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Back to the lender?

January 10, 2013

THE start of the post-programme monitoring review of Pakistan’s macroeconomic figures by the IMF has spawned widespread speculation that Islamabad is seeking yet another bailout from the Fund to support its weakening balance-of-payments position. The government, however, has adopted an ambiguous stance. It has neither confirmed nor denied speculations rife in the media for the last several months. Whether or not Islamabad is looking for a fresh loan from the lender of the last resort at this juncture, the ongoing review is expected to prepare the ground for future borrowing from it. It appears to be only a matter of time before the government formally applies for the new IMF ‘stabilisation’ programme. It can be delayed for a few months, not avoided.

Pakistan’s foreign exchange reserves have been under pressure ever since the $11.3bn standby arrangement loan from the Fund was terminated prematurely in 2011 on account of non-implementation of tax and fiscal reforms. The rapid decline in foreign exchange reserves has seen pressure growing on the exchange rate with the rupee experiencing a free-fall in recent weeks. This is despite the release of Coalition Support Funds of around $2bn by the US. With other foreign official and private capital inflows having dried up and large debt payments approaching, it is feared that the balance-of-payments position will deteriorate to a precarious level by the end of this fiscal. The reserves are likely to fall below import cover for one and a half months unless the government is able to sell 3G telecom licences and bring in the remaining PTCL privatisation proceeds from Etisalat to raise about $1.5bn. How the market is going to react to such a situation is anybody’s guess. This is not the only reason why we need the IMF. Other lenders like the World Bank and the ADB also need the Fund’s endorsement of Islamabad’s economic and fiscal policies before they resume cash lending.

As much as we need the IMF dollars, the new programme won’t be extended to us without very harsh conditions. Whether it is negotiated by the incumbent administration or the interim set-up or the new elected government after the forthcoming elections doesn’t matter. Islamabad will have to agree to implement certain tough actions it had so far resisted in dread of the political fallout. A future deal with the Fund will hinge on the willingness of our elite to pay taxes and take steps to control public expenditure to control the rising budget deficit. Are they ready to pay this price to save the economy? We’ll know when the time comes.