Beggars can't be choosers

We are not late for the IMF by nine months. The need to go to the IMF started back in October 2016, when the current account starting slipping and some sane voices were raised at that time, but could not resonate. Had the government entered an IMF programme back then, the economic adjustments would have been less severe. On the flip, the 5 percent plus growth in FY17 and FY18 would not have been the case.
If there was any plan to live without IMF, it would have been implemented by the Abbasi-Miftah duo, arguably relatively better economic managers in the recent lot. They let the external slippages grow for 14 months before currency started adjusting in December 2017.
Nonetheless, the PML-N geniuses had no alternate workable game plan to avert IMF - all they did was to buy time till elections, and in the mean time, there were no efforts to consolidate the fiscal mess as they did not stop the spending spree. Caretakers realized the gravity, but interim government did not think that they have the mandate to sign off or even initiate a Fund programme. Dr Shamshad Akhtar accelerated the adjustments, and created a roadmap for the upcoming PTI government.
Asad Umar continued with the macroeconomic adjustments, including slowing down the government development spending. He took eight months in negotiations with the IMF. During that period, the PTI team did not work for an alternate plan of getting out of the mess without the IMF.
In a nutshell, no one in the country has any roadmap of attaining economic stability without the Fund programme. And here we are in. Both the Finance advisor and Governor SBP are new, and have no inhibitions whatsoever about speeding the negotiations with the Fund. At the time of writing, the negotiations are still ongoing, as IMF is not willing to deviate much from its stance.
Some of the IMF's prior conditions are fulfilled as long as exchange rate and interest rates are concerned. A few in Islamabad say that the programme would not be front loaded as was the case for Egypt, but others are talking about another 15-20 percent currency adjustment. Nothing can be certain until the programme is signed off.
The currency cannot be free floated in a thinly traded market where a few bank treasurers could decide the fate of rupee-dollar parity, and currency fall usually brings more profits for banks - higher interest rates are consequence of currency fall, and higher interest rates ensure higher profits for banking system where majority of assets are deployed in government papers. Hence, it could be in bankers' interest to let the currency dip further.
Thus, the talks are on having a flexible exchange rate regime. Even in Egypt, in essence, it's a flexible exchange rate regime, as currency movement in the past few years had been erratic - one big movement, followed by stable rate. Expect something similar in Pakistan, but with less erratic movements.
Currency could be pegged to real effective exchange rate or be linked to flows. The chances are more to move the rupee in accordance to foreign currency flows and the SBP would buy dollars from the market to comply with NIR and NFA targets. In simple words, to encourage more inflows, the currency would have to be depreciated.
On interest rates, the IMF prescription is to move rates according to the market need. Couple of days back, the cut off yield of 3M T-bill increased by 24 bps which was against the thinking of newly appointed DG debt at MoF. One of the conditions of Egypt is that government can only reject the outliers in the auctions, and that happened earlier this week in Pakistan. Thus, one could safely say that it's a prior action of the Fund programme. Hence, based on these parameters, interest rates may go up further by 50-100 bps. Any further increase will be based on inflation outlook and that is dependent on currency movement, energy prices adjustment, and new taxes.
A politically sensitive issue is about the energy prices which a few commentators termed could be suicidal for prime minister Imran Khan. Since, energy adjustment is for long due, and nothing happened till the start of this year. The gap is huge, and it is probably one of the stiffest pre-conditions of the IMF. The talks are to increase the average energy tariff by Rs 2 per unit. It's a tricky one for the PM.
On taxation, challenge is humongous. The newly-appointed chairman Syed Shabbar Zaidi has to win hearts and minds of the FBR team before he could lead them to chase nil filers or non-filers. He has no choice but to accept new taxes, and getting rid of tax exemptions in the upcoming budget. The new taxes amid higher energy prices, will suppress an already slowing down economy. The PM would hate to do so, but beggars can't be choosers.