Over the past three decades, Pakistan has been a regular customer of the International Monetary Fund’s bailouts. So much so that every government that has come into power since 1988 has turned to the lender, even if only a handful of the programmes were actually completed.
Keeping in line with the tradition, the Pakistan Tehreek e Insaf government announced on Sunday that it has reached an agreement with IMF for a 39-month Extended Fund Arrangement worth around $6 billion. What preceded this was perhaps one of the most prolonged negotiations in Pakistan’s long history with the Fund, extending for some six months and involving multiple staff level visits.
As is the formula of IMF, Pakistan will now be subject to strict conditionalities and austerity measures, with the primary objective of cutting down the budget deficit which was envisaged to be 2.7% of the GDP. The press release issued by IMF on Sunday said: “The forthcoming budget for FY2019/20 is a first critical step in the authorities’ fiscal strategy. The budget will aim for a primary deficit of 0.6 percent of GDP supported by tax policy revenue mobilization measures to eliminate exemptions, curtail special treatments, and improve tax administration.”
But how did we get here in the first place? Up until late 2017, things had been smooth for Pakistan with projected growth rates north of 5% while the fiscal deficit, albeit a bit out of range, was still at a manageable level of around 4%. So where did things go wrong?
During the last government’s tenure, expansionary policies were undertaken in order to push for higher growth with a key policy rate below 6%. The growth that ensued was led by import-driven consumer demand, aided by unsustainably overvalued currency funded through forex reserves and external debts. When it was time to pay back the borrowings, there wasn’t much left in the dollar stockpile and nothing had been done over the prior years to boost the exports. All of this made for a bad recipe, and as result, the rupee devalued over 40% in year and a half, which further raised the amount of external debt as well as its interest payment.
Things came spiralling down in a matter of months once the PTI government took charge. Talks of IMF bailout started echoing in economic circles. The foreign exchange reserves were on a steep decline, amounting to only $10.2 billion – barely enough to cover 2 months of imports. The fiscal deficit, too, was fast crossing the 5%-mark while current account deficit around that time stood at a massive $36 billion – over 10% of the total GDP.
The government soon turned to friendly countries for help and managed to secure a few billions of dollars in bilateral agreements, such as $3 billion from Saudi Arabia in cash and an equal sum in deferred oil payment facility. However, that only helped delay the bailout with the global lender, not avoid it altogether.
Now that an agreement has been made, the reform mantra is going to be the same old one: fiscal management through cost cutting measures and increase in revenue collection, improving public enterprise management, strengthening institutions and governance etc.
For time immemorial, the Fund has called for Pakistan to minimise its expenditures, with particular focus to the loss-making public sector enterprises, especially in the energy sector that have drained the national exchequer. Latest data had put the power sector circular debt at a staggering Rs1.4 trillion, which is roughly one third of the annual revenue collection the country managed last year. Every few months, the government intervenes, raises funds through capital markets and bails out these entities and the cycle repeats all over again. With IMF now again calling the shots, there would be a move towards market mechanism in power and fuel billings and thus free some of the government’s resources.
Would things be different this time and structural reforms finally bear fruit? One can hope but there’s ample room for skepticism. To begin with, the man who was in-charge of the finance ministry at the time of 2008 IMF programme is again at the helm, just like many other old faces calling the shots. However, there are reasons for optimism as well: over the past year or so, measures have been taken to limit the imports which lead to the current account deficit shrinking rapidly. Similarly, some structural changes have been made in the functioning of tax body as well as a noticeable shift has been seen towards a market exchange rate regime – something that IMF has asked for in the latest package. On top of that, the Fund as its own guy heading the State Bank of Pakistan which would give it more control over the economic management of Pakistan.
However, austerity, coupled with a tight monetary policy (interest rate at 10.75%) and inflation clocking in at 8.5%, could be suicidal for the country’s growth prospects. In fact, IMF projections have cut down the annual GDP growth to a mere 2.9% by 2018-19 end with estimated unemployment rate rising to 6.2%, which doesn’t bode well for the country’s fast growing population. Unlike the previous programmes however, the fund is focused more towards increasing revenues rather than cutting expenditures, which curbs demand in the economy.
Whether the 102938th time’s a charm or it’s business as usual for Pakistan, we will find out soon enough.