THE discontinuation of Pakistan's $11.3bn programme with the IMF has been some time in the making. Barring some flood-related funds released in autumn 2010, Pakistan has effectively been cut off from IMF and World Bank funding since May 2010. But having kept the IMF at arm's length for over a year now is anything but good news. The widespread belief is that the government has wanted to throw off the constraints that an IMF programme imposes in the run up to the next general election. The three key demands of the IMF — holding down the fiscal deficit, reforming the power sector and nudging upwards the tax-to-GDP ratio — are all politically unpopular and undermine the politics of patronage. So, free of those constraints, the government can pursue politically beneficial tactics like holding down electricity tariffs, suppressing the cost of fuel and go on a spending spree for patronage purposes.
If that does happen, what will come next is almost inevitable: Pakistan will be forced back into the arms of the IMF. And the next time the IMF is unlikely to be as lenient. Indeed, even at present, if the country's economic stewards were to negotiate a fresh deal with the IMF immediately, the conditions likely to be imposed are what are causing the political bosses to baulk. But there will be a reckoning eventually and if in a post-election scenario the country is saddled with a fiscal deficit in the range of seven to eight per cent as is likely, the IMF will show little sympathy. Frontloading fiscal adjustments in a programme at that point — the IMF usually prefers budget deficits in the three to four per cent range — would mean some very painful choices. With little room on the expenditure side for cuts, rapid increases in electricity tariffs, fuel prices, etc can be expected in order to slash subsidies and raise more tax revenue quickly. There will be plenty of pain to go around.
It didn't have to be this way. But with a political leadership that is so breathtakingly indifferent to the demands of managing the economy soundly, it has become all but inevitable. Job creation, investment, growth — the drivers of economic prosperity do not appear to feature on the list of concerns. The silver lining — reasonable reserves on the back of high remittances and record exports — is also expected to diminish as new orders for cotton-based exports have already dipped. Inflation may stay manageable if cost increases of electricity and fuel are not passed through, but then those subsidies will have to be paid for somehow eventually. Any which way matters don't look good.