THERE is no dearth of economists and analysts who believe that the negative impact of the IMF package will far outweigh the fact that the country could stave off the possibility of default. What would have been the impact of default is now out of question as the country has already received the first IMF tranche of $3.1 billion.

The fear of default was a major factor that pushed the government towards the IMF. The impact of not meeting global financial commitments would have been complex and manifold, but it sis yet to be seen what impact the IMF agreement will have on the national financial sector. If history is anything to go by, Pakistan deviated from such agreements eight times out of nine. It was only the last standby agreement that was successfully concluded during the Shaukat Aziz era. Will Pakistan be able to carry out the conditions embedded in the current agreement? One can keep guessing.

Pakistan provided a long list of assurances to get the IMF loan which is worth $7.6 billion. A number of these assurances have deeply negative consequences for both financial sector as well as the overall economy. The policy discount rate (interest rate) was increased to 15 per cent which is not only drastic for the domestic economy, but is contradictory to the measures taken in developed economies to help them out of their recession. Money is available at 0.25 per cent to 3 per cent from the United States to Euro zone in a bid to generate economic activities and push various sectors that are either slowing down or have reached the dead-end.

The situation is apparently reverse in Pakistan and practically we are inviting recession by imposing restrictions on the flow of liquidity and by making it too costly to borrow. The State Bank and the Ministry of Finance have their own arguments to justify their strategy the worth of which may be no more than suggesting a slow, instead of sudden, death. Both said the economic fundamentals here are different from the developed economies. Shaukat Tarin said the tight monetary policy with high interest rate was aimed at bringing down inflation.

Ironically, the State Bank has been maintaining a tight monetary policy for four years and inflation has still kept on increasing; the CPI 12-month inflation has risen to 25 per cent. Interestingly, the State Bank has been blaming food price hike for higher inflation and not the monetary expansion. What would happen if the inflation continues to rise despite tight monetary policy?

The biggest impact will emerge with the economic slowdown which has already started. The State Bank in its annual reported predicted an economic growth in the range of 3.5 to 4.5 per cent for the 2008-09 fiscal.

The country achieved an average economic growth of 7 per cent during 2000-07. The business community has shown strong resentment over the hike of policy interest rate as the cost of borrowing forced them to minimise its activities and not to go for new ventures and expansion.

The 15 per cent discount rate means the borrowers are getting money at the rate not less than 22 per cent and in many cases 24 to 28 per cent. For example, leasing companies are charging up to 28 per cent, while the consumer banking fell flat as its charges were already high before the policy rate reached 15 per cent.

Industrialists and exporters feel that the IMF conditions are clear discrimination and all advantages will go to the developed countries. Exporters believe their cost of product will be too high than the goods being manufactured in the developed economies where money is available at 1-3 per cent. The other negative side is that the domestic market will be filled with the cheaper imported and smuggled products and replace the goods manufactured domestically. The interest rate is highest in the region and even China is maintaining an interest rate of 6 per cent; 150 per cent higher than Pakistan.

India revised the interest rate downward. “To improve the flow of credit to productive sectors at viable costs so as to sustain the growth momentum, the Reserve Bank signalled a lowering of the interest rate structure by reducing its key policy repo (Repurchase Operation) rate by 150 basis points from 9.0 per cent as on October 19 to 7.5 per cent by November 3, 2008,” said the Reserve Bank of India in its publication issued on December 6.

It has further been decided to reduce the repo rate by 100 basis points from 7.5 per cent to 6.5 per cent and the reverse repo rate by 100 basis points from 6.0 per cent to 5.0 per cent, effective December 8, 2008.

The Indians have taken the right decision to save their economy from recessionary impact while Pakistan is moving in the opposite direction. The higher interest rate means local products will take a severe blow in and outside the country. Bankers say the high interest rate has double negative impact; lower supply of credit to market and higher risk of non-performing loans. Analysts in their reports predicted that banks’ profits would be severely reduced up to 3 per cent from the earlier up to 12 per cent. They said higher inflation substantially reduced deposit growth to just 6 per cent which further restricted lending. The banks in Pakistan have been facing the direct impact of global liquidity crunch while the conditions of IMF agreement could aggravate their problems. “We should expect failure of banks in coming months which could be absorbed by mergers and acquisitions,” said a senior banker.

The State Bank has assured the IMF that it will prepare a contingency plan to deal with the problem of private banks by end-December 2008. The plan will contain criteria for SBP liquidity support, assessment of bank problems, and intervention procedures. It said the SBP has already dealt with problematic banks through mergers.

“Looking ahead, if there are severe strains in the inter-bank market and inter-bank lending guarantees appear necessary, these guarantees will be provided in limited amounts only to solvent banks,” reads the IMF agreement. Bankers are of the opinion that only large banks are safe and protected under the agreement.