Too little, too late

Published January 30, 2023

A massive power breakdown last week in Pakistan left millions of citizens without electricity across the country for most of the day on Monday.

Triggered by ‘frequency variations’ in the system, it was the second major electricity breakdown since October, forcing many to compare the nation’s fragile power sector and its economy on the verge of collapse.

Later in the evening, the State Bank hiked its key policy rate by 100 bps to a 25-year high of 17 per cent to fight runaway inflation.

Nonetheless, the biggest surprise came on Thursday when the SBP silently let the rupee fall by almost 10pc, the biggest one-day drop in more than two decades, as its foreign currency reserves shrank to a new low of $3.6 billion, enough only to cover three weeks of suppressed imports.

Shortly after, the International Monetary Fund (IMF) announced sending its mission to Pakistan to conclude the talks on the pending ninth review of its programme from January 31 to February 9. All and sundry breathed a great sigh of relief, rejoicing in the fact that it would mitigate the country’s risk of a sovereign default.

Indeed, the resumption of the stalled IMF loan programme will relieve Pakistan’s dollar crunch by paving the way for other promised multilateral and bilateral inflows, but it will do little by way of improving the political standing of the 10-month old coalition government led by the PML-N.

The dollar would not be at such a high level today if Pakistan had stayed the course with the programme

In return, the lender of last resort is expecting the politically-beleaguered government of Prime Minister Shehbaz Sharif to significantly boost its tax revenues to meet the budget targets of fiscal deficit and primary surplus, raise electricity prices to control so-called circular debt in the power sector, impose the promised taxes on petroleum products, cut its spending, remove the curbs placed on imports to restrict dollar outflows and let the market determine the exchange rate.

But this isn’t going to be easy for the government facing the provincial polls in Punjab and Khyber Pakhtunkhwa in April and a general election in the country in October.

The politically tough IMF-mandated ‘reforms’ that the prime minister says he is now willing to follow diligently for the programme’s resumption have been promised repeatedly before but never followed through.

That the government has decided to swallow the bitter pill of IMF conditions after delaying talks for three months underlines a growing reluctance on the part of the so-called friendly countries like China, Saudi Arabia and the UAE to step up to help the government directly without the Fund onboard.

The PBC has urged the government to seek an increase in the size of IMF funding and an extension in the period of the programme

A newspaper report quoted an anonymous official as having said that the coalition had conceded to the return to the Fund only after the US conveyed in plain words to follow the IMF path instead of seeking favour from foreign nations. No wonder the multiple trips made by the prime minister and his finance minister Ishaq Dar to the Gulf countries for dollar shopping to find a way around the IMF had failed to produce any result.

Analysts are unanimous that the revival of the lending programme will help mitigate Pakistan’s risk of default by shoring up its foreign currency reserves and narrowing its fiscal and external deficits. Now that the Fund has agreed to continue talks on programme resumption, the record currency depreciation and strict conditions will likely result in low economic growth and hyperinflation in the country.

According to Fahad Rauf, head of research at Ismail Iqbal Securities, Pakistan’s GDP growth is estimated to grow by a negative 1pc in the current fiscal year, and the nation will face high inflation over the next six to twelve months. “In the wake of implementing the IMF’s conditions, the average inflation reading is projected to be 25pc for the present fiscal, but will continue to increase by another 10-15pc in the next fiscal year.”

The anticipation of the negative impact of the programme on voters has been the main reason the government deviated from the programme. But, the analysts said, this wrought incalculable damage to the economy and brought no benefits.

The dollar would not be at such a high level today if Pakistan had stayed the course with the programme and the SBP reserves might have been much higher than their current level.

It went on to say that “stronger policy efforts and reforms are critical to reduce the current elevated uncertainty that weighs on the outlook, strengthen Pakistan’s resilience and obtain financing support from official partners and the markets that is vital for the country’s sustainable development.”

Considering Pakistan’s huge foreign financing gap next financial year and beyond, many believe that while it is important to seek immediate IMF funding to shore up reserves, the government shouldn’t focus on short-term relief only.

The current loan programme will expire on June 30. What next? The revival of the deal may take care of our immediate balance-of-payments needs but will not be sufficient to cope with a similar payments crisis in the next fiscal year.

The Pakistan Business Council (PBC) has, therefore, urged the government to seek an increase in the size of IMF funding and an extension in the period of the programme. This would ensure an unimpeded inflow of multilateral and bilateral dollars beyond the term of the present political dispensation and enable the next government to carry on the reforms without a break or the need for going back to the Fund for a fresh package.

Simultaneously, the PBC has advised the government to use the space provided by the IMF funding to conduct deep structural reforms needed to correct the course and put the teetering economy on a sustainable path.

Published in Dawn, The Business and Finance Weekly, January 30th, 2023

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