After months of delay, Pakistan has finally reached a long-awaited agreement with the International Monetary Fund (IMF). The Extended Fund Facility (EFF) unfortunately didn’t materialize due to the finance minister’s stern gaze, but the lender of last resort has stepped in to provide a $3 billion lifeline to Islamabad through a Stand-by Arrangement (SBA).
IMF Lifeline
In the days to come, the IMF Lifeline Executive Board is anticipated to grant approval to the SBA, ensuring that Pakistan can stave off default, at least temporarily.
Similar to many other things these days, the SBA and its significance have become victims of polarization. If you belong to Team PDM, you might see this as the ultimate triumph, but for those who no longer bear a name, it serves as yet another indictment of the current government’s failings.
Nevertheless, the truth lies somewhere in the middle.
The positive news is that the SBA will offer much-needed breathing space to the economy and alleviate near-term uncertainties.
Furthermore, this agreement will pave the way for additional inflows of dollars, including from friendly nations and other international creditors who had made additional support contingent upon reaching an accord with the IMF.
With a nine-month duration, this agreement also grants an incoming government—assuming elections proceed according to the constitution—sufficient time to negotiate a new EFF with the IMF Lifeline.
This does provide an opportunity for a future government to take immediate action, signaling a commitment to reforms and engaging in negotiations with the IMF and other creditors until the end of 2023. However, the positive outlook ends here, giving way to a series of challenges.
Pakistan’s economic prospects remain bleak primarily because the underlying structural issues driving this ongoing crisis have not been adequately addressed. To secure the SBA, the government had to make significant changes to its budget, increase the Petroleum Development Levy (PDL), raise interest rates, and demonstrate a willingness to hike energy tariffs. Moreover, the government has “committed to ensuring the full market determination of the exchange rate,” a step the current finance minister has been hesitant to take.
As a result, the remainder of the year will be characterized by austerity measures. The incoming caretaker setup, along with the newly elected government, will have to continue implementing macroprudential policies. Unfortunately, this means that providing the desired “relief” to the people will be impossible. Taxes will need to be raised, energy tariffs will increase, and the government will have to restrain its expenses to prevent exacerbating an already dire situation.
Furthermore, it is crucial to hold the finance minister accountable for the damage caused by his obstinacy. It’s worth noting that everything agreed upon with theIMF Lifeline could have been accomplished months ago. However, he embarked on a mission to engage in a staring contest with the IMF Lifeline, aiming for a better deal.
The road ahead is challenging, requiring concerted efforts and responsible decision-making to navigate Pakistan’s economic crisis effectively.
In the process, the finance minister sabotaged the economy and eroded whatever credibility remained for his party. While the prime minister’s direct intervention led to a breakthrough, the ultimate responsibility lies with him.
The time lost, the damage inflicted, and the uncertainty generated by Ishaq Dar have caused unimaginable distress to millions of ordinary citizens.
Looking ahead, Pakistan’s economy remains precarious, and the outlook for ordinary citizens is grim. Successive governments have failed to acknowledge that the prevailing status quo—a kleptocracy that has exploited the people and amassed immense wealth—can no longer be sustained.
The adjustments made to the budget under the IMF’s influence serve as evidence that the ruling elites are unwilling and incapable of changing their course. The IMF’s description of these measures as “steps to broaden the tax base and increase tax collection from undertaxed sectors” is ludicrous. It also implicates the institution as being aligned with the ruling elites who burden ordinary citizens while enjoying over $17.5 billion in annual subsidies and perks provided by the people.
In conclusion, while the SBA provides some much-needed relief to the economy, the reality is that Pakistan is still adrift at sea. The next twelve months present another opportunity for the ruling elites to take decisive action.
Unfortunately, their pronouncements, both in politics and institutions, indicate their reluctance to change course, at least for the time being.
However, three factors could signal a significant shift and increase optimism that perhaps this time will be different: sustained efforts to broaden the tax base by including traders and real estate in the tax net, substantial cuts to government spending by streamlining the size of the federal government, and an honest conversation that informs the people about the crucial role of opening trade with India in improving the country’s economic prospects.
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As long as the elites remain unwilling to undertake the aforementioned steps, this author, at least, will continue to believe that the ruling elites are not genuinely committed to changing their ways.