IMF package: pace of actions, sequencing

SOURCEBusiness Recorder
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The extremely harsh ‘prior’ conditions of the International Monetary Fund (IMF) bailout package that has yet to be put up to its management and Board for approval, have begun to impact on the people of this country. The staff-level agreement between the Fund’s mission and the Pakistan authorities was reached on 12 May 2019 and in the following five-day work week, the inter-bank rupee rate depreciated from 141.40 to 146.5 to the dollar, as the State Bank of Pakistan (SBP) adopted a market-based exchange rate. The rupee has not yet found its real effective exchange rate and depreciation is likely to continue in days and perhaps weeks to come. This major policy decision, designed to make imports unattractive, is generating considerable uncertainty amongst not only importers who have opened letters of credit and are awaiting shipments as to the rupee-dollar parity at clearance but would also: (i) raise the rupee value of essential imports particularly petroleum and products whose effects would be passed onto the consumers with lower to lower middle to middle income earners especially hard hit. As a consequence, public transport and transport of goods costs would also rise; and (ii) raise the rupee value of debt servicing and repayment as and when due given that each rupee loss of value vis-a-vis the dollar raises the country’s indebtedness by 105 billion rupees.

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The budget deficit is projected at 7.2 percent for the current year while independent economists place the figure at closer to 8.2 percent and hence the rise in the interest and payment on government borrowings for the current year is likely to take up a higher percentage of the total expenditure than envisaged. The exact amount would depend on the depreciation till the end of the fiscal year on 30 June and hence budget estimates would at best be projections. Disturbingly, based on Hafeez Sheikh’s previous inclinations when he was the finance minister, he may be tempted to err on the side of misplaced optimism. One would have therefore hoped that this particular prior condition’s effectivity had been deferred till 1 July. Any adjustments that maybe made in the budget as the actual rupee-dollar rate becomes available would imply a cut in defence and civilian administration in next year’s budget, the two largest components of current expenditure, given that the Fund has stipulated that development expenditure including for social sectors cannot be slashed unlike in previous programmes.


The SBP raising the rate by advancing the monetary policy meeting by 11 days indicates that this too is a prior condition. The outcome of this would no doubt further dampen economic activity particularly with respect to the manufacturing sector, which was already performing poorly, leading to redundancies.

Oil and Gas Regulatory Authority has recommended to the government to raise gas rates by 205 percent for domestic consumers effective 1 July, that may well be a prior condition (unless the government is able to meet all other prior conditions by that time). These include requesting the friendly countries, Saudi Arabia, the United Arab Emirates and China, to roll over the estimated 10.2 billion dollar one year loans acquired by the government and used for balance of payment support.

The number of politically challenging ‘prior’ conditions, Business Recorder acknowledges, reflect the Fund’s legitimate reservations based on the country’s sustained poor performance in undertaking structural adjustments in the power and tax sectors, improving governance in state-owned entities and in ending red-tape during the previous 21 bailout programmes in the country’s 72-year history. To add to this is the perception of pervasive corruption in the country which is defined by the United Nations as “bribery, embezzlement, money laundering, tax evasion and cronyism, to name a few. Whatever its shape, corruption always comes at someone’s expense, and it often leads to weaker institutions, less prosperity, denial of basic services, less employment and more environmental disasters… It contributes to instability, poverty and is a dominant factor driving fragile countries towards state failure.” All of these elements are prevalent in Pakistan and in spite of the general perception that Prime Minister Imran Khan is an honest man yet unfortunately the same opinion is not held for some in his large cabinet including advisers, special advisers and assistants.

Be that as it may, IMF’s prior conditions would be followed by time bound structural adjustment benchmarks once the programme is launched with few, if any, waivers granted for a tranche release. There is little doubt that the state of the economy merits a rigid programme but its fallout on the steady and significant decline in the value of each rupee earned would have serious social repercussions due to a projected rise in the numbers living below the poverty line which a 180 billion rupee programme would be unable to protect.

A gloomy beginning

Irrespective of who bears more responsibility for the current economic impasse, the fact remains that the government cannot go it alone and needs support from the opposition at the federal level as well as at the level of provinces, especially in Punjab where the PML-N has a sizeable minority; one would hope that the government seeks rapprochement with these parties or else face the distinct prospect of a social upheaval as the IMF conditions begin to bite more and more.

To conclude, one would have hoped that Pakistan’s negotiators had been able to convince the Fund staff in sequencing and pacing the prior and programme conditions that would have been more acceptable from a social perspective with a much greater chance of successful implementation.

(This news/article originally appeared in Business Recorder on May 21st, 2019)

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