Pakistan and IMF (International Monetary Fund) have reached a $3 billion Stand-By Arrangement (SBA) to help the country successfully avert default. However, the agreement comes with tough conditions! Many of them are the same that were part of the 9th review that expired at the end of June without reaching an agreement.
Under the SBA, IMF will provide financial assistance in the amount of SDR 2,250 million (about $3 billion or 111 percent of Pakistan’s IMF quota). This nine-month short-term loan (SBA) has started this month after IMF Executive Board’s full approval.
The following are the major highlights of the $3 billion SBA:
Greater fiscal discipline
Expansion in tax collection & revenues growth
Market determined exchange rate
Energy sector additional reforms
Preserving macroeconomic conditions
Business climate improvements
Climate reforms/resilience
Stabilise the economy from recent external shocks
Pakistan’s financial crisis is deeply rooted in its fiscal predicament and trade account deficit. Since many decades, successive governments have failed to address the root cause of the issue by making structural changes in its policies.
As a matter of fact, every government pushed passed the problem onto future governments to address it and funded the shortfalls by securing assistance from the multilateral donors (IMF, WB, ADB, etc.) and bilateral partners (Saudi Arabia, China, the UAE, Qatar). Over the years, for every financial crisis, the IMF has been the proven lifeline for Pakistan.
Because of lack of courage for the reforms and shying away from using the political capital by the elected officials, fiscal as well as the trade account deficits have transformed into monsters and now there seems to be no easy way out to fix them! As a result, Pakistan has left with no other choice but to go back to the IMF to desperately seek its assistance. Like any other lender, money is rolled out only if the assistance seeker (debtor) can meet its (lender’s) terms and conditions. From this perspective, bilateral and multilateral donors, including the IMF, are no different insofar as this basic concept of money lending is concerned.
No doubt, $3 billion is a very small amount compared to the funds needed for servicing the debt payments and balancing the trade account deficit.
But it provides some breathing room for the government and its policymakers to make structural changes to address the fiscal deficit, creating an environment to attract Foreign Direct Investments (FDI), and giving an impetus to exports. According to some published reports, currently Pakistan owes a whopping $130 billion external debt.
Pakistan is still struggling with its highest inflation rate since 1957, and many economists believe that reduced subsidies coupled with higher taxes, as part of the $3 billion SBA, will not bring any relief to the average citizens, but additional hardships. Since this assistance is just for the next 9 months, it provides a cushion and breathing space for the caretaker government before and during the scheduled elections this fall.
Since remittances from the diaspora are one of the major sources for the foreign exchange, Pakistan can easily increase remittances by opening training schools geared for increasing their chosen field of expertise.
The training period could be from 1-2 years focused on learning Arabic language (compulsory for everyone), masonry, carpentry, auto mechanics, irrigation, restaurant attendance, packaging, etc. The trained diaspora will not only earn higher wages but will also increase its demand at the cost of the other nationalities.
According to the experts of the diaspora placement and consulting services, trained expats earn at lease 50% more than their non-trained counterparts. This means that about $25 billion diaspora money could easily be increased to $50 billion in a very short period, without changing any increase in the current diaspora population of about 9 million.
For the current government, it is a great opportunity to initiate some reforms that are easy to implement but will set a great precedent for the new government to keeping the reforms going.
Major cities of Pakistan are highly polluted due to ever-increasing automobiles (motorcycles & cars) population and lack of their timely maintenance. Replacing the government fleet with electric vehicles (EVs) or hybrid vehicles (h-EVs) and providing subsidies and tax incentives to the public for owning these vehicles will greatly reduce the toxic fumes/pollution generated by the internal combustion engines (ICE).
Also, by offering incentives to the auto industry to assemble EVs and hybrids, including the recharging stations networks, will greatly help reduce the atmospheric pollution in a short time. This in turn will improve citizens’ health, reduce emphysema, chronic pulmonary, and upper respiratory body diseases. Improved health of the population will require less government funds to spend on public health, and in turn it will result in higher productivity resulting in an increase in the GNP/GDP.
In conclusion, Pakistan’s financial crisis is deeply rooted in its fiscal mismanagement and trade account deficit. The $3 billion SBA with IMF will not change the everyday life of the citizens but it will help to stabilize the overall economy by removing the imminent threat of the country default and giving some breathing space to the government.
There is a desperate need for political and economic stability for attracting FDI, simplified rules for higher exports, diaspora training for increase in remittances, and increase in tax revenues. In addition to developed nations’ financial support to mitigate climate change effects on Pakistan, the government must also take small steps in reducing the air-pollution by replacing its fleet with EVs and h-EVs and incentivizing the consumers and the auto assemblers for the non-gasoline automobiles, including the motorcycles (2-3 wheelers).
By following this strategy, slowly Pakistan will wean itself away from the IMF and other donors’ financial supports.
Copyright Business Recorder, 2023
The writer is Executive Director, Polykemya International
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