Pakistan’s economy – looking beyond the crisis

IMF is a lender of last resort, not a development agency

The risk of default has been avoided – for now! After months of fruitless negotiations on the Extended Fund Facility, Pakistan was granted a nine-month Standby Arrangement (SBA) with the IMF. This means a loan of $3 billion that will hopefully also unlock funding from friendly countries, as well as from commercial sources and multilateral sources.

But there is no need for euphoria or complacency. The money from the IMF is a loan, and will have to be paid back within the next 3 to 5 years. Moreover, the IMF is a lender of last resort and not a development agency. No new investments will be made, no new infrastructure will be built and no new businesses will be set up. The loan from the IMF would increase gross reserves and allow the country to better manage its short-term liquidity needs.

Will SBA help solve any of our problems? It will certainly help, but if and only if, it is used to address some of the key issues that underpin Pakistan’s abysmal economic performance – GDP growth rate of only 0.29 %; rising inflation; limited employment opportunities, especially for the poor; and stagnant exports.

The programme agreed with the IMF will focus on fiscal adjustment and debt sustainability while protecting critical social spending; a return to a market-determined foreign-exchange rate; an appropriately tight monetary policy aimed at disinflation; and further progress on structural reforms, particularly with regard to energy sector, State Owned Enterprises and climate resilience.

The IMF programme will force Government to address key issues that have been hampering growth in Pakistan. These include the artificial propping up of the exchange rate which makes exports uncompetitive and creates ongoing balance of payments problems. It will also help address the chronically poor fiscal and monetary management where public expenditures regularly outpace tax revenues and results in excessive Government borrowing from the State Bank. This in turn fuels inflation and crowds out private investments.

Addressing these issues also provides an opportunity for Government to undertake much-needed reforms in key areas such as elimination of inefficient or ineffective subsidies, privatisation of loss-making state enterprises, addressing bottlenecks in the energy sector, downsizing bloated and unproductive Government departments, and building resilience to climate change.

Contrary to what is often said, the implementation of the IMF programme does not simply imply more taxes and higher prices. Many of the much-needed reforms will not cost money and would actually reduce public expenditures. For example, billions could be saved by privatising public sector white elephants such as the steel mill; the elimination of ineffective or inefficient subsidies; and the right sizing of Government departments.

But with elections around the corner, the existing Government may have little time and less appetite to address these structural issues. The latest budget is one indication of this. Instead of reforms and belt tightening, the budget announced new programmes and initiatives. Public expenditure on development by the Federal and Provincial Governments was increased by 25%; high impact projects and programmes were launched; and tax exemptions and incentives were announced that would, it is claimed, unlock domestic and foreign private investment.

An over-optimistic view of the situation is understandable with elections around the corner.  But realistically speaking it is unlikely that there will be time or resources to implement any of these plans. More critically, full implementation of the SBA will most likely be a precondition for further support by the IMF and without such support Pakistan will once again be facing default in nine months’ time.

After several conversations with the top managers in the IMF, the current Prime Minister seems to have finally understood that the SBA is a bridge loan and full implementation is necessary to obtain an Extended Fund Facility when the SBA runs its course. He has made statements to the effect that he is fully committed to implementing the SBA. This is certainly an important statement as Pakistan has a very poor record of sticking to agreements made in the past with various international agencies including the IMF, the World Bank and the Asian Development Bank.

But it would be useful if other major political parties in the ruling coalition, as well as in the opposition, could also publically announce their commitment to adhere to the macroeconomic directions agreed with the IMF, and to implement a series of institutional and policy reforms. At the minimum these should cover the energy sector, the privatisation of State Owned Enterprises, a restructuring of spending and subsidies, and a rightsizing of Government departments. They should above all avoid the temptation to blame the IMF or others for the poor state of the economy, promising to roll back essential reforms that negatively impact entrenched lobbies. This would just mean digging a deeper hole for the much battered Pakistani economy.     

Given Pakistan’s poor economic management a productive engagement with international agencies such as IMF, the Asian Development Bank, the World Bank, the UN and other multilaterals is essential. These agencies have strong technical skills and top-notch professionals that can help Government chart a detailed reform programme. And it is worth recalling that even highly successful and rapidly growing countries such as China and Viet Nam routinely seek their advice.

Published in The Express Tribune, July 25^th, 2023.

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