IMF agreement; consequences that Pakistan should be prepared for

May 15, 2019 (MLN): After months of tiring negotiations and discussions, Pakistan has finally reached a staff level agreement with the International Monetary Fund (IMF) for a 39-month Extended Fund Facility (EFF) for about $6 billion, much to the economy’s relief. This agreement is subject to IMF management approval and to approval by the Executive Board.

In addition to this, the government shall also be receiving an amount of $2-3 billion from the World Bank, Asian Development Bank, and other funding agencies, as reported by the Advisor to Prime Minister on Finance, Hafeez Sheikh in his interview to a state-owned channel.

However, there is no such thing as a free lunch. The much awaited and highly sought IMF deal has come with a hefty price in the form of tough conditions, which Pakistan is bound to comply with.

These conditions would be imbedded in the forthcoming budget for FY2019/20, which as per IMF conditions, would aim for a primary deficit of 0.6 percent of GDP supported by tax policy revenue mobilization measures to eliminate exemptions, curtail special treatments, and improve tax administration. For this matter, a report by Insight Securities suggests that the government would have to ensure an improvement in GDP of around 1-1.5% via fiscal measures.

However, these changes and improvements clearly cannot be made overnight, which means that certain long-term as well as short-term decisions will have to be taken that will exert immense pressure on the economy’s growth, which can ultimately result in stagflation.

It is historically evidenced that IMF gives more precedence to long-term growth than the short-term, which means that these programs entail government to take harsh economic measures that might be agonizing in the interim, such as fiscal consolidation, tariff hikes as well as withdrawal of subsidies that has strong repercussions for the fertilizer sector.

Another important point mentioned in the IMF’s press release is that the exchange rate will be brought to a market determined rate, which indicates that any interference from the Central Bank shall not be welcomed. In other words, local currency rate will purely be determined by market forces. A report by Shajar Capital suggests that this move is likely to bring the local currency in line with the Real Effective Exchange Rate (REER) in the long run, whereas the REER is expected to fall below 100 in the short-run.

With regards to equity markets, an agreement with IMF has definitely dissipated the clouds of uncertainty that had overshadowed the trading floors for a long time. While the initial response to the conditions was hostile, the reaction in the long-run will most likely be pleasant. However, the ultimate consequences of IMF agreement, such as weaker currency, higher interest rates and economic slowdown may jeopardize the well-being of some companies.

It is also pertinent to mention that in addition to the repayment of $6 billion, the government will also have to repay the remaining portion of debt taken from IMF by the former government, which amounts to nearly $3.1 billion.

Now that Pakistan has finally reached a conclusion with IMF, the important question is whether this would be the last time the government is approaching IMF. On this matter, Hafeez Sheikh said that instead of viewing it as a money making mechanism, IMF should be considered as a reform which is going to be beneficial for the well-being of the country for years to come.

Copyright Mettis Link News

Posted on: 2019-05-15T13:43:00+05:00

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