The IMF Package for Pakistan: A short-term bailout, not a solution

Abstract

(Development economists and socialists argue that the only morally appropriate response to the climate catastrophe in Pakistan and the devastating floods would be to unconditionally cancel the country’s external debts.  These resources should be used to support Pakistan’s most vulnerable rather than to service foreign capital. It is a minimal first step toward reparations. Also, a long-term panacea would be to definitively break the debt traps and cycles. Our usual habit of securing an IMF loan and ignoring structural deficiencies will have us back knocking on the IMF’s door soon enough. – Author)

 (This is the first of a two-part paper. While this part provides an overview of the recent IMF package for post-flood Pakistan, the second part (to be published in the next issue of CQ) will highlight recommendations to stabilize and bring Pakistan’s economy back on track, creating an essential economic base for a more sustainable future. – Editor)

 For Pakistan, IMF type institutions can at best be, a short-term panacea, not a long-term remedy. For Pakistan to become truly self- reliant, it must wean off dependency from IMF type institutions and vicious debt servicing cycles.

IMF stabilization programs are too often used as a convenient catch- all cure to solve our economic ills. IMF bailouts should never act as the solution for complex institutional, structural, financial and political challenges to explain the shortcomings of the country.

However, in the short-to-medium term, until Pakistan does not become economically self-sufficient, a long uphill struggle, total IMF independence remains wishful rhetoric and not in tandem with harsh ground realities.

Recently, Pakistan has secured financial succor of USD 14.5 billion in total to stabilize its economy. A $3 billion Saudi deposit in assistance as well as a $ 1 billion in an oil loan facility from the Kingdom of Saudi Arabia (KSA hereafter)¹ cools off some of the financial heat engulfing Pakistan. Additionally, a Renminbi 15 billion (USD $2.3 billion²) in commercial loans from a Chinese consortium of banks³ and, in August, another $ 2 billion was received from China which rolled over $2 billion loan in safe deposits⁴ for a cash-strapped Pakistan’s economy amid dwindling foreign exchange reserves.

More financial respite came when Qatar confirmed a $3 billion investment package. Pakistan-Qatar bilateral trade is on an upward momentum as Qatar supplies Pakistan a lifeblood of energy through LNG. A recent two-day visit of PM Shehbaz Sharif helped in this regard where he met the Emir of Qatar, Sheikh Tamim Bin Hamad Al Thani, and both leaders made new strides in renewable energy, industrial and infrastructure development, tourism and hospitality.

Qatar remains home to a large number of expatriates who form the backbone of Pakistan’s economy. Qatar envisages immense investment scope in Pakistan, earmarking aviation, agriculture and livestock, oil and gas, maritime and hospitality. Pakistan exports perishable goods to Qatar. Rising maritime relations and increasing exports to Doha make it a viable destination for people-to-people cooperation⁵.

Furthermore, along with a $1.2 billion tranche from the IMF, a $1 billion investment package from the United Arab Emirates to Pakistan in multiple sectors ranging from gas to logistics is highly likely⁶.

While such revenue influx allows momentary respite, it does not address the deeper institutional and structural issues, some of which will be explored in this CQ paper.

These cash injections are temporary quick fixes. Over the medium to long-term, more deep-seated macro reforms are required to limit Pakistan`s debt exposure and rebound and stabilize the economy.

Global price hikes, domestic political instability and a lagging policy action has worsened Pakistan’s fiscal and external position in FY22, catalyzing substantial exchange rate depreciation, and eroding essential foreign reserves.

The immediate priority is to stabilize the economy via a consistent application of the approved budget for FY23, observance of a market- determined exchange rate, and a proactive and cautious monetary policy. It is essential to urgently widen the social safety to protect Pakistan`s most vulnerable and hasten structural reforms, including the drastic performance enhancement of state-owned enterprises (SOEs hereafter) and governance. SOEs must be subject to more rigorous Key Performance Indicators (KPIs) as is often the case in the private sector.

HOW TO SECURE LONG-TERM INDEPENDENCE FROM IMF DEBT TRAPS.

Our usual habit of securing IMF bailouts and ignoring our deeper structural challenges will have us forever knocking on the IMF’s door. In Pakistan, we have grown so accustomed to putting out fires that most weeks it is all that we talk about. This vicious cycle must end. The sooner the better.

We lack funds for imports, so we run from pillar to post landing up at the IMF, amongst others, requesting for loans. Not asking why we can’t pay for what we buy and borrow from the planet. Floods displace millions, so we pull together to rescue them, as we must. Yet, again, there is scant introspection on why we cannot build (small) effective dams and why authorities negligently permit construction on waterways. Construction licensing permits merit closer inspection and scrutiny. We can’t control the rain, but we could unclog the drains.

Now, combining the IMF loan with investment pledges from Riyadh, Doha, and Abu Dhabi and some funds from the World Bank, we have circumvented an immediate balance of payments cataclysm. Yet, we have just put the infernal flames out (for now). We have done nothing to solve the root-causes of the fire itself. Call it naya or purana Pakistan, the system in place right now just doesn’t work. It doesn’t work for most Pakistanis, who either live in poverty or dangerously close to it. It doesn’t work because it can’t sustain itself, so it needs almost consistent foreign help⁷. ‘Painful adjustment’ becomes a tiresome cliché when it is cosmetically repeated as regularly as a dress rehearsal.

Pakistan survives on the generosity of its allies and its ability to export its human capital. Living on the kindness of strangers is a great line by Tennessee Williams⁸, but a lacklustre national strategy.

Other than a few products, we produce hardly anything that the world yearns to purchase. We prioritize cartels (sugar, real estate), over fair pricing and competition.

Such is our state that we are being constantly compared to Sri Lanka while Bangladesh races ahead in nearly every indicator imaginable. According to World Bank indicators, on average, citizens in India and Bangladesh today live longer than Pakistanis, are more likely to be able to read and write and have broader swifter access to high-velocity broadband⁹. Most other South Asian states have become more affluent over the past few decades at a speed we can but envy.

Today’s Pakistan is also untenable vis-à-vis international shocks. Climate change is the Damoclean sword dangling over our heads like the ever-ending debt traps. We rank amongst the most vulnerable countries on the Global climate risk index¹⁰ yet have much more to do than keep on blithely planting saplings left, right and center.

We urgently require infrastructure, technology, quality assurance and systems that mitigate the adverse consequences of soaring temperatures, smog, pollution¹¹, melting glaciers, rising sea levels, torrential floods, and more. Despite piecemeal efforts, we simply are not prepared.

Another shock staring us straight in the face is an international heightening of energy prices. Pakistan depends heavily on imported oil and gas to keep the engines ignited and the lights switched on, however, we need a way to pay for them. Higher oil and gas prices exacerbate a spike in food prices,¹² culminating in food insecurity and famine.

To course correct, Pakistan must reform¹³, urgently, meaningfully and substantially. It must accelerate economic transformation from the bottom-up and radically innovate.

Islamabad must alter an outdated system that keeps throwing financial lifelines at firms that are barely able to export. It must drastically modernize State Owned Enterprises. It must de-prioritize real estate as a national priority. It must empower grass-root local communities instead of trying to run a country of nearly a quarter-of-a-billion people through an antiquated Byzantine bureaucracy.

In the winter of 2022-2023, ordinary Pakistanis will endure soaring inflation and exasperatingly crippling economic growth, and politics that is more about raw power, lust and egoism than about the problems citizens endure, while simultaneously having to reconstruct lives, livelihoods and communities devastated by the floods.

Pakistan must get its house in order. If we don’t, either the world will give up on us, or the people will burn down this decayed system. Neither outcome will be desirable. But neither will be unfounded¹⁴.

PAKISTAN’S IMF BAIL-OUT – A  SHORT-LIVED CADMEAN¹⁵  VICTORY?

Tailoring an IMF package more fit for Pakistan’s current crisis – Tackling the flash floods head on.

A resuscitation of the IMF deal gives Pakistan latitude and breathing space, but it also permits old complacency to return. Prematurely celebrating an IMF bailout is a Catch-22 contradiction in terms. Such agreements temporarily salvage governments and their economies, but development economists reason that such deals are always anti-people with deep and damaging long-term ramifications.

Reading the fine print of the IMF deal, there are some bitter truths which the coalition government of Pakistan selectively chose not to highlight, beyond the soundbites and glossy headlines. The IMF read- out emphasized multiple bitter pills for Pakistan. The IMF projected a pre-floods inflation rate of 20 per cent which is no longer valid in a post-floods Pakistan. Inflation, already at historic highs, will rise even further after the destruction of crops and infrastructure. Therefore, many government and IMF quantitative assumptions and metrics are outdated and will swiftly need to be revised.

In a dramatic turn of events, the IMF program’s targets, agreed to in June 2022, have again become irrelevant owing to the devastating floods that inundated one third of Pakistan, which now requires major relief and rehabilitation efforts, dwarfing the sum provided by the IMF.

The IMF statement was also deafeningly silent on the issue of disaster caused by the floods.

Certain senior political economists are of the view that IMF’s current package should have been more tailored and fit for Pakistan’s current purpose. Since Islamabad secured a hard bargained instalment of $1.16 billion from the IMF, Pakistan should have requested the IMF to do more in lieu of the climate induced flood cataclysm. The resuscitation of the IMF program comes at a time when its underlying economic model has been made redundant by the humanitarian crisis inflicted upon one-third of Pakistan by the floods. Most alarmingly, the devastation wrought has washed away the already low growth projections and the assumptions of fiscal deficit built in budget for FY23¹⁶ where the budgetary fallout could accelerate further challenges.

Monetary caution will also have its limits. After the balance of payments, the IMF has to support the budget. Fortunately, the IMF itself has a window for such unexpected natural disasters and emergencies. In addition to appealing to bilateral and multilateral donors and the UN system, Islamabad must swiftly approach the IMF as well in this regard. In the past, the facility was called Emergency Natural Disaster Assistance and Emergency Post-Conflict Assistance. Recently, the two have been merged into one, more flexible, Rapid Finance Instrument (RFI hereafter)¹⁷.

The IMF`s RFI provides broader coverage with rapid and low- access financial assistance to member countries facing wide-ranging urgent needs, including those stemming from commodity price shocks, natural disasters, conflicts and emergencies resulting from fragility. As a single, flexible mechanism with a broad coverage, Pakistan can seek assistance under the Large Natural Disaster (LND) window¹⁸ for 80% of quota. Access limits such as the annual access limit (AAL) and cumulative access limit (CAL) under the LND windows were temporarily increased for Covid-19 financing and Pakistan was one of the beneficiaries in 2020 where the IMF Executive Board approved a US$ 1.386 billion disbursement to Pakistan to address and alleviate the COVID-19 Pandemic¹⁹.

The eligibility is for a damage to be of at least 20% of GDP. It is too premature to fully assess the floods damage, but the initial assessment is easily between $ 10-12 billion dollars. With all of Sindh and Balochistan devastated, along with swathes of Punjab and KP, the ultimate damage assessment is likely to significantly rise.

In April 2020, when the Executive Board of the IMF approved the Covid-19 related purchase by Pakistan under the RFI, as at present, Pakistan was already under the Extended Fund Facility (EFF) program. The case then (as it is now) was to offer leeway for increased public health spending and broaden social safety nets. Presently, the requirement is alarmingly more urgent. Immediate humanitarian rescue and relief efforts must encompass not just cash transfers but essential supplies as well.

The first line of relief under such emergencies, as seen during the Kashmir and KP earthquake of 2005 and the floods of 2010²⁰, are the NGOs and INGOs. Crops, particularly cotton and rice, as well as 80% of livestock have been destroyed by the flash floods, as per a BBC fact check. Imports will swiftly have to be lined up as wheat stocks have been washed away. Reconstruction of homes, structures and infrastructure will require even more expenditure.

Before the Covid-19 pandemic, Pakistan`s external current account was ameliorating, there was a primary surplus in the fiscal account and the economy was inching toward resilience. Now it is the polar opposite. The August 2022 flash floods increase the balance of payments requirements. A fiscal stimulus package, along with monetary easing, are inescapable²¹.

If appealed for and approved, the RFI is a one tranche release to support emergency response of the government. It will also be a temporary (but much needed) financial lifeline and offer signals to other multilateral and bilateral donors. But this should not furnish an excuse to stop reflecting and implementing deep-seated structural reforms.

PAKISTAN’S ECONOMIC ROADMAP AFTER THE IMF BAIL-OUT

Usually, as a last-ditch attempt, fragile states on the verge of economic ruin are the ones which go to the IMF, desperately seeking a loan, mostly when it is already way too late, and an economic disaster is thrust upon them. Sri Lanka’s²² last resort $2.9 billion IMF loan over 48 months springs to mind. Other countries, however, are prescient with the foresight to approach the IMF well before they are on the verge of economic tumult. Bangladesh is an instructive case in point. Bangladesh was performing above most of its peers, yet the global slowdown forced it to turn to the IMF under the IMF`s Resilience and Sustainability Trust (RST)²³ loan framework. Though deliberations will soon start, the IMF is cognizant that Bangladesh is nowhere near a crisis situation. And then, there is Pakistan, truly an expert of generous IMF munificence.

Pakistan was expecting this IMF tranche since when the State Bank of Pakistan (SBP hereafter) and the Ministry of Finance went public on Aug 1 making it clear that all the IMF preconditions had been met and all the government of Pakistan had to do was to wait till the IMF board finalized the loan continuation by the end of August.

Since then, however, quite consequential events unfolded, even by Pakistani standards. Firstly was the story of the Army Chief, General Qamar Bajwa, contacting the American government seeking assistance to lobby for the IMF loan.²⁴ Another surprising event was a leaked audio recording of a former federal finance minister, Shaukat Tarin, in conversation with the two current finance ministers²⁵ of Punjab and Khyber Pakhtunkhwa (KP), endeavoring to sabotage the IMF deal by allegedly writing to the IMF stating that the agreement could not be adhered to due to provincial financial constraints faced, especially by KP, on account of the damage caused by the devastating floods.

The audio leaked tape sets a precedent. If and when the PTI returns to the reins of power it will likely face provincial governments that are not PTI-led, behaving exactly the way Tarin has sought to direct Punjab and KP to behave. What will PTI do then? The country should care.

Such negligence luckily did not have much ramification as the IMF only negotiates with federal governments and this occurred only three days prior to the IMF Executive Board meeting. The ink on the agreement had virtually dried and all that was required was the Board’s ratification.

Contrary to popular belief, the current IMF agreement brokered is by no means new, and is the revival, with additional, even harsher conditionality and strings attached, many of which will be tough to meet, after multiple stop-start moments, of the deal agreed to in July 2019.

The former PTI government signed a thirty-nine month Extended Fund Facility (EFF) in July 2019, aspiring to avoid default on foreign repayment obligations. Yet, Pakistan was mired in turmoil and in spite of remaining in the IMF program, its ever-dwindling foreign exchange reserves remained hauntingly thin amid intense external debt-related susceptibilities. The forex reserves remained below $7.8 billion, insufficient for the policymakers to relax despite resuscitation of a bailout package. Partially owing to faulty EFF programme design architecture, unrealistic targets and lack of political willpower to execute what the former premier and PTI chief had himself agreed to, the programme was suspended for nearly two years out of three.

The jubilation witnessed around us, especially by the ruling elite, of receiving a mere $1.1 billion, is a sign of just how low our expectations and standards have sunk.

The IMF deal revival furnishes Pakistan a highly short-lived fiscal breathing space. The deep-rooted institutional and structural challenges which mire Pakistan’s economy, have barely been communicated, let alone tackled.

The resuscitation of the IMF loan furnishes the government a modicum of economic breathing space now that their anxieties are lifted and they can return to status quo ante. A sobering analysis and reality is that the IMF deal allows for antiquated, persistent chronic complacency to return. All measures and initiatives undertaken over the last financial quarter by the incumbent government were to assure that they secured the loan. Now that they have, and not facing a general election any time soon (unlikely in 2022), they have the opportunity to sit on their false laurels and can easily avoid taking tough measures which are even more unpopular than the ones they have already initiated.

Before collective amnesia sets in, these are strict loans with term- limits and sharp interest that must be paid back, not charity, grants nor aid without strings attached (not that aid itself ever comes free of favours in return). However, the conditionality imposed to secure the IMF loan, the ‘preconditions’ as they are euphemistically dubbed, end up raising taxes (usually regressive ones, especially indirect taxes), chopping expenditure (mostly development), increasing tariffs on consumers for utilities and other essential items, and slowing down aggregate demand and the economy.

Having inked twenty-two agreements with the IMF, Pakistan’s numerous governments, even at the best of times, have scant to show by means of progress. Even strong and supposedly resilient military governments have depended on the IMF and apart from a slight, short amelioration in economic figures, made scant progress, with the burden of debt being passed on to Pakistan`s vulnerable masses, never the silver-spooned elite.

With the damage caused by the flash floods to the economy estimated at ten times the amount secured by the IMF, this latest rescue package is not going to rescue the people of Pakistan²⁶.

More so, with Pakistan’s uncertainty caused by belligerent politicians, possible further waves of Covid-19, a seemingly protracted never-ending Russia Ukraine war, a heightened “risk premium” due to renewed TTP terrorism, instability in Afghanistan, a global economic recession haunting the world and climate crisis with related natural disasters, it is patently clear that there is going to be much political and economic disequilibrium for many months (if not years) to come.

In lieu of the above, Pakistan can create a long-term sustainable “economic base” by hastening structural reforms, especially those that strengthen governance, not just at the Federal but crucially at the Provincial and District levels (placing meat on the bones of the 18^th amendment). Reforming and streamlining, especially state-owned enterprises, de-subsidizing non-performing entities, and enhancing the incentive structures for an entrepreneurial business environment would catalyze sustainable growth.

Unwavering implementation of remedial policies and reforms remain quintessential to regain macroeconomic stability, address imbalances and lay the foundation for diverse, inclusive and sustainable growth. More Free Trade Zones (FTZs) and boosting trade through regional geo-economic corridors are a way forward.

Reforms must create a fair-and-level playing field for businesses— small, medium and large—with investments and trade necessary for job creation and the development of more resilient public-private partnerships remain key.

ANALYSIS OF THE IMF BAILOUT PACKAGE FOR PAKISTAN – BACK FROM THE BRINK OF DEFAULT

One Step forward two steps back?

A sigh of relief was breathed for Pakistan’s embattled coalition government as it got a much-awaited financial lifeline from the IMF. With the green light from its Executive Board, after a hiatus of six months, a much-yearned for tranche is making its way into Pakistan’s coffers.

An IMF mission team, led by Nathan Porter, finalized discussions for the combined seventh and eight reviews of Pakistan’s economic program supported by an IMF Extended Fund Facility (EFF hereafter).

Concluding the discussions Mr. Porter stated that:

“The IMF team has reached a staff-level agreement (SLA) with the Pakistan authorities… The agreement is subject to approval by the IMF’s Executive Board. Subject to Board approval, about $1,177 million (Special Drawing Rights 894 million) will become available, bringing total disbursements under the program to about $4.2 billion. Additionally, in order to support program implementation and meet the higher financing needs in FY23, as well as catalyze additional financing, the IMF Board will consider an extension of the EFF until end-June 2023 and an augmentation of access by Special Drawing Rights²⁷ (SDR hereafter) 720 million that will bring the total access under the EFF to about US$7 billion”.²⁸

The above implies that the nation can withdraw $894 million of the IMF’s special drawing rights (SDRs), equivalent to about $1.1 billion. The IMF also increased the nation’s bailout package to $6.5 billion. Pakistan needs to service $3 billion of debt through June 2023, including a $1.7 billion repayment due December 2022.

The IMF stabilization funds are key to restore (temporary) balance to Pakistan’s economy and debt payment after surging energy costs eroded the nation’s foreign-exchange reserves and stoked Asia’s second-fastest inflation. Pakistan is projected to have secured $38 billion through June 2023, enough to cover the $31 billion it needs²⁹. The IMF decision will grease the wheels for more aid from Middle East countries. “Pakistan has averted the default threat, avoiding the fate seen in Sri Lanka.”³⁰

This (temporary) achievement and Pyrrhic victory has averted the risk of default (for now) though, it has come at an excruciating social and political cost, and the nation will be reeling under its aftermath for a long time to come. The tête-à-tête that materialized the IMF deal, after belligerent undertaking³¹, has seen prices of oil, gas and electricity soar to dizzying heights (to the detriment of the impoverished masses), as the social security net of subsidies are withdrawn.

The IMF forecasts that Pakistan’s economy will grow to circa 3.5% but the fly in the ointment is that average inflation rate is around 20% — the projections had been made before the floods destroyed vast swathes of the country as one third of the nation is submerged under water, 80% livestock is destroyed, thousands left without shelter. The IMF package is not even one-tenth of the cost wrought by the devastating floods.

The IMF also green-lit an increase in the loan size to $6.5 billion and extended its expiry date till June 2023. The $6 billion original program was going to end in September 2022 with half of the amount un-disbursed due to failure of the previous government to honor its commitments. With the newly increased IMF loan of $6.5 billion the program size has been augmented to Special Drawing Rights SDR $4.988 billion, which equals 245.6 % of Pakistan’s quota.

“The board’s decision allows for an immediate disbursement of SDR894 million (an estimated $1.1 billion), bringing total purchases for budget support under the arrangement to $3.9 billion”³².

In its loan disbursement, the IMF underscored the requirement to increase electricity prices and bolster taxes on petroleum products. The IMF stated that curbing current spending and increasing tax revenues are crucial to create fiscal space for much-needed social protection and strengthening of public debt sustainability. Maintaining a proactive and data-driven monetary policy would bolster such aspirations. Preserving a market-determined exchange rate remained crucial to absorb external shocks, generate competitiveness, and rebuild foreign reserves.

Pakistan assured the IMF that it remained committed to resuming reforms and already increased the electricity tariffs and withdrew the fuel subsidies as well as restoring taxes.

Certain IMF directors voiced concerns over ‘policy slippages’ and reversal of the commitments that former finance minister Shaukat Tarin³³ had given on behalf of the government of Pakistan. Such concerns are partly founded since in February 2022 the former PTI government, despite assurances, laid the landmines by giving subsidies and introducing another tax amnesty scheme, which culminated in the collapse of Pakistan-IMF negotiations in March 2022.

All executive directors (except India which abstained from the voting) supported Pakistan’s request for the revival of the program and the loan approval. The board also waived off the conditions that Pakistan could not meet during January-June 2022 period. With the new approval, the disbursement would heighten to $3.9 billion, leaving a balance of $2.6 billion that will be disbursed by June 2023. The next IMF review is now scheduled for November 2022 to gauge the performance of Pakistan’s economy for the July-September 2022 period³⁴.

The previous Pakistani government left the economy in tatters, compromised its relations with global financial institutions and also severed ties with friendly countries (especially former Western allies), subsequently Pakistan’s financing was nearly choked. A tenuous external environment meshed with pro-cyclical domestic policies geared domestic demand towards un-sustainability. The subsequent financial overheating created huge fiscal and external deficits in FY22, leading to sky-rocketing inflation and eroding foreign exchange reserve buffers. The IMF stated:

“The programme seeks to address domestic and external imbalances, and ensure fiscal discipline and debt sustainability while protecting social spending, safeguarding monetary and financial stability, and maintaining a market- determined exchange rate and rebuilding external buffers. Pakistan’s economy has been buffeted by adverse external conditions due to spillovers from the war in Ukraine and domestic challenges, including from accommodative policies that resulted in uneven and unbalanced growth”.³⁵

In its readout, the IMF articulated that Pakistani “authorities” sought to realize a minor surplus in FY 2023. The IMF hailed this as a welcome step to lower external economic burdens and boost confidence.

In lieu of Pakistan`s devastating floods, diplomats and directors from the United Arab Emirates, Saudi Arabia and Qatar furnished guarantees to offer provide additional financing to Pakistan, as agreed between Islamabad and the IMF staff.

Pakistani officials informed the board members about the monetary tightening by 8% and setting the key policy interest rate at 15%, which would lower inflationary pressure. However, the recent flash floods have wrought devastation on entire food supply chains, which would culminate in a large inflationary increase.

Inflation³⁶ forecast realistically by many (post-floods) will augment to at least 44.5%, the highest since the 2008`s Great Recession. It is, however, envisaged that the resuscitation of donors’ confidence with the disbursement of the IMF tranche will lead to some easing over the coming months. Apart from the Fund’s input, an additional $9 billion is trickling in from the Gulf states and $4 billion will pour in from other institutional multi-lateral lenders, as well as commercial banks, helping steer the lagging economy to newer vistas.

Pakistan’s main ailments are its bulging current account deficit (CAD hereafter) of $17.4 billion at a 4 year high, gigantic debt servicing and sagging exports that have almost stagnated its growth from a development perspective. It had compelled financiers to alter the budget twice over the past financial quarter of this fiscal year.

Pakistan is encumbered by a primary deficit of Rs1.6 trillion, as the difference between revenues and expenditures goes through the ceiling. This is why the new estimates envisage over Rs1.716 trillion (2.2% of GDP) of fiscal adjustment, mostly through taxation which will sorely dent the disposable income of the lower salaried classes.

The toiling impact on the masses cannot be brushed under the carpet, and it is high time inflation is reined in and the rupee strengthened to achieve stability. For the first time, a fixed tax regime for sectors such as traders, merchants, retailers, jewellers, builders, developers, restaurants, property dealers and automobiles are testing the resilience of both the masses and the economy. As a bolt from the blue, the flash floods will keep the economy on tenterhooks, as the entire developmental paradigm stands torpedoed³⁷.

Pakistan’s precarious economic situation and a sharp rise in the cost of living has the masses reeling under an unprecedented increase in oil and energy prices. Now, even the IMF has voiced its alarm over the debacle and warned that price spike and uneven distribution of resources could lead to public backlash.

The ailing economy and draconic statistics have torn the country’s social harmony asunder. When prices of essential staples and commodities surpass the common citizen’s reach, and the government is unable to cushion it with succour, the ultimate outcome is revulsion on the streets. Instant relief initiatives are needed, and that entails macro-fixing of the entire budget estimates.

Pakistan is teetering on the verge of a shortage of eatables, dairy and livestock due to the monsoon deluge, and feeding 220 million mouths is the biggest challenge. This cannot be done at the cost of today’s price index. It solicits a contingency plan to evade mass unrest³⁸.

Coupled with all the above is the country’s festering political instability and a changing regional environment, upping the ante for economic recovery. Pakistan is in dire need of inclusive growth, one that is centered on and caters to human security, as well as doing away with archaic subsidies and protectionism for non-performers. Opting for stringent austerity and kick-starting developmental projects through foreign investment and privatization proceeds are indispensable necessities³⁹.

Given Pakistan’s manifold and multiple constraints it would be a gargantuan challenge for the government to keep all IMF conditionality on track. There will be mounting political pressure on the government both from the opposition and from within the ruling coalition itself to restore certain subsidies, especially on petroleum products and power tariffs that constitute a major part of the Fund’s stabilization initiative.

With Growing political polarization and the opposition PTI ruling Punjab and KP, the federal government’s capacity to efficiently implement tough economic initiatives has been dealt a severe blow. Leaked audio tapes reveal that some political parties, through their provincial governments, even endeavoured to sabotage the IMF deal at the last moment adding reinforcing doubts on the government’s future ability to implement the IMF stabilization program.

So, while the release of the much-awaited $1.17 billion may help the country escape the immediate threat of default, the crisis is far from over. The revival of the stalled IMF loan program was critical for an already shaky government whose challenges are intensifying at break- neck speed.

A little before its ouster, the Imran Khan government announced a vast subsidy plan derailing the whole stabilization initiative. It was triggered by calculated political expediency as the former prime minister faced a no-confidence motion. It required taking bold economic initiatives before the IMF’s crucial approval. It was the toughest conditionalities Pakistan had to negotiate with the lending agency. Not only were the prices of petroleum products hiked, other subsidies, too, were withdrawn. The government had to generate an additional Rs 436bn in taxes. Such requirements will now extract a significant political cost for a shaky ruling coalition that struggles to stay afloat.

With the economy on the brink, the government did not have any option but to swallow the bitter pills, however whether they will be implemented and digested remains to be seen by a fledgling government already on life support.

Interestingly, Finance Minister Miftah Ismail faced the most scathing criticism from some senior members of his own party. It was a manifestation of the power struggle within the PML-N and the Sharif family. One must give him credit for standing firm and for successfully concluding the deal. But it is not the end of the saga.⁴⁰

The IMF deal has given the country some breathing space, but the challenges ahead are far more daunting. We may be out of the ICU but we are not yet out of the woods. Worsening political instability remains the biggest impediment in the way of economic recovery.

References

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15. A Cadmean victory is a reference to a victory involving one’s own defeat and/ or ruin, originating from Cadmus, the iconic founder of Thebes in Boeotia.
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20. Earth Observatory of NASA (2011) Heavy Rains and Dry Lands Don’t Mix: Reflections on the 2010 Pakistan Flood
21. Tahir, Pervez (2022) The IMF needs to do more, Express Tribune, 2 September, 2022.
22. Ondaatjie, Anusha and Sirimanne, Asantha (2022) Sri Lanka seals initial IMF deal for $2.9 billion loan, Bloomberg, September 1, 2022.
23. Lawder, David (2022) IMF says it is working with Bangladesh on RST loan with “safeguards”, Reuters, August 3, 2022. The IMF’s Resilience and Sustainability Trust (RST) will help low-income and vulnerable middle-income countries build resilience to external shocks. The RST will be a loan-based trust, with resources mobilized on a voluntary basis.
24. Gul, Ayaz (2022) Pakistan Army chief reportedly seeking US help in securing crucial IMF loan, Voice of America, July 30, 2022.
25. New audio leaks show how PTI planned to torpedo Pakistan-IMF deal (2022), The News International, 29 August, 2022.
26. Zaidi, S. Akbar (2022) A pyrrhic victory, Dawn, September 1, 2022. The writer is a political economist heading IBA, Karachi. He can be reached at sazaidi@ iba.edu.pk
27. Special Drawing Rights (SDRs) are a global reserve asset created by the IMF to supplement the official reserves of its member countries. The SDR is not a currency. It is a potential claim on the freely usable currencies of IMF members. SDRs are allocated to each IMF member countries. The amount of SDRs allocated to each country is contingent upon their individual IMF quotas. IMF quotas are based primarily on the relative economic standing of the country within the world economy. Corporate Finance Institute (2022) How do Special Drawing Rights Work? 16 March, 2022.
28. Porter, Nathan (2022) IMF Reaches Staff-Level Agreement on the Combined Seventh and Eight Reviews for Pakistan’s Extended Fund Facility, The International Monetary Fund, 13 July, 2022.
29. Murtaza Syed (2022) Governor State Bank of Pakistan, 29 August, 2022.
30. Rameez, Muhammad (2022) Head of equities sales at Foundation Securities Pvt., Karachi. August 30, 2022.
31. Deal and aftermath (2022) Express Tribune, 31 August, 2022.
32. Official statement issued by the IMF after the Executive Board meeting, Washington D.C, International Monetary Fund, August 29, 2022.
33. Kiani, Khaleeq (2021) Shaukat Tarin outlines five actions demanded by the IMF, Dawn, November 17, 2021.
34. Express Tribune (2022) IMF revives Pakistan`s programme, approves $1.16 billion loan, Express Tribune, 31 August, 2022.
35. Sayeh, Antoinette (2022) IMF Deputy Managing Director, Washington, USA, August 29, 2022.
36. Rana, Shahbaz (2022) Inflation rate highest since Great Recession. It`s highest increase since October 2008 amid steep fall in Rupee`s value against dollar. Express Tribune, August 2, 2022.
37. Deal and aftermath (2022) Express Tribune, 31 August, 2022.
38. The terrible crunch (2022) Express Tribune, September 3, 2022.
39. Express Tribune (2022) IMF revives Pakistan`s programme, approves $1.16 billion loan, 31 August, 2022.
40. Hussain, Zahid (2022) The IMF deal and beyond, Dawn, August 21, 2022. The author can be emailed at [email protected] and Twitter followed @ hidhussain