Imran and his designated Finance Minister, Asad Umer, have publicly acknowledged that the economic situation is so dire that all options including going on an International Monetary Fund (IMF) programme are on the table to tackle the twin unsustainable deficits - current account and budget - that the country is facing at present. Independent economists are of the view that the country has no other option but to go on an IMF programme. According to them, an IMF bailout package would enable the country not only avoid default, but also provide a comfort level to other lenders to provide funding for budget/balance of payment support. However, the exercise of IMF option must be accompanied by another equally relevant acknowledgement: given the current appalling state of the economy, the IMF team would negotiate extremely stringent politically challenging conditions that would shorten the usual six-month honeymoon period associated with a new popularly elected government by half at least.
This newspaper urges the PTI government to first determine the sequential actions it must take to deal with the current economic impasse. First priority must be to formulate a budget given that the previous government's 27th April 2018 budget was (i) completely unrealistic in terms of revenue projections, inclusive of the obviously flawed conclusion that a reduction in income tax rates would increase revenue collections by 17.9 percent when in Pakistan, there is no linkage between lower tax rates and higher tax collections given the extremely narrow tax base; additionally the government must be aware that the IMF mission leader for the previous programme focused on total revenue collections, which account for the PML-N administration to rely on ease of collections rather than the difficult task of actually reforming the tax structure; and (ii) an expenditure allocation geared towards the previous government's development agenda that focused on physical infrastructure (roads and power in that order of priority) rather than social sectors as consistently maintained by Imran Khan. While the new government has little if any manoeuvrability in defaulting on payments due on external loans/equity debt (Sukuk and Eurobonds) yet it would be well advised to sit down with the two main recipients of public funding, defence and running of civilian government, to seek some voluntary reduction in their allocations for the year as a necessary sacrifice to bring about a reduction in the budget deficit projections that would no doubt strengthen the government's negotiating position with the IMF. Without this sacrifice, it is a foregone conclusion that the IMF conditions would be untenable for the public that voted the party into power.
If the budget does seek to undertake meaningful reforms reflective of homegrown solutions rather than those imposed by the IMF, (though there is no doubt that some of the reforms required in the budget would be those that the Fund would propose in any case) it would be preferable to begin the process prior to going to the Fund.
The IMF would also require the government to take three other major decisions and again it would be preferable for the government to take mitigating measures before going to the Fund for a bailout package. First, the state-owned entities (SOEs) that are projected to receive more than a trillion rupees in the budget, as indicated in IMF's last report on Pakistan, there is an urgent need to either restructure the loss-making units or sell them. The PTI would be well advised to remember that privatisation would meet with resistance both within and outside parliament and the PML-N's attempt to bring in experts to run these entities from the Pakistani diaspora settled abroad horribly backfired. Secondly, the Caretakers have allowed the market to set the rupee value, given lack of reserves with the State Bank of Pakistan (SBP) to intervene in the market, however given the massive foreign loan/debt equity interest and repayments as and when due there would be a need for delicate balancing of the rupee value. And finally, the IMF fully supports that SBP be granted complete autonomy - a move that was resisted by the then finance minister Ishaq Dar.
To conclude, the elected government faces an extremely daunting task in terms of taking politically challenging measures to deal with the current state of the economy. In this context, one would hope that the PTI government would enlist the services of eminent economists to steer the economy out of the present perilous state.