IMF lending - Pakistan vs Egypt

Ever since the IMF rolled out its current programme in Pakistan, the global lending agency's programme for Egypt has been under intense discussions. The IMF rolled out, in 2016, a programme in Egypt. There are striking similarities between Egypt's and Pakistan's programmes. They however differ from each other in the sense that the IMF package for Egypt was of $ 12 billion against Pakistan's $ 6 billion.

Egypt's IMF programme was spearheaded by Dr Reza Baqir who, upon its conclusion, moved to Pakistan not as an IMF official but as the Governor of State Bank of Pakistan.

A perception was created by country's leading economists that the Egypt model is being replicated by the IMF in Pakistan and that the Egypt model had failed to deliver as per public expectations and turned out to be much against public interests, pushing more people below the poverty level.

A closer look at the Egypt's programme by this writer has revealed that indeed the issues, model and recipe of reforms of the two programmes have striking similarities but the results are not as perceived and propagated by many. On the contrary, the Egypt model, concluded in 2019, appears to be a success story which helped stabilise the largest Arab country's (Egypt is the largest Arab country in terms of population) fiscal and economic disciplines with the potential to eventually improve the well-being of the poor. In short-term, the programme did push more people below the poverty line.

It was in 2016 that Egypt confronted a severe fiscal and economic crunch amid a shortage in its foreign currency reserves. Egypt approached the IMF to move out of the crisis and agreed with the Fund on a $12 billion extended arrangement to be disbursed in tranches over a period of three years.

The IMF loan, supplemented the loans taken by Egypt from different bodies and countries, enabled Egypt to pay off its outstanding debts to several countries, donors and petroleum companies and increase its cash reserves.

The programme was aimed at improving Egypt's credit rating and allowing it to implement development projects and improve its road and utility networks.

The conditions of the 2016 IMF loan included liberalizing the Egyptian currency exchange rates against foreign currencies, ending subsidies on many services and products provided to citizens, increasing tax revenues and reducing the role of the state in the Egyptian economy and encouraging the private sector through privatisation of some government companies.

As a consequence, average annual inflation hiked from 10.4 percent in 2015 to 13.8% in 2016, then to 29.5 percent in 2017- the highest level in the history of Egypt - before falling to 13.8% in 2018 and declining to 3.1 percent in October 2019.

As a result of the inflation from 2016 into 2018, the purchasing power of an average Egyptian shrank. At the end of the 2017/2018 fiscal year, 32.5 percent of Egyptians were living below the poverty line compared to 27.8% in 2015.

The IMF programme concluded with Egypt's foreign currency reserves exceeding their highest historical levels and Egypt now has full access to international capital markets to meet its needs.

Egypt's central bank reported that at the end of 2019, the country's foreign reserves exceeded $ 44.5 billion.

Reportedly, Egypt will not opt for a new IMF loan; it is said to be confident that its economy is now robust enough. Egypt and the IMF are now discussing possible IMF technical support to the government economic reform agenda and structural reform programme aimed at reducing the size of bureaucracy.

It is understandable why the IMF has adjusted Pakistan in the Egyptian template as the issues of the two are almost identical.

The outcome so far noted in Pakistan is similar to that of Egypt with inflation hovering around 13 % in the first year and foreign exchange reserves getting better. If the Egypt trend is to be followed then the country is yet to experience worse in year 2 before it starts to get better in third year, whereas by the end of the programme, we could hope to experience an IMF-free Pakistan.

The weak link towards reaching the ultimate goal in Pakistan is the extent to which the people can sustain the hardships and its social and political consequences on Pakistan's landscape. The opposition parties are out to cash in on the situation.

The government endeavours to dilute the hardships for the poor segments through utility stores, readily availability of basic eatable commodities in the market and action against hoarders are some favourable ad hoc remedies to respond to situation. More needs to be done in this regard and reforms programme is required to be expedited in areas that are lagging yet vital for the economic turnaround, notably, the energy sector and restructuring/privatisation of loss-making Public Sector Enterprises (PSEs).

The IMF programme has a great chance of success in Pakistan. In its first year, the programme is on track with expected results. However, the remaining two years are going to be more challenging than the first year.

(The writer is former President of Overseas Investors Chambers of Commerce and Industry)