IMF loan may come with a political cost for Pakistan PM Imran Khan

When the Pakistan Tehreek-e-Insaf government came to power in July, Finance Minister Asad Umar announced he would table a mini-budget to stabilise Pakistan’s faltering economy by creating political consensus around tough economic steps and imposing austerity measures.

Umar presented a reworked budget 2018-19 to parliament on September 18. The amended budget imposed heavy taxes on around 5,000 items of luxury spending (like doubling the excise duty on imported cars with engine capacity of 1800 cc from 10 per cent to 20 per cent and hiking duty on imported upper-end mobile phones from 12 per cent to 17.5 per cent) and doubled the highest taxation slab from the current 15 per cent to 30 per cent. The budget also announced a savage slash in development spending that was expected to cut Pakistan's budget deficit, which Umar warned could go up to 7.2 per cent of the GDP if left uncontrolled. With the cuts amounting to roughly 1 per cent of the GDP, including curtailing spending on building roads and dams, the budget deficit was expected to come down to 5.2 per cent of the GDP. In tandem, the cost of natural gas was increased by 20 per cent, effectively slashing consumer subsidies. 

We already know about the austerity measures, the auctioning of government vehicles and buffaloes, in order to save government spending. Taxation was hiked but none of the measures could make good the gigantic hole that Pakistan has on its books: It needs $11billion over the next nine months of FY19 to finance its imports and repay pending debts. It asked around. Saudi Arabia and China were the unnamed ‘friends’ that Prime Minister Imran Khan said would ‘help Pakistan’. But they did not oblige. Last week, the country saw a $628 million decline in foreign exchange reserves to $8.4 billion.

On October 8, the country announced it would seek a loan from the International Monetary Fund (IMF), its 13th since it was created. The final amount (thought to be around $8 billion) will be announced post negotiations. But experts are asking if the IMF intervention will create more problems for Pakistan than it can solve.

Conditions set by the IMF could exact a heavy political price. Khan’s election promise of turning Pakistan into a Madinat-type welfare state will have to wait. There is a major difference of opinion between the IMF and the government on the system for exchange rate management: The IMF would like Pakistan to adopt a free float exchange rate regime instead of the current managed exchange rate that will curtail the government's autonomy in intervening in the market to stabilise its currency. The IMF would like the Pakistani rupee to settle upwards of PkR 145 to a dollar, compared to existing rate of PkR 125 to a dollar. This will have its impact on the cost of infrastructure projects. The IMF also wants interest rates raised from the current 8.5 per cent to 12.5 per cent to control inflation and reduce the current account deficit.

The Pakistan government has begun to take some steps: An economic advisory council of the best and brightest economic minds (minus Atif Mian at Princeton, because he is an Ahmadi) has been constituted. A massive rejig of the bureaucracy has begun to replace political appointees with professionals. Parts of the China Pakistan Economic Corridor financing is being revisited.

But the IMF will ask for structural changes to be put in place that will be politically painful — like efficiency improvements in its other state-owned enterprises; widening of the tax net (as opposed to the hiking of tax rates on the existing narrow base), and addressing network theft and non-payment in the electricity sector.

Add to this the pressures represented by the Financial Action Task Force, which is closely scrutinising systems in place to prevent money-laundering. The country is in for a rocky time.