The new government will likely be formed under a PDM set up. Chances are that without public support, economic management will prove to be an uphill task as the path of structural reforms (under the expected IMF programme) will be tough and the experience of PDM 1.0 is a telling story.

What economic direction would the PDM2.0 assume? Certainly, the direction will be provided by the IMF (and partially by SIFC). The first will be to get the upcoming review of the SBA done. The IMF review mission would only come after the formation of the new government. The quicker it is done, the better it is.

The review is likely to evaluate the performance till December and possibly numbers for Jan and Feb will be discussed, as well. The problem is; that this could be the circular debt which has already breached the committed levels. Gas prices are expected to increase soon, and electricity prices should follow.

Then the Fund may have issues with the currency management and the staff may view the currency to be fixed. There might be concerns about the fiscal numbers, as these are not adding up. Moreover, financing and deficit are not matching which means the deficit could be higher in the coming quarters.

While these issues may not be a bone of contention for the final approval in the upcoming review but would certainly become part of the discussion of the next programme. The timings of the next program initiation are not clear. This may or start post-budget. That brings us to the question on the role of the IMF in the upcoming budget which is unclear.

Nevertheless, the next programme will be tougher.IMF could raise questions on the role of the SIFC, as some think that it’s against the spirit of level playing field, and the Fund may also have issues with the involvement of the security apparatus in economic decision-making. However, the pundits at home are seeing SIFC as the key factor of economic management in the hung parliament of PDM 2.0 where politically elected members will be at the helm of economic management.

On the structural reforms, the IMF could have benchmarks on broadening the tax base where the untaxed or undertaxed areas may be touched. That would result in pushing the powerful traders and agriculture elite to pay a due share of taxes, which is never easy in a weak coalition government. Then some of the tax juice is to be extracted from provinces which would not be an easy task. And the government may not have a 2/3rd majority to make any constitutional amendment in this regard.

Then the Fund may have a condition to end any form of import restrictions (as currently banks are being asked to manage inflows and outflows). This would have an impact on the currency if the demand and supply have to be managed. This coupled with an upward revision of energy prices could keep inflation high and limit the prospects of aggressive interest rate cuts.

The new government may have a window to cut rates after the completion of the second review of SBA and the signing of the new programme. It would be interesting to see how the Fund takes this and possible relaxations in the budget of FY24-25.