A delegation of the International Monetary Fund wrapped up week-long consultations with Pakistan’s government and the reports that are emerging will not make for pleasant reading, especially for the country’s poor.
Economists think another bailout from the Washington-based lender is unavoidable. It is only a matter of when, and not if. “When you are ill, you have no choice. You have to go to a doctor,” said Nadeem ul Haque.
The dollars Pakistan will get from the IMF will help it avoid defaulting on foreign payments. But these dollars come with conditions that will lead to higher inflation and more unemployment because the country is heading towards an economic slowdown.
Pakistan’s troubled economic situation made headlines in local and international media right after the new government took charge in August. The new government has to deal with a double challenge. The government’s expenditures for the latest financial year were much higher than its revenue, leading to a loss or deficit of Rs2.2 trillion. It relies on borrowing from banks to finance this gap and meet its expenses: government salaries, security expenses, and development projects, for example.
On the international front, the country’s monthly imports exceed its exports by 2.7 billion dollars, which leaves it with fewer reserves than it needs to pay for essential imports (oil, raw materials, machinery etc) that keep the economy going, and to repay its foreign loans (more than $90 billion).
According to the latest data, the government has $8.4 billion in reserves, which are not enough to sustain even two months of imports.
Since coming to power, the Pakistan Tehreek-e-Insaf government has been exploring all financing options, including help from China and Saudi Arabia. However, it turns out we are still falling short of meeting our dollar requirement for the current financial year: 12 billion dollars.
To fix the economic mess, the government has taken several measures that include increasing duties on imported items, prices of domestic gas and the central bank’s interest rate. Since December, the dollar has also become 18 percent more expensive. The government is likely to increase electricity prices as well, but the situation hasn’t improved.
“Recent policy measures are steps in the right direction, but not yet sufficient,” the IMF said in a statement. “Decisive policy action and significant external financing will be needed to stabilize the economy.”
According to the IMF, Pakistani rupee is overvalued while a fast rise in international oil prices is also adding to the country’s problems. In this environment, economic growth will slow down and inflation will rise, the IMF said.
“There is a slowdown already,” economist Muzammil Aslam says. “If you go to market, you see businesses are down because there are few buyers.”
Aslam says prices have gone up but people’s income didn’t increase the same way. “I see a contraction in the economy,” he says.
Is the IMF loan a bad bet then?
“When there is fire, first you put this out and then worry about other things,” says Kaiser Bengali, Dean of Management Sciences at SZABIST. “We need to avoid the default.”
The economist said the IMF will not benefit from giving Pakistan a loan; our economic situation demands it. The professor said an economic slowdown is likely because of the decisions the government will have to take under the IMF program.
In other words, there will be more inflation and higher unemployment. If Pakistan adjusts its exchange rate, it will go past Rs140 and may hit Rs150 to a dollar. This will make imports (oil and raw material) more expensive, which will cause inflation. Cutting back on expenses will slow the economy down and lead to fewer jobs or even cut in jobs.
Why are we here?
“It is always the poor who has to pay for wrong economic policy decisions,” the economist says, referring to policies from the last 10 years.
The PTI government insists it is its priority to protect the poor and create employment, but it will have to take decisions that will be unpopular and hurt the very segment it aims to protect.
There is a contraction [economic slowdown] in the beginning whenever you enter the IMF program, but later on things improve, says Nadeem ul Haque.
The last government had its chance when it availed the program, but brought the country back to a difficult situation at the end of its term. Whether this will be our last IMF program will depend on reforms the current set-up will make.