EDITORIAL: That the situation is getting more and more complicated and mysterious is a fact. With State Bank of Pakistan’s (SBP’s) forex reserves falling below $7 billion, the anxiety in the market is growing.
At this juncture, returning to the right path or right direction in relation to the International Monetary Fund (IMF) programme is extremely critical. As per information on the SBP’s website, the external repayments over two months (December 2022 and January 2023) are of $8.9 billion.
Sources reveal that payment of $1.7 billion (out of $8.9bn) is already being made. Out of the remaining $7.2 billion, around 40 percent is commercial debt which may not be rolled over at all.
With such low levels of reserves and ballooning external loan repayments, the need for fresh inflows and rollovers cannot be overemphasised. However, it is extremely difficult to arrange the direly needed financing without IMF’s nod.
The Fund, however, is not willing to give any leeway to the government; it is insisting on bridging the fiscal gap. New (or additional) taxes must be imposed and expenditure substantially curtailed in order to close that gap.
This indeed is almost impossible for any finance minister to implement in a politically charged environment. The incumbent finance minister came back to extricate the economy out of the tailspin without further losing PML-N’s (Pakistan Muslim League-N’s) political capital.
It is a near impossible task. He is in a tight spot. Everyone could sense his frustration at not being able to help. And he cannot stand the frustration of not being able to help. That is why perhaps he openly voiced his resentment over IMF’s inflexible approach to its lending to Pakistan.
Earlier this week, the finance minister met ambassadors of the US, Saudi Arabia, and the UK. These countries have significant voting rights on the IMF board and their support may be useful in persuading the Fund to offer some accommodation in the pace of corrections as regards the timelines.
While bridging the fiscal gap through higher revenues and lower expenditure (including subsidies) is imperative to improve the macroeconomic health, so are the other structural reforms that the IMF is asking for; these are in essence for the long-term betterment of Pakistan’s economy. But the request for accommodation by relaxation in the gradient of adjustments in view of the devastating floods that have ravaged the people and the economy also merits consideration.
Inflation is already very high in Pakistan and growth is subdued. Some of it is due to global factors and floods; but one cannot rule out domestic challenges such as political instability and delay in taking key actions.
This is happening since 2021. Successive governments and their finance ministers all tried to ‘reset’ the lending agreements. In the process, therefore, the mistrust between the authorities and the IMF deepened.
The situation is becoming more tense and more divisive and in need of genuine mediation. It is extremely challenging for the economic team to strike a delicate balance between the conditions of the IMF and political leaderships’ fiery populism.
It in fact requires selecting battles in a way that does not jeopardize Pakistan’s economic security. Market pundits are clear that there is no way out without the IMF. The question is how to bring both IMF and the political leadership back on one page.
As a first step the government is trying to get additional support from friendly countries such as Saudi Arabia and China. Once these commitments materialise, these could help in negotiating with the IMF as some of the external gap would have been bridged.
Secondly, the government should raise taxes and lower subsidies to bring fiscal numbers close to what has already been committed to the IMF. Thirdly, bring Pakistan Tehreek-e-Insaf (PTI) to the negotiating table to decide schedule for elections and other political matters.
It is, however, needless to say that both Saudi Arabia and China – Pakistan’s great friends — want greater political stability in the country. The IMF, too, wants an end to political instability in the larger interest of the country’s economy.
Copyright Business Recorder, 2022
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