TO avert the possibility of sovereign default and blunt the PTI onslaught, the Sharif government is banking on instant bilateral and multilateral help.

Fearing a public backlash, Prime Minister Shehbaz dismissed the summary to increase fuel prices. The new government has yet to go public about how it intends to fund industrial subsidies and relief packages for the distressed.

Pakistan needs to reschedule loan repayments to ease pressure on reserves and to stem the erosion of the currency. It also requires a life-saving injection of foreign exchange to prop up the reserves to be able to fund the necessary imports. To this end, the revival of the suspended $6 billion International Monetary Fund (IMF) programme is deemed crucial.

The IMF held back the $1bn tranche after the sixth review as the former government reneged on agreed terms — froze fuel and power rates and extended a blanket tax amnesty scheme. Since May 2019 when the three years $6bn Extended Fund Facility deal was signed, the IMF has disbursed $3bn. The IMF has hinted at flexibility when it clarified that there is ‘no concept of suspensions’ in the facility.

Businesses do not expect the current govt to do something radical in a few months that the others couldn’t do over the years

Finance Minister Miftah Ismail proceeded to the US last week to attend World Bank/IMF spring meetings. In Washington, he told media he was hoping for an early deal on the seventh review of the IMF package after the initial engagement with the fund officials and early arrival of the $1bn tranche.

China has already indicated its readiness to allow deferral of loan repayment. The finance team was hopeful of leveraging help from Saudi Arabia, the UAE and Qatar as well. It is also hoping to get the Financial Action Task Force bogey off its back which, if it happens, would pave the way for a favourable environment in the global financial market.

The big question remains, ‘how’; how does the government intend to finance relief measures for both the public and the business to gain the trust that any democratic government needs to function effectively?

Most watchers believe that the generous response of donors and friendly countries will allow Pakistan to face immediate threats. It will grant breathing space to the government to put its act together for course correction without having to resort to steep policy reversals and painful shocks.

“Some nations might not find the past conduct of Pakistan particularly inspiring but Pakistan is a nuclear power, too big to be allowed to collapse. Chaos in Pakistan can create a strong whirlpool that can potentially destabilise the entire region. Even the country’s arch-rivals find this risk too serious to tempt,” commented an anonymous expert wary of what he calls “dangerous power politics” in the country.

The business leaders and experts, sensing the gravity of the economic situation with slim prospects of political turmoil subsiding anytime soon, hope Prime Minister Shehbaz would choose prudence over populism. “The political expedience will compromise the economic future. The government must prioritise restoring some semblance of economic stability in Pakistan,” a cautious watcher commented privately.

Syed Salim Raza, former State Bank governor who sits on the board of several leading companies and teaches at the Institute of Business Administration, commenting on what he sees ahead, said: “The new government will probably ask for time to roll back the fuel subsidy. The IMF may allow some concessions, until the budget. Friendly countries may also accommodate Pakistan by extending repayment dates and possibly (limited) incremental funding.

“All this should help reintegrate back into the IMF programme and assist in having greater access to commercial funding. The government will, however, need to maintain the current social programmes, and look for augmentation. Global pressure on oil and commodity prices looks set to cast a long shadow on domestic prices everywhere.”

Nasim Beg, a reputed business executive who is the founding member of several firms and serves on the boards of many companies of Arif Habib Group, sees little scope for the government to drag the prices down even if it succeeds in arresting inflation. “The government needs to make significant direct transfers. During the early days of Covid-19, the PTI covered 12 million families. The government should remove all the existing subsidies and replace those with perhaps Rs5,000 a month under the Benazir Income Support Programme to at least 12m but preferably 20m needy families. If need be, it should stop all Public Sector Development Programme transfers for the time being.”

He supported the perception that the IMF would show flexibility. “The IMF will come around with a sensible plan. China and Saudi Arabia will probably agree to rollovers, provided we strike an agreement with the IMF. We also need short-term out-of-the-ordinary measures to curtail imports.

“The SBP has thus far used interest rates and the exchange rate to control the money supply. To my mind, increasing reserve requirements, rather than interest rates is perhaps a better option.”

Ehsan Malik, CEO, Pakistan Business Council (PBC), shared the actionable advisory note the elite business body has sent to Prime Minister Shehbaz Sharif. The said letter calls for returning to the IMF fold, sticking to fiscal prudence, restraining populist urges, suppressing imports, promoting exports, broadening the tax base and continuing with subsidised energy rates for the industry. “For the medium to long term, we believe a Charter of Economy with cross-party consensus is essential,” reads the note.

Responding to Dawn request for comment, he wrote back: “To hope that an interim government can radically transform the economy in a few months, which the previous one couldn’t do in over three years, and others in decades, is unrealistic. The issues confronting Pakistan (energy, fiscal deficit, state-owned enterprise losses, pensions) have accumulated over many years as has deindustrialisation of the country, under-investment, loss of exports share and growth of the informal economy.

“Both the PTI and the current government also faced and are facing Covid-19 and commodity headwinds, now made worse by the Ukraine crisis. After the Afghanistan pullout, we don’t enjoy the same cordiality of relationship with the West either. In these circumstances and without cross-party consensus on the economy, even an IMF programme will only serve as temporary though essential support. This is why the PBC advocates a Charter of Economy.”

Published in Dawn, The Business and Finance Weekly, April 25th, 2022

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