IMF programme is inevitable
FINANCE Minister Asad Umar said, “The government seeks IMF’s support for its efforts aimed at achieving an economic turnaround.” He expressed government’s desire for the bailout package at a meeting with the visiting IMF mission led by its chief Harald Finger. However, the programme’s size will depend on the financing gap projected for over the next three years under the extended fund facility (EFF). An official, privy to the IMF-Pakistan’s recent meeting has said, “We will have to seek IMF program in the range of $6 to $8 billion under EFF for next three years period, and the final decision is expected till November 20.” The visiting delegation requires of Pakistan to make further amendments to the NEPRA Act to empower the regulator to issue automatic notification of quarterly, annual and multi-years tariffs. The objective is reportedly meant to stop re-emergence of circular debt.
Regardless of the recently secured short-term support from Saudi Arabia and China, IMF programme is inevitable to fill the yawning gap. Government critics were skeptical of the Saudi support,; however according to a report Saudi Ambassador met the Prime Minister and assured that Saudi Arabia will remit the first installment of the amount promised within a week. Though, China has committed to help Pakistan extricate from the economic crisis, the figure is not yet known, and the modalities are being worked out by both sides. Anyhow, the Finance Minister shared the government’s vision of economy with the IMF delegation, and referred to the corrective measures being taken to remove imbalances in the economy. The government is resolved to implement deep structural and institutional reforms, and at the same time it is committed to safeguarding the poor and vulnerable segments of society. It shall therefore invest more in human development.
The revival of domestic industry and export sector is high priority of the government along with structural and governance reforms, but it is a tall order. The IMF is likely to propose measures to arrest the fiscal deficit, which includes increasing electricity tariff, devaluation of the rupee and increasing the interest rate and further devaluation of rupee, the cost of imported raw material and machinery will become expensive. Since the cost of production increases with the increase in cost of inputs like electricity and gas, it will render the industry uncompetitive in the world market. Pakistan faces many economic challenges such as fiscal deficit, trade deficit, current account deficit, unemployment and last but not the least the challenge for poverty alleviation. To meet these challenges, it is not only money but also the policies to eradicate corruption from the body politics of Pakistan.
For the economic turnaround, there is need for massive investment, but country’s savings rate is 13 per cent of the GDP which is the lowest in Asia. To achieve 6 per cent growth, the investment ratio of savings to GDP in the country should be 18 per cent on the basis of Incremental Capital Output (ICOR) 3:1. The problem is that inflation hinders the capacity to save, as it erodes the people’s income, especially the salaried class and fixed income groups; therefore, Pakistan has to depend on IFIs and foreign countries. However, the most serious aspect of the dire situation is the growing public debt which is more than 70 per cent of the Gross Domestic Product and 40 percent of revenue income allocated for debt-servicing. In fact, Pakistan earns less and spends more, and exports less and imports more, resulting in fiscal deficit, trade deficit and current deficit.
The World Bank in its South Asia Economic Focus 2017 report had described Pakistan’s external sector as particularly vulnerable and suggested that remedial action had become urgent. The report said that immediate action was needed to rectify Pakistan’s position through revival of exports and slowing down of imports. But how to do it has been a big question? Efforts have been made from time to time in the past but despite all incentives and measures such as price mechanism adjustments, subsidies, rebates, exchange rate adjustments and devaluation, Pakistan has not been able to boost its exports to address its unfavorable balance of trade. During the last 70 years, Pakistan has only twice had a favourable trade balance – once in 1950s during the Korean War and then in 1973 due to the oil boom. However, surpluses were not large and amounted to $53 million in 1950-51 and $20 million in 1972-73.
Even massive devaluation during the 1990s and thereafter could not produce positive results because Pakistan could not build an export base through diversification; hence the exports were not enough to meet the growing needs of foreign exchange for the import of goods and services. Furthermore, the SBP report revealed that despite robust economic growth and macroeconomic stability, Pakistan could not overcome the problems of poverty reduction, inflation and an increase in investment level to achieve sustained economic growth and create more employment opportunities. The glaring reasons were profligacy, ineptness and corruption of the ruling elite. The new government is determined to eliminate corruption, reduce poverty and put the country on the road to progress and prosperity. It is hoped that the government would negotiate with the IMF keeping in view that no burden is placed on the vulnerable section of the society.