Negotiating new IMF deal, controlling inflation: Dr Reza Baqir highlights challenges for new govt

Former governor of the State Bank of Pakistan (SBP) Dr Reza Baqir said the incoming government would need to initiate negotiations with the International Monetary Fund (IMF) and control inflation.

“Pakistan has significant economic challenges, one of them is how sustainable is its debt. Pakistan does not have access to capital markets, and one of the key priorities for any government that is elected is going to be how to restore confidence in its economy,” he said while talking to Bloomberg TV.

The remarks come as Pakistan conducts General Elections with cellular services suspended amid what the interior ministry called ‘security concerns’.

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Baqir noted that the challenges for the incoming government would be its negotiations with the IMF, and controlling skyrocket inflation.

“I think the number one challenge is going to be how to put the economy on a sustainable footing and how to manage its relationship with the IMF,” said the former SBP governor, who termed the IMF-Pakistan history as an “unhappy marriage”.

On projections, Baqir said the inflation level in the coming 12 months would depend on the pace of economic confidence restoration.

“How quickly also the IMF deal is put through, because the earlier that is done, the earlier people will have confidence and the currency would continue to stabilise.”

Baqir said Pakistan remains dependent on the Washington-based lender “at least for now” as “it needs the IMF’s seal of good housekeeping if it is to continue to borrow from China and the Middle East”.

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Baqir, currently the Managing Director with Alvarez & Marsal, shared over the next five years Pakistan has to repay $7 billion to the IMF, whereas its current external reserves stand at $8 billion.

“So where is Pakistan going to get this money, unless it gets new money from the IMF to repay the old money that had gone from the IMF part?”

Pakistan is currently under a $3-billion Stand-By Arrangement (SBA), which is scheduled to expire in March-April.

On a query on what conditions Pakistan needs to fulfil to secure the next IMF programme, Baqir stated: “This time around, IMF would be looking at how to get ownership on the reform programme that is implemented.

“The first goal is going to be how does Pakistan make a more equitable tax system? How does Pakistan bring into the tax net people and privileged classes, who have avoided taxes instead of continuing to squeeze those in the middle class and the salary-earning people? How Pakistan can broaden its base?

“These are fundamental questions of ownership, and if the new government generates the ownership around the reform momentum and is less seen as dictated from above by the IMF, the chances of it being sustainable are going to be much higher,” he said.

Baqir also shared the priorities the incoming government should have to address the economic crisis.

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“In my view, the number one priority has to be how to protect the poor from the very high inflation that Pakistan has seen over the last couple of years. Headline inflation of around 30%, food inflation of 40%. These are unprecedented levels in decades,” he said.

“Whoever is the next finance minister should bring a cash transfer programme or a social safety net,” he said, citing the example of the Ehsaas Cash Programme launched during Covid-19 by the then government.

“The second priority is the tax effort, to have an equitable system, and the third priority has to be how to lay the lay the foundation for export-led growth, as the only way for Pakistan to meet those (payment) obligations without having to borrow more is to sustainably grow its export base,” he added.