ISLAMABAD – There is no doubt that Pakistan is going back to IMF withinthis calendar year. The question is on the timings of entering the fundprogramme. The way external reserves are falling with no buffer towithstand the southward journey; the need to knock the fund’s door becomesimmediate. However, the IMF may not like to negotiate with the governmentin its last months or with an interim set up for three months thereafter.
A full-fledged IMF facility that would have visible strings attached isunlikely to be negotiated prior to 2018 general elections. This means nofund programme prior to Sep 18. However, some kind of bridge facility isinevitable with the way reserves are falling in the last three months or so.
What options do the incumbent economic managers have to sustain for thenext six months before the tough programme negotiations start with the newgovernment somewhere is Sep-Oct 2018? Is going back to IMF the only viablesolutions? What kind of reforms the fund would demand? And how theauthorities are handling the situation to prepare the ground for stability?
Before delving into these questions; let’s put the historic facts correct.IMF is no messiah, and the entire previous fund’s programme had taken theeconomy out of the crisis in the short to medium term but failed to providea long term sustainable path of growth and stability.
The problem is that the fund’s recipe of stability has always resulted incompromising growth while the tough reforms never took place to avoidcrisis when the economy starts growing high again. The challenge today isnot entering into the fund programme as IMF being a lender of last resortwould lend its facility to at least secure the amount Pakistan owe to theinstitution and other western multilaterals.
The catch is in the negotiations; the emphasis should be on negotiating thekind of stability polices or conditions that would not hurt growth momentumand that would not result is asset accumulation or worsen the income gap.
The WB group agenda is poverty reduction, and improved income inequalityequation; ironically, in every IMF programme the desired equations worsen.The point is that Pakistan cannot simply say no to the IMF seeing thecurrent external vulnerabilities; the debate should be on how to make fundprogramme constructive.
The fundamental difference between today and prior fund’s programmenegotiations is the growing Chinese interest in the economy in form ofCPEC. And a few development policies/funds of CPEC are in contradiction tothe IMF’s prescription. Plus, the political clout of the US on IMF wouldnot like too much of Chinese interest/stake in Pakistan.
One may fear that IMF conditions may hurt the CPEC momentum or vice versa.Before, delving into that debate, it’s pertinent to note that CPEC projectshave already slowed down; had the pace been the same as it was in FY16 andFY17, things would have been different in FY18. Yes, its politicalstability that is imperative for Chinese to pick speed in Pakistan. And ifanything that has been severely compromised in the past 6-8 months ispolitical stability; as a result, no new project in CPEC has begun sincethe political turmoil hit the country.
Having said that, the responsibility of current mess is also attributed toNawaz and Dar, as they duo had the tailwind to instill some reforms. Oilprices were too low, CPEC was at its full swing and PMLN had the politicalclout. However, the opportunity had been wasted, and now we are back tosquare one.
Thus the debate is on how to sustain in the short-term. The incumbents inministry of finance and SBP are eyeing to raise external funding to controlthe reserves from falling further. And they are proactive in engagingpolicies to pave way for the fund to take over.
The currency has depreciated against US Dollar by 10 percent since December2018 and the fall against other trading partners is even more. The REER isfast adjusting to its equilibrium value, and the indications from ministryof finance and multilateral lenders is that there is no need for furtherdepreciation. However, proponent of fund programme is talking about another10-12 percent fall in currency, which could be counterproductive.
The financing for international capital market is becoming expensive due toFed’s rates hike, and indication of further hike. However, the world isreacting in an opposite direction to US, as despite fed’s rate hike thedollar is weakening. There are not many emerging economies that are optingfor monetary tightening cycle; but it is happening in Pakistan.
The policy rate in the country was up by 25 basis points in January 2018,and another 25-50 bps hike is expected in upcoming monetary policy likelyto be announced by the end of week. Monetary tightening should not beoverdone. But that is only be possible if the economy finds some kind ofbridge facility till September 2018.