Pakistan is very likely to seek an IMF program, as experienced technocrats advising the government are likely to point out how resorting to the Fund is a less riskier option, and far more economical than other options on the table.
According to analysts from the Citi Bank’s Economics Division on the Emerging Markets of Asia, the IMF seems very ready to engage with the government, and concerns that the United States may be opposed to it should not be as pressing since it would be in the best interests of the US, geopolitically, to see a stable Pakistan economy.
A research report issued by Citi titled ‘Macro Trip Notes – All (Bumpy) Roads Lead to the IMF,’ opines that both China and Saudi Arabia are going to be supportive on the matter as neither of them wants to be the “lender of last resort.” Similarly, they hold the view that neither IMF is going to be critical of Pakistan’s engagement with China on CPEC, nor would China be opposed to greater transparency if a program is to initiate, both of which make it likely that all major stakeholders will be supportive of a program with the Fund.
However, while an IMF program appears likely, the research report highlights that it is also likely to be much more stringent than it was in the past. Pakistan has used IMF programs 21 times in the past, with a new potential program to be the 22nd one. Hence, it is likely that the IMF would want to create a program that is more effective than it was in the past. In addition, the Fund will likely want the authorities of Pakistan to have more ownership of the program and seek consensus among key political players.
More importantly, Citi’s research analysts claim that their meetings with stakeholders suggest that the IMF (and authorities) remains positive that Pakistan’s problems are “fixable,” reducing the odds that Pakistan’s debt could fall in a “grey zone” that warrants debt operations like re-profiling.
On fiscal, analysts hold the view that reversing income tax cuts in the FY19 budget, broadening the tax base, increasing excise taxes, improving tax administration and curbing current spending, especially from the provinces, will be key.
“We think SBP can hike rates at least by another 100-150bps and the rupee has more room to depreciate to help curb imports,” said the report.
Moreover, “PSE restructuring, tariff hikes and possible privatization will be on the agenda given the sharp build-up of PSE debt,” it added.
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