from the State bank going forward to tame the rising inflation, which is resulting from these aggressive measures, and that will be more detrimental to the business sentiment, economy and markets.

Nobel laureate economist Joe Stiglitz has warned the central bankers globally in his recent interview to Bloomberg TV in Davos that rising interest rates cannot solve the problem of rising inflation, which most economists believe is largely driven by supply-side bottlenecks rather than demand-side issues. In the past, despite turbulence, all governments have at least completed their five-year term to bring some sense of stability and continuation.

But this time around, the situation has worsened due to the premature departure of Pakistan Tehreek-e-Insaf (PTI) government as there is clearly a lack of ownership and lingering uncertainty, while the decisions of PML-N led coalition government can be best described as kicking the can down the road. Although the IMF deal and the subsequent rollover of debt by Saudi Arabia, the UAE and China is termed a lifesaver in the short term, the resultant inflationary pressures and contraction in gross domestic product (GDP) will do more harm than good in the long run.

There will be many political, economic and social repercussions and trickle-down effects of these decisions, which will come with a lag and will be felt for months, if not years, to come. THE WRITER IS

A FINANCIAL MARKET ENTHUSIAST AND IS ATTACHED TO PAKISTAN’S STOCKS, COMMODITIES AND EMERGING TECHNOLOGY