The IMF Deal and Beyond By Zahid Hussain
THE IMF deal has finally come through after months of hard negotiations providing major relief to a teetering economy. But while the release of the much-awaited $1.17 billion may help the country escape the immediate threat of default, the crisis is far from over. The revival of the stalled IMF loan programme was critical for a shaky government. However, it has not come easily.
Like many developing nations Pakistan has been confronted with the spectre of an economic collapse. The country has been among the most vulnerable states in this respect. The threat of a default may not have been unavoidable but it was close enough. The IMF deal was crucial to stabilise the financial situation. The latest tranche is part of a $6bn loan facility.
Pakistan entered the IMF programme in 2019, but only half the funds had been disbursed as the previous government did not find it easy to keep the targets on track. A little before its ouster, the Imran Khan government announced a huge subsidy plan derailing the entire stabilisation effort. It was driven by political expediency as the former prime minister faced a no-confidence motion.
The reckless populist action could not save the PTI government, and, in fact, further shrunk fiscal space, plunging the country deeper into the financial crisis. It left the new administration to negotiate the revival of the Fund programme on much harder terms. It required taking necessarily tough economic measures prior to the IMF’s nod of approval. It was perhaps the toughest conditionalities the country had to negotiate with the lending agency.
The revival of the Fund agreement may have given us some respite, but challenges still loom.
Not only were the prices of petroleum products increased, other subsidies, too, were withdrawn. The government also had to generate an additional Rs436bn in taxes. Those actions have meant a huge political cost for a motley ruling coalition that is struggling to keep afloat.
While Pakistani authorities and the IMF staff mission reached an understanding to revive the stalled loan programme in June, it took another two months for the IMF board of directors to give its assent.
Signs of hope were also observed as the IMF consented to consider an extension of the loan facility as well as increase it by $720 million to expand its size to $7bn. With the IMF’s formal approval, Pakistan is likely to get financial aid from multilateral agencies such as the World Bank and some friendly countries.
That is indeed good news for the government but tougher times are in store with the economy still in dire straits. It will be a major challenge to ensure that economic stabilisation goals are on track in the face of the latest catastrophe caused by the floods and torrential rains that have affected an estimated 33m people. That is 15 per cent of the entire population. The magnitude of the devastation is far greater than seen in recent history.
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Millions have been displaced across the country. People have lost their livelihoods with hundreds of thousands of acres of crops destroyed and livestock perishing in the floodwaters. Roads and dams have been destroyed causing massive damage to the infrastructure. With the forecast of more floods, the situation remains dire.
It’s too early to calculate the economic cost of the devastation, but according to the government’s estimation, the country would be needing more than $10bn to rebuild. A weak economy can’t bear such colossal losses. With millions of acres of crops lost, the country may also face acute food shortages in the coming months, worsening our predicament. It will make it extremely difficult for the government to contain the spiralling inflation which is already running over 40pc.
In this situation, it would be a monumental challenge for the government to keep IMF conditionalities on track. There will be growing political pressure on the government both from the opposition and from within the ruling coalition itself to restore some of the subsidies, particularly on petroleum products and power tariffs that constitute the major part of the Fund’s stabilisation programme.
Given the existing political polarisation with the opposition PTI ruling Punjab and KP, the federal government’s capacity to effectively implement tough economic measures has weakened. The PTI through its provincial governments even tried to sabotage the IMF deal at the last moment. The leaked telephonic conversation between former federal finance minister Shaukat Tarin and the finance ministers of Punjab and KP reinforces allegations of the PTI making a desperate attempt to undermine the IMF deal.
While the PTI may not have succeeded in stopping the disbursement it can still create problems for the federal government. PTI leaders are already campaigning against the deal notwithstanding the fact that the latest agreement is the continuation of the 2019 IMF programme started under the Imran Khan government. In fact, the former government’s decision to deviate from the course destabilised the economy.
It was one of the reasons why the IMF hardened its conditionalities. With the economy on the brink, the government did not have any option but to swallow the bitter pill. Surely the increase in oil prices and the removal of subsidies have severely hit the people but they saved us from complete economic collapse.
It was certainly not easy for the fledgling government to take politically unpopular measures in the face of a strong opposition. Intriguingly, Finance Minister Miftah Ismail faced the most scathing criticism from some senior members of his own party. It was a manifestation of the power struggle within the PML-N and the Sharif family. One must give him credit for standing firm and for successfully concluding the deal. But it is not the end of the saga.
Indeed, the IMF deal has given the country some breathing space but the challenges ahead are far more daunting. We may be out of the ICU but we are not yet out of the woods. Worsening political instability remains the biggest impediment in the way of economic recovery.
The writer is an author and journalist.
The IMF Deal and Beyond By Zahid Hussain
Published in Dawn, August 31st, 2022