October 5, 2018 (MLN): Pakistan just concluded staff-level talks with Washington-based mission chief Harald Finger of International Monetary Fund (IMF) who advised the government to push interest rates into double digits, and weaken the currency by at least 15 per cent during the ongoing calendar year.

Finance Minister Asad Umar has been working on alternative options other than an IMF led bailout which includes China and Saudi Arabia as he seeks to solve the problems on the external front. The delay however in finalizing a course of action has sent the entire financial sector into a dis-array.

The equity market is in absolute tatters; KSE 100 Index fell to its lowest in months and is well on its way to fall to its former lows seen in January and June.

Analysts believe that the government is pushing itself into a corner and will lose whatever bargaining power it has since reserves are depleting quickly with every passing week. They warn that the government will have to resort to IMF or opt for a multilateral – IMF, China and Saudi Arabia – agreement within a few weeks. Pakistan urgently requires $9-11 billion in the next nine months to pay off its maturing liabilities and finance key imports.

Adding to that, Foreign Minister Shah Mehmood Qureshi has been in Washington DC for the past few days arguing his case with the US officials to resume US aid to the country. Pakistan’s external sector woes have worsened since US stopped bilateral payments under the Coalition Support Fund following stricter US policy.

The country, however, will have to undertake tough decisions as IMF after reviewing the actions taken by government in the last month has advised a further increase in interest rates, depreciate the currency, curtail public sector entities losses, decrease imports by substitution, fix the revenue generation mechanisms and increase the tax-to-GDP ratio – lowest in the region.

The challenge lies in the government’s ability to grow out of the crisis by pursuing long-term policies and fixing the fiscal and trade mismatch. The analysts have also warned that the government must look towards increasing foreign direct investment, remittances, bilateral partnerships and increasing the local revenue generation.

The consequences thereof also hurt the overall GDP growth hovering at decade highs, since IMF will push the central bank to halt expansionary policies. 

However, the economy must brace for a slowdown in growth in the short-term once the IMF led bailout is put in place.

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