Bitter-sweet pill: IMF’s ramifications

Average inflation reading is projected to be 25% for FY23, but will continue to rise

Salman Siddiqui January 27, 2023


Pakistan is expected to narrowly escape defaulting on its international payments after the International Monetary Fund (IMF) finally agreed to continue discussions under the ninth EFF (Extended Fund Facility) review, now that the government gave up control of the rupee-dollar exchange rate.

Speaking to The Express Tribune, Ismail Iqbal Securities Head of Research Fahad Rauf said, “As a positive impact of the revival of the lending programme, Pakistan has successfully mitigated its risk of default. Hopefully, the country’s foreign exchange reserves will start improving now.” Now that the IMF has agreed, however, some of the strict conditions imposed are likely to result in negative economic growth and hyperinflation in the country.

“Pakistan’s GDP growth is estimated to grow by negative 1% in the current fiscal year 2023 and the nation will face high inflation over the next six to twelve months,” he stated. In the wake of implementing the IMF’s conditions, the average inflation reading is projected to be 25% for FY23, but will continue to increase by another 10-15% in the next fiscal year 2024.

Arif Habib Limited Head of Research Tahir Abbas said, “The inflation reading will be worse in case Pakistan defaults and the IMF programme remains stalled. No economic measure is going to be painless at this moment. Implanting the IMF programme is like taking a bitter pill – it is a remedy to the current financial turmoil only...” Explaining the situation, Alpha Beta Core (ABC) CEO Khurram Schehzad said, “Just from an impact perspective, the depreciation of every Rs10 against the US dollar will add an additional Rs1.3 trillion to our foreign debt.”

“So, when the currency went down by 25/$ (from 230/$ to 255/$) on Thursday, an additional Rs3,250 billion (Rs3.25 trillion) was added to the country’s foreign debt,” he explained.

The impact of IMF’s conditions

With no other options left, Prime Minister Shehbaz Sharif categorically said his government is ready to take all the necessary decisions required to revive the IMF programme worth $6.5 billion.

Of the four major prerequisite conditions, needed to be met to revive the lending programme, the government has fulfilled the first one by letting the market forces determine the rupee-dollar exchange rate. Accordingly, the local currency plunged by Rs24.54 (or 9.61%) to an all-time low at Rs255.43 against the US dollar in the interbank market on Thursday.

“The steep decline in the exchange-rate may increase petroleum products (POL) prices by up to 50% in the weeks and months to come – if it remains at its current level. The petroleum development levy is set at Rs50/litre on petrol and diesel each, and a sales tax is imposed at 17% on POL products as well, going forward,” estimated Rauf.

The price of petrol is projected to increase by 44% to Rs309/litre from Rs215/litre at present, while the price of diesel may spike by 50% to Rs341/litre from Rs228/litre.

In addition to this, all imported goods will become more expensive by an additional 10%, due to the nearly 10% drop in value of the rupee against the greenback on Thursday. These goods will include food (wheat and wheat-flour, pulse and cooking oil), cotton for textile, steel scrape, energy products (oil, gas and coal).

The rising price of essential commodities, however, will hit the common man the most, particularly those from the lower-income segments of society who were already struggling due to the ongoing financial turmoil and political upheaval. AHL Head of Research Abbas said the other three of IMF’s prerequisite conditions include the imposition of new taxes worth Rs280-300 billion, increasing the price of electricity by Rs7/unit and raising the price of gas by 70-75%.

All of three conditions are expected to be implemented within the next one-week to 10-days.

A presidential ordinance is expected to implement new taxes, while the power and gas tariff will be increased by the Economic Coordination Committee (ECC) of the cabinet and the federal cabinet. “The impact of all the prerequisites will be both positive and negative,” said Abbas.

The positive impact of the rupee depreciation will be that the workers’ remittances being sent home by overseas Pakistanis will start improving. For the past three months, remittances were getting diverted to the black-market as the exchange rate was being artificially managed by the government. Now, however, the inflows will steer back towards the official channels. Secondly, the exporters, who were waiting for the much-awaited and expected devaluation of the rupee, will now bring their proceeds into the country. As a result, export earnings will also increase in the months to come.

Moreover, imports are likely to drop. Accordingly, the current account deficit will narrow down further, the country’s foreign exchange reserves will surge and the country’s capacity to make international payments will enhance.

The negative impacts of the IMF programme, however, will be high inflation in the range of 29-31% in February onwards.

The AHL analyst further said the new taxes being imposed will directly impact non-filers. The government is also considering imposing a tax on the withdrawal of cash from banks by non-filers.

Other steps under consideration are imposing taxes on banks’ income from their foreign exchange business, federal excise duty on sugary drinks and cigarettes among other goods. Moreover, the increase in power and gas tariffs will hit both the business community and common man.

Ultimately, the hike in the tariffs will increase the cost of doing business and make exports uncompetitive at the regional and global levels.


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