THERE are indications that the government’s ongoing talks with the IMF for a bailout may be heading towards an impasse.

What is clearer is that, whether the talks stall or not, the rulers are moving towards a sharp adjustment that will require them to raise taxes and cut current expenditures, possibly necessitating a reduction in the size of government, and an effort to at least partially roll back some of its provincial transfers under the NFC award.

Steep political costs are involved, and time for making a decision is running out. The billions of dollars borrowed from ‘friendly countries’ to shore up the balance of payments might delay the decision, but there is no escaping the tough choices that lie ahead.

At the moment, it seems that the government has procured some time, thanks to the deposits from Saudi Arabia and the UAE, with word going around of further support from China. It intends to use the time to try and give a boost to exports and remittances and engineer an improvement in the external account.

But the headwinds should not be underestimated. Boosting exports through subsidy payments on gas carries a trade-off that the government may not be able to afford for much longer. And while continued depreciations of the exchange rate may produce a short-lived boost in exports, it will elevate the size of the external debt, and make imports more expensive.

In short, turning around the external sector using only tools such as the exchange rate and subsidies can be a self-defeating policy — it can never be a substitute for sound reforms.

The sense of comfort created by the billions in deposits from friendly countries, which are landing in the State Bank, must not give rise to complacency.

The government really has no other choice but to undertake a sharp adjustment in the fiscal accounts, follow up with painful reforms to stem the bleeding in the state-owned enterprises, and reduce the debt-to-GDP ratio. It must realise that there is no shortcut, and there is no easy way of doing this.

More than ever before, the urgent need for a clear policy direction is now upon us, while the government gives the appearance of still being stuck in campaign mode.

It is important that populist promises now be curtailed, and the focus shift towards addressing the growing fiscal and external imbalances in the country.

Published in Dawn, December 26th, 2018