Hard choices proposed by IMF

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Mutual disagreement

By the looks of it the Pakistan-IMF parleys suffered from lack of empathy. It was quite obvious that IMF did not entertain a healthy view of the imperatives dictating economic policies of Pakistan particularly their whimsical handling by the previous government that ended an IMF programme prematurely as it faced restrictions on spending on highly-visible developmental project geared to ensure it popular support. The see-saw style of economic management is always an anathema to international financial outfits and they become sterner while dealing with recalcitrant countries.

PTI government proposed quite an ambitious plan to IMF for obtaining a bailout but it was not convincing enough to satisfy the concerns of the international lender. As was expected IMF prepared to hit hard the priorities successive Pakistani governments have attached vital importance to. The result is that IMF has asked Pakistan to ensure primary surplus on budget deficit to move ahead with the programme. This technical terminology clearly implies that IMF is asking PTI government to either slash its development plans or cut down spending on defence.

It must be obvious to policy planners that addressing both conditions asked by IMF will leave space for maneuver. Defence expenditure is the most difficult head to slash in current security-ridden scenario and reducing development expenditure will hamper the efforts of the government to win popular acclaim before going for next elections. There appears to be no midway as IMF has hit where it hurts most and there is an aggressive intent behind this demand.

Protecting the people
Fears of high inflation

IMF has asked that during its programme period Pakistan is required to curtail its budget deficit appreciably to bring it within a range of 4 to 5 percent of GDP that is a tough task as budgetary deficit is very hard to cut down fast. IMF is also insisting on free float of exchange rate that is surely a recipe for steep fall in the value of rupee that can be ill-afforded by any government. It has increased the pain-level by asking to hike energy tariff by 22 percent, a condition very difficult to negotiate as energy rates in Pakistan are already one of the highest in the region. The fall-out of the increase asked-for will prove simply unaffordable by the people.

The IMF demand for achieving primary surplus on the budget deficit front means that the government will be bound to devise means ensuring that the total revenues minus total non-interest expenditures come down in the vicinity of 4 to 5 percent of GDP. The first difficulty that will come in devising such means would be the rise in interest payments that may burden the economy decisively. The other method could be for the government to revise its priorities in respect of defence and development spending with a view to affect appropriate reductions in them. Cutting defence spending has always been the Achilles Heel for any government and every effort is made to prevent such an eventuality.

Another difficulty pertains to IMF’s insistence to implement its conditionalities before a bailout package is sanctioned. This approach reveals that the hard line taken by IMF is on someone else’s behest and that it may stall the talks on the present stage if the asked-for demands are not met. PTI government is in a fix as it is caught between its populist enunciation of shielding the people from adverse effects of an IMF bailout and the realities of fiscal difficulties.

IMF is of the view that it does not consider viable the revenue projections made by PTI government because the advance mission sent to Pakistan by the IMF calculated the FBR target on the basis of devaluation of rupee ranging beyond Rs150 against US dollar but Islamabad refuses to accept this kind of adjustment in one go on immediate basis. The current spate of devaluation triggered off a deep inflation drive resulting in widespread agitation against the government and further inflationary tendencies may escalate the level of protests.

IMF is insistent that FBR should raise its revenue collection to more than Rs4,550 billion for the current fiscal FBR has expressed its inability to meet the target and is undertaking collecting revenue close to Rs4,455 billion, an estimate falling short of IMF target. FBR has assured taking further measure to boost up revenue even without an IMF programme and intend raising tax rates on POL products and qualify their restraint by mentioning that rising inflationary pressures would also help increase tax revenues for the purpose of curtailing the budget deficit in the current fiscal year. This assurance appears not to satisfy IMF and it is to be seen how this issue will be addressed.

PTI government is also under pressure to resist measures that may curtail CPEC projects that it considers essential for future monetary benefits. It plans reaching-out to important members of IMF executive board to put pressure on the international lender to soften the hard stance it has taken about the bailout. The demands of the IMF may not be able to be met fully by PTI government and chances are that the bailout approval may be delayed in maturing.

Abdul Basit works in finance and industry and is well versed in commercial affairs

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