The International Monetary Fund (IMF) said last week that while Pakistan’s economy had gained growth momentum amid improved security conditions, energy supply, infrastructure investment and agriculture, it needs to do more to maintain this upward swing and ‘ensure sustainable private investment and job creation’ in the medium term.

Explaining what Islamabad is required to do in the period ahead, the fund advised the government that this will require strengthening the economy’s resilience with greater exchange rate flexibility, fiscal discipline, and an adequately tight monetary policy stance.

In a statement following the first post-programme monitoring review since the end of Pakistan’s $6.2 billion Extended Fund Facility (EFF) loan in Islamabad, the fund scaled up its GDP (gross domestic product) growth forecast for the ongoing fiscal year to 5.6 per cent.

It also cautioned that the country was facing important near-term challenges: depleting foreign exchange reserves, widening fiscal deficit and growing intercompany debt in the power sector. “A strong reform effort is needed to maintain the external stability, ensure debt sustainability, and support higher and more inclusive growth in the medium term,” it argued.

Analysts are divided on whether the Pakistan Muslim League-Nawaz (PML-N) government, already struggling for survival in an election year since Nawaz Sharif’s disqualification, would risk alienating the business community and voters by cutting development spending, raising taxes, letting the rupee (that lost almost five per cent last week) slide further against the dollar, hiking the price of bank loans and so on.

‘So we are left with no option but to either borrow more from global markets or steeply devalue our currency and increase interest rates’

Fahad Irfan, an analyst at Alfalah Securities, concludes that the IMF statement is just a harsh reminder of the negative implications of accumulating (foreign) debt and rising imports (for external sector stability), and betrays the fact that the Fund’s programme had failed to push the government to implement crucial reforms like increase in tax to GDP ratio.

He says it is difficult to predict the future but feels that the government will avoid depreciating the currency further or hiking the interest rates (as suggested by the IMF) in an election year. He believes that the recent adjustment of the exchange rate will not help grow exports or restrict imports.

“A weaker rupee will only change market sentiments that had long been expecting the rupee to depreciate. (But) if the government wants to grow exports and decrease imports, it’ll have to devalue the rupee by another 10pc to 15pc.”

A chartered accountant by training, Mubashar Bashir is of the view that the government would prefer to borrow more from the international market rather than adjusting the exchange rate and raising interest rates over the next several months.

“Our basic problem at the moment is our external sector: our exports are not rising as fast as we want them to; our imports are mostly inelastic and difficult to decrease. Consequently, our current account deficit is expanding and our balance of payments situation becoming vulnerable.

“So we are left with no option but to either borrow more from global markets or steeply devalue our currency and increase interest rates. I guess that a politically beleaguered government would rather borrow than make the tougher decision that could cost it the elections.”

He is of the opinion that the government had allowed the rupee to slide last week to obtain a favourable comment on the state of the country’s economy from the IMF that will make it easier for Islamabad to raise foreign exchange of $2.5bn in bonds in January/February in continuation of its strategy to prop up foreign exchange reserves by accumulating debt.

Saad bin Ahmed, head of Equities Broking, however, argues that the government has no choice but to let the rupee slip a bit further and raise the interest rates over the next several weeks.

“We see that the government had long been resisting devaluation despite pressure from the IMF and build-up of market expectation. But it was forced to give up its stance (on the rupee stability) and go for abrupt exchange rate adjustment when the pressures on the external sector mounted, and the post-programme talks with IMF began.”

But he believes that the decision to let the currency slide further will be made only after the real import demand for dollars (over and above debt payments to be made during this financial year) becomes clear over the next one month or so. “I think that the SBP will let the rupee adjust to Rs112/114 to a dollar by February and start increasing the interest rates.”

Published in Dawn, The Business and Finance Weekly, December 18th, 2017