IMF deal reached: Pakistan’s path to recovery

Finally, the International Monetary Fund (IMF) deal is closed. After months of uncertainty over mistrust between Pakistan and the IMF with constant engagement, negotiations and conclusions, the authorities reached an agreement. The lender is rightly agitated to see the borrower continually unable to repay the previous debt and yet asking for more. But after noticing the political will and a geopolitically responsible entity, the IMF again came to the rescue and Pakistan has another chance to achieve sustainable development and bring prosperity to 250 million people. The $7 billion Staff Level Agreement (SLA) has been reached for a 37-month program that will focus primarily on the following: 1) As part of fiscal consolidation, tax revenues will increase by 1.5% of GDP in 25 and 3 % by 27th year (ambitious ) 2) Broadening the tax base and removing tax exemptions (requires digitization) 3) Targeting retail, agriculture and exports for increased taxation (exports are tied, retailers next) 4) According to the National Fiscal Law, the provinces will introduce changes by January 1, 2025 to share the real burden (no other option) 5) Monetary policy to focus on deflation and continue high real interest rates (expected 14-15 % plus) 6) SBP to focus on a flexible exchange rate without artificial retention of value (not free float) 7) As part of energy reforms, government should pay attention to cost reduction, tariff adjustments and termination of cross-subsidy (much needed) 8) Fast track privatization of SOEs (and profiteers) to reduce fiscal burden 9) Phase out SEZs and agricultural support prices (a very difficult decision) 10) Abstain from guaranteed projects performance under SIFC as well (feasible) Although three years is a relatively short time to undertake such massive reforms, even 80% success These will restore stability in the fiscal sector, energy sector and monetary policies. Unfortunately, policymakers see entry into the IMF program as their key success and its implementation. This alone will not put us on par with Vietnam, Malaysia, India, Indonesia and Bangladesh, let alone Eastern European countries. Huge efforts are needed to improve business confidence, make industries regionally competitive, increase value-added exports, attract foreign investment in exports and import substitution, establish LNG terminals and pipelines to supply gas, limit losses in DISCOs and fully privatize them, increase spending on quality education to develop a world-class talent pool and ensure that exports grow much faster than imports to increase trade-related growth, revenue, dollars, jobs and value added. Global integration with value chains is mandatory in order to put population growth to productive use to increase overall GDP levels and create enough jobs to absorb population growth of 5 million people each year, similar to the population of Johannesburg , Barcelona and Washington. The signing of the SLA is a done deal, requiring the nod of the executive board. Previously, our creditors – friendly countries – pledged to overcome debt and not pull the plug on life support. Always, there is a commitment not to send western US dollars to China because of geopolitical rifts and that’s fine. However, the IMF agreement will definitely lead to the following positive events: Increase in foreign reserves of SBP. strong PKR/USD exchange rate. further flow of US dollars from multilaterals – the World Bank, ADB, AIIB and IDB; restoring investor confidence; improving Eurobond yields at par; interest rate cut to 14-15% by June 2025; KSE-100 will reach 5.5-6x PE (110k-120k) by June next year. further flow of US dollars into the domestic debt market; raising sovereign credit ratings by Moody’s, Fitch and S&P; and easing fiscal woes after controlling state-owned enterprise losses and cyclical debt. The IMF program will not move us towards a developed economy. Policymakers need to enhance their capacity, skills and vision to move Pakistan towards 6-8% GDP growth in a sustainable manner. There is already enough reliance on talented overseas Pakistanis, who send remittances and sustain the economy. Negligence and complacency should be a criminal offence. It’s time for a nuclear-armed country with huge development potential to stop begging lenders for support to raise $6-7 billion every few years. If we had lots of tech unicorns and well-earned billionaires exporting enough from Pakistan, we would rather give aid to other countries looking for investment from us instead of the other way around. Let us work earnestly – not just pray – to make this last program happen. The author is an independent financial analyst

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