Q: What does the IMF want in return for $6 billion?
The IMF’s $6 billion (Dh22 billion) bailout comes with a lot of strings attached, which will not be easy for Pakistan to adhere to, either economically or politically.
Of the $6 billion, the lending institution has so far released $1 billion.
But with the IMF extending support, the belief is that this will prompt other multilateral and bilateral creditors to provide Pakistan with $38 billion and more, “which is crucial for Pakistan to meet its large financing needs in the coming years”.
In return, Pakistan must move decisively to “reduce public debt and build resilience”, while at the same time create a “flexible, market-determined exchange rate to restore competitiveness and rebuild official reserves”.
The IMF will also be driving efforts to “eliminate quasi-fiscal losses in the energy sector and strengthen institutions and enhance transparency”.
Q: What is the target on inflation?
The stated inflation objective is 5—7 per cent of GDP.
Q: How has the Pakistan rupee fared?
The difficulties in meeting these requirements are steep indeed. The Pakistan rupee had been through bouts of volatility in recent times, and was quoting at Rs150 to a dollar after the IMF announced the bailout. At one time, it was even going for slightly over Rs160.
Since May 16, the State Bank of Pakistan has “allowed the exchange rate to be market determined". Going forward, the SBP might intervene to prevent a possible overshooting or disorderly market conditions, while at the same time not suppressing an underlying trend and in a manner consistent with rebuilding reserves.
Finally, to remove future drains on its reserves, the SBP has agreed to gradually scale back its short swap/forward foreign exchange position to US$4 billion by the end of the programme.
Q: When should Pakistan start working on the turnaround plan?
The IMF wants Pakistan to show its intent to clean up with the 2020 federal budget — “The adjustment will be supported by comprehensive efforts to drastically increase revenue mobilisation by 4 to 5 per cent of GDP at the federal and the provincial level over the programme period.”
It will also be hoping that Pakistan will not end up repeating the same mistakes that blighted past bailout programmes.
“The authorities recognise that incomplete policy implementation derailed past adjustment efforts and allowed for repeated cycles of economic and financial stress,” the IMF states.
“Their steadfast commitment, including their ability to overcome entrenched resistance to reforms, will be critical for this new program to succeed. In this regard, the bold and front-loaded actions already undertaken demonstrate the authorities’ commitment to the programme, and the significant external support is key to mitigate risks and allow the programme to achieve its objectives.”
Q: How has the Pakistan economy fared in recent times?
Economic growth has averaged close to 5 per cent over the past five years. But it is on the deficit that Pakistan is hurting the most. The financial year 2018 fiscal deficit ballooned to 6.5 per cent of GDP — 2.5 per cent of GDP higher than budgeted — and pushing public debt to 75 per cent of GDP.
“The fiscal stimulus together with an accommodative monetary policy and the defence of an overvalued exchange rate, fuelled the current account deficit to 6.3 per cent of GDP last year,” the IMF notes.
Q: How have state-owned enterprises fared?
Beyond the energy sector, losses in the three largest state-owned enterprises — Pakistani International Airlines, Pakistan Steel Mills, and Pakistan Railways — have continued to accumulate, now totalling over 2 per cent of GDP, according to the IMF.
According to a Dubai based financier, “Loss making enterprises need to be privatised or closed; widening the tax base means more than just levying indirect taxes that end up being regressive.
“Even though the currency has been devalued and the government has taken painful steps to raise interest rates, structural problems still remain unaddressed.”