Ten months after coming to power, and after publicly claiming that he would rather commit suicide than go to the International Monetary Fund, Pakistan prime minister Imran Khan agreed to a debilitating, stringent, austere, stabilisation programme with the IMF, uncharacteristically, on a Sunday, May 12. However, the bravado shown against better wisdom, resulting in the inevitable embrace of the IMF, has cost the Imran Khan government, and the economy of Pakistan, dear. Had his government acceded to an IMF programme soon after it was sworn in, even reluctantly, on a wave of hope and rejuvenation to build his naya (new) Pakistan, the costs, consequences, and the criticism might have been less severe.
The 10-month delay cost Khan his finance minister, Asad Umar, who was summarily dismissed in April on his return from Washington, where he attended the spring World Bank and IMF meetings. Umar’s ouster was followed by the dismissal of the governor of Pakistan’s central bank, the State Bank of Pakistan, and also the removal of the finance secretary and the chairman of Pakistan’s Federal Bureau of Revenue. A wholesale change in leadership was required to get the deal through — initial discussions for which had started in October 2018 — and following the agreement, changes were made in the finance and economic departments to ensure that the IMF programme would be implemented.
If the reshuffle was unprecedented in scope and scale — even for Pakistan where such wholesale changes are made frequently — so too are some of the very strict conditions for the meagre $6-billion Extended Fund Facility (EFF) from the IMF.
While Pakistan’s foreign exchange shortfall and requirements have been between $8-12 billion in recent years, the expectation and hope many months ago was that the IMF would lend Pakistan twice of what it had. Moreover, this 39-month EFF Programme is Pakistan’s 22nd bailout, the 13th since the 1980s, of which only two have actually been completed. Pakistan has been known as a “one-tranche country”, where soon after signing an agreement, the government is unable to carry through the reforms suggested by the IMF.
Unprecedented also is the fact that three weeks following the staff-level signing of the agreement, its details have not been made public. Also, there was no joint press conference, as is the practice, by the adviser to the prime minister on finance—the new de facto finance minister, who, unlike his predecessor, is an unelected technocrat who served as a minister in two earlier governments — and the IMF chief negotiator. Though the agreement has not been made public, numerous aspects of it have been revealed and a series of steps, known as prior actions, taken.
Some of the key aspects made public through an IMF press release require Pakistan to move from a managed or dirty float for its exchange rate to a free-market exchange rate, manage revenue sharing between the Centre and the provinces in a better way, and raise considerable revenue over the next two financial years to plug the fiscal deficit. These “prior conditions” also include raising of the prices of gas and electricity. The IMF has also asked the government to request friendly countries — China, Saudi Arabia and the UAE — to ‘roll over’ the estimated $10.2 billion they had lent to Pakistan.
The reaction to the first, setting the Pakistani rupee supposedly at the mercy of the free market, was manifest in a 9% devaluation of the currency immediately after the agreement was signed, adding to a 34% erosion in the value over the last 16 months. Moreover, as one of the pre-conditions, the State Bank of Pakistan brought its scheduled monetary policy rate announcement forward by 11 days and raised the basic interest rate by 150 basis points to 12.25%.
What to expect
The writing is on the wall for Pakistan’s economy and for the people, who anticipate a considerable deterioration in their livelihoods. As it is, Pakistan’s growth rate for this fiscal, which ends June 30, will be around 3% at best, the lowest in nine years and almost half of what it was just a year ago.
Pakistan’s per capita income has fallen over 8% in one year, from $1,650 to $1,515, mainly on account of the depreciation. Inflation, also nearing double digits, is the highest in around five years. With an IMF programme that requires reducing development expenditure, further devaluation having a considerable knock-on effect on prices, and rising interest rates, things are only going to get far, far, worse.
Calculating the economic and social costs and consequences of the IMF programme, economists fear inflation will rise dramatically to around 16% in one year, further devaluation of the rupee will also affect prices and the unemployment rate will continue to rise over the three years of the programme. They also suggest that Pakistan’s gross domestic product rate will fall further before it begins to rise, while foreseeing a drop in per capita income over the next two years. Worst still, are the assessments that the number of Pakistanis living in poverty will increase by 13 million over the next three years, and that around six million people will be unemployed in the next two years.
After the rot had set in — the rupee losing 9% in two weeks, Pakistan’s Stock Market continuing its losing streak following the IMF agreement, and inflation heading towards double-digits — addressing a gathering, prime minister Imran Khan told his captive audience that they would need to bear the pain for only “two or two-and-a-half months” more. After that, he said, people from all over the world would be lining up to work in Pakistan, and even day labourers would willingly pay income tax.
By all accounts, Pakistan’s might be heading into its worst economic nightmare, with considerably grim consequences for the Pakistani people. The tabdeeli (change) that Khan promised in his naya Pakistan has certainly set in, but perhaps not in the direction his millions of voters and supporters had hoped for.
(S Akbar Zaidi is a Karachi-based political economist)
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