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Last IMF bailout package

Muhammad Javaid

EVENTUALLY after the months-long hesitation, Pakistan and International Monetary Fund (IMF) have been able to finalize a $6 billion bailout package named as Extended Fund Arrangement (EFF) for a three-year period, aimed at structural changes in public finances and strengthening a slowing economy. IMF will provide $6 billion backed by a series of reforms to cut extensive deficits and improve growth. The agreement still needs the approval of IMF Executive Board. PTI Govt came into power with determination not to contact IMF. Prime Minister Imran Khan tried to seek help from friendly countries and succeeded to raise billions of dollars. Nevertheless increase in inflation, unfavourable balance of payment, continuous decline in foreign exchange reserves forced to contact IMF.
The other reason is that IMF plays a significant role in determining ability to gain access to other donors’/creditors’ development finance in the years to come. More important such accords not only provide opportunity to avail loan at minimum rates and resolving immediate problems but also secure access of funds from other international financial institutions even from bilateral donors. According to IMF assessment Pakistan is facing a challenging economic environment, with lacklustre growth, elevated inflation, high indebtedness and a weak external position. The IMF forecasts Pakistan’s economic growth slowing to 2.9 per cent this fiscal year from 5.2 per cent in 2018, while the central bank has cut its estimate to between 3.5 to 4 per cent. IMF also noticed that Pakistan has had chronic problems collecting tax and the programme envisages reforms to improve public finances and cut public debt, including “revenue mobilization measures to eliminate exemptions, curtail special treatments and improve tax administration”. In addition, it foresees a “comprehensive plan for cost-recovery” in the creaking energy sector, where mounting debt backlogs have acted as a growing drain on government resources. Therefore, the current program would aim to cut Pakistan’s debt through tax measures to improve revenue collection as well as reforms to its creaking energy sector, with a “market-determined exchange rate” to help the functioning of the finance sector. The program aims to support the authorities’ strategy for stronger and more balanced growth by reducing domestic and external imbalances, improving the business environment, strengthening institutions, increasing transparency and protecting social spending.
IMF defined the role of the State Bank of Pakistan (SBP). SBP will focus on reducing inflation, which disproportionately affects the poor, and safeguarding financial stability. It added that an ambitious structural reform agenda will supplement economic policies to revive economic growth and improve living standards. SBP would be able to regulate exchange rates independently, and the rate of the US dollar would be set without any pressure from the government. This implies that the government is expected to allow a significant rupee depreciation and a key interest rate hike in future. The two sides also agreed that electricity and gas cost would increase in the next budget although it has already been increased twice. However, reforms in the tax and energy sectors have been outlined in the list of top priorities. According to sources, the government will have to reduce subsidies and take Rs 340 billion from consumers in the energy sector only. The National Electric Power Regulatory Authority (NEPRA) and SBP would be made autonomous. The government interference to take popular decisions would be minimized. The target of current account deficit (CAD) is set $8 billion for the next fiscal year.
The package include an ambitious structural reform agenda to boost growth. Priority areas include improving the management of public enterprises, strengthening institutions and governance, continuing anti-money laundering and combating the financing of terrorism efforts. However nothing is mentioned about privatizing notoriously sensitive and high-employing state-controlled companies like Pakistan International Airlines and Pakistan Steel Mills. Prime Minister’s Advisor on Finance Hafeez Sheikh expected that the agreement will improve the debt situation and sent a positive signal to the world to attract foreign investment. He further added that the IMF programme will provide an opportunity to bring structural changes to handle issues pertaining to loss-making state-owned enterprises, exports and to enhance revenue. The coming budget for the year 2019-20 will be the first critical step, will aim for a primary deficit of 0.6 per cent of GDP supported by tax policy revenue mobilization measures to eliminate exemptions, curtail special treatments and improve tax administration. He is optimist that it may be the last bailout package if fully implemented and supported by all stockholders. It is worth mentioning here that back in 2013, soon after coming to power, the Pakistan Muslim League-Nawaz (PML-N) government signed a $6.6 billion bailout programme with IMF under the same title “Extended Fund Facility for a period of three years. The targets fixed in that could not be achieved even situation was worse than take over in 2013.Resultantly Pakistan has to accept the new bailout package with more tough conditions. The program may only be successful if properly implemented without politics. Prime Minister Imran Khan should make a mechanism to monitor the results of this agreement after every three months and personally chair the meeting on a regular basis. For this purpose a small team may be formed comprising national and international experts available within or outside the country.
—The writer is ex-Chief, Planning Commission of Pakistan.