THE Pakistan Muslim League-Nawaz, which is poised to form the federal government, is not keen on borrowing more dollars from the IMF — at least not in its early months in power, despite warning of a looming balance-of-payments crisis.
The party leadership feels that its plan to stimulate growth, the main plank of its economic revival strategy as outlined in its election manifesto, will be compromised by the stringent, painful economic stabilisation conditions attached with the IMF loans, and prevent it from providing relief to voters who have returned it to power in the May 11 election with emphatic victory over its rivals.
Sartaj Aziz, who headed the PML-N committee that wrote its election manifesto, doesn’t see his party’s government signing up for a fresh IMF loan facility, at least not in the next three to six months, but says it will continue ‘engagement’ with the multilateral lender.
”We will not be able to move in the direction of growth if we go to the IMF at this moment. There’s little room for growth under an IMF programme owing to its excessive emphasis on stabilisation policies. We want to approach the Fund in a dynamic situation, not in a static situation so that we have to make fewer adjustments,” he told Dawn last week.
Analysts say the next government faces staggering economic challenges, which demand both short-term fixes and long-term reforms. Most important among these challenges is securing external support to avert the balance-of-payments crisis, they argue. They point out that foreign exchange reserves have slumped to import cover of less than two months.
Sartaj is confident that removal of bottlenecks like, energy shortages hampering investment and growth can boost exports and tax revenues, which will bridge fiscal and current account deficits and stabilise the faltering economy, thus precluding the need for the IMF bailout.
”The continuation of the current downward trend in the global oil prices should further help (improve the balance-of-payments position),” he said.
Pakistan’s liquid foreign exchange reserves dwindled to $11.6bn the day before the polls with the central bank holding $6.5bn and commercial banks $5.1bn. The rupee has been under pressure for several months over balance-of-payments worries, and the central bank is estimated to be spending an average of $250mn a month since October to prop up the currency. The central bank too has noted that net capital and financial inflows weren’t sufficient to finance current account deficit.
The IMF has already indicated its willingness to provide an extended fund facility of $5.5bn,. The amount will however be barely enough to repay the outstanding debt of about $6bn on the previous Fund loan that was suspended in 2011 after power sector and tax reforms were postponed by the government under political pressure. The PML-N led opposition to implementation of valued added tax (VAT) that soured Pakistan’s relations with the Fund and other multilateral and bilateral lenders.
While some contend that the country may face default by the end of the first half of the next fiscal to December unless a bailout package was signed with the Fund, others agree that the new government will not need to immediately sign up for the multilateral funds.
“The PML-N is pinning its hopes on the promised release of coalition support fund of $1.8bn by the US before the close of the current financial year, which will improve the stock of reserves and provide a breathing space to the new government and preclude the urgency of applying for a fresh IMF loan,” says analyst Shahid Zia.
Unlike the previous Pakistan People’s Party-led government was plagued by political instability, says Zia, its emphatic victory in the polls affords the PML-N enough space to work out its economic revival strategy, take bold policy decisions and implement structural reforms to fix the faltering economy rather than going to the IMF.
The PML-N manifesto outlines a populist growth strategy focused on supply-side policies, large infrastructure investments (on motorways, ports, dams, housing, power and urban transport projects), privatisation, and trade liberalisation.
It targets to more than double economic growth rate to six per cent by 2018 from an average 2.9 per cent in the last five years and spur investment-to-GDP ratio to 20 per cent from existing 12.5 per cent. Half of remittances sent by overseas Pakistanis will be converted into investments and multinationals will be given incentives linked to flow of foreign investment to expand production for local and export markets.
Growth in the manufacturing will be improved to eight per cent a year from the current level of about three per cent through removal of energy shortages and reduction in interest rate and upfront project costs for new investments. Corporate tax rates will be brought down over a period of time to encourage foreign direct investment (FDI), sales tax will be rationalised and its scope broadened, and custom tariffs reformed to eliminate anti-export bias. A technology up gradation fund will be set up in the public sector to support new investments in prioritised sectors.
The PML-N manifesto also pledges to cut fiscal deficit to four per cent of GDP from over eight per cent but says a balance will be struck between fiscal consolidation and growth. It vows to raise tax revenue to 15 per cent of GDP from below 10 per cent by broadening the tax base, cut current spending, energy subsidies, and budgetary borrowings, and plug the loses of the state-owned enterprises (SOEs) by revamping and privatising them. At the same time it promises to spike development spending because cutting it is an unsustainable way of reducing fiscal deficit.
Yet it is unclear as to how will the PML-N deliver on its election promises.
“Delivering (on its promises) will be a challenge given the government’s weak fiscal position and large debt payments due in the next 12 months. Turning the economy around will require significant tax and expenditure reforms (to create space for public and private investment).
“Pakistan will need balance-of-payments support from the IMF to cushion its foreign exchange reserves position, especially with $6bn of external debt payments due next financial year,” argues Sayem Ali, senior economist at Standard Chartered Bank.Like many others, Ali considers the PML-N economic revival programme as doable. “The banks are flushed with liquidity and the private sector has a large appetite for investment. But an investment-friendly macroeconomic environment needs to be ensured by addressing energy shortages and balance-of-payments position to revive investment and growth,” says Ali.
“The PML-N’s strong mandate has given the markets hope of significant progress on reforms in spite of major challenges facing it. In the absence of significant reforms in the first 100 days, the market’s focus will likely return to unsustainable fiscal deficit and dwindling reserves.”