Image Courtesy – The Statesman

As Pakistan stands at the crossroads of economic decision-making, its relationship with the International Monetary Fund (IMF) emerges as a pivotal factor shaping the trajectory of the nation’s financial landscape. With recent developments, such as the State Bank of Pakistan maintaining its key rate and the continuation of a $3 billion Standby Arrangement, the country faces critical choices that will influence its economic future. In this article, we delve into Pakistan’s ongoing collaboration with the IMF, exploring the current economic climate, the challenges ahead, and the potential pathways that could define Pakistan’s economic destiny.

The State bank of Pakistan and the IMF future

Governor Jameel Ahmed highlighted that the nation has witnessed enhancements in its external accounts and foreign exchange reserves. The anticipation is that the current account deficit will diminish, and despite persistent inflation, there is an expectation for a more rapid decline starting from March. In June, Pakistan elevated its key rate to an unprecedented 22%, a measure taken to combat inflationary pressures persisting in the economy and to fulfill one of the conditions mandated by the IMF for securing the bailout.

Although the IMF rescue program successfully prevented a sovereign debt default in Pakistan, implementing certain conditions, including raising the benchmark interest rate, boosting government revenue, and elevating electricity and natural gas prices, has posed challenges in the efforts to mitigate inflation and has subdued business sentiment. Despite facing negative real rates, the business community had been advocating for a rate cut to provide some relief amidst the prevailing economic challenges.

Dr. Ayesha Khan, a prominent economist, remarked, “Given the recent surge in inflation, particularly attributed to escalating food and energy prices, the likelihood of a rate hike at this juncture seems improbable. However, the Monetary Policy Committee (MPC) might indicate potential tightening measures if inflationary pressures persist.”

The policy rate is closely monitored by businesses and consumers alike, as it exerts influence on borrowing costs and the overall economic landscape. A consistent rate offers predictability, while adjustments can either stimulate or restrain growth depending on the prevailing economic conditions.

In an additional development, the State Bank has unveiled the schedule for upcoming MPC meetings until June, providing businesses and investors with a roadmap for forthcoming policy decisions.

The post-meeting press conference by Governor Ahmed is eagerly awaited, with analysts scrutinizing any indications regarding the MPC’s evaluation of the economy and its future strategies. Undoubtedly, today’s decision will fuel discussions and analyses, shaping financial choices and affecting lives throughout the nation.

Economics and Politics

Pakistan confronts a myriad of challenges, encompassing an economic downturn, heightened unemployment, and political instability.

The economic downturn led to a significant contraction, with growth plummeting from 6.1% in 2022 to -0.2% in 2023, primarily attributed to sluggish growth in the industrial and services sectors. The resulting surge in unemployment, reaching a record high of 8.5% in 2023, has compounded the challenges, surpassing the 6.2% observed in 2021.

The interim government, established after the removal of former Prime Minister Imran Khan, has struggled to instill economic stability. Delays in announcing the 2024 elections, mandated by the Supreme Court, and political maneuvers have only deepened economic and political uncertainties.

While the successful negotiation of a $3 billion Stand-By Arrangement with the IMF, the conditions imposed on Pakistan have sparked negative repercussions. The economic landscape awaiting the government post-election, scheduled for February 8, 2024, is fraught with fiscal imbalances, high debt payments, and balance of payment gaps, posing substantial obstacles to any economic revival agenda.

Addressing rising unemployment, especially among the youth, and grappling with historically high inflation, which has contributed significantly to increased poverty, are imperative for ensuring social prosperity. Additionally, Pakistan’s vulnerability to climate change demands urgent attention, given its fifth-ranking in global vulnerability. The impacts of climate shocks and floods in 2022 underscore the urgency of mitigation and adaptation strategies.

A stable and functional democracy is supposedly seen as a prerequisite for implementing structural reforms and institutional overhauls. A proposed five-pillar approach aims to revamp Pakistan’s economic model and achieve a growth target of 7–9% in 2024, setting the stage for long-term reforms.

The suggested reforms include reducing wasteful expenditure across sectors, improving fiscal management, simplifying the complex tax system, fostering a fair and competitive environment, and seeking new partnerships with international financial institutions, particularly the IMF. Emphasizing expenditure rationalization over tax rate increases during negotiations is deemed crucial for economic revival.

To spur job creation, especially for the youth, facilitating private sector engagement and implementing broader reforms are recommended. The focus should extend to developing skills, education, health, and mindset, with an emphasis on technology and internet access. Revisiting the role of technical vocational institutions and redefining social protection strategies are identified as essential components of a comprehensive reform agenda.

Sri Lanka’s affair with the IMF & resemblance to Pakistan

The policy prescription for both Sri Lanka and Pakistan by the IMF is alarmingly similar. Though there are certain similarities in the trajectory that the country’s undertook, it is unclear why a ‘copy & paste’ system is being used by the IMF on developing nations in the South East.

Regressive policies such as hiked austerity, opening up markets and restructuring public assests seems to be the play book the IMF is working with. But is this working?

According to the estimates by the government’s data the indication is that it wont. The Pakistani economy has only grown by about 0.29% in 2023.

Starting in 2004, Pakistan witnessed a scenario where its imports exceeded exports. Although the inflow of workers’ remittances from abroad partially offset this trend, the country’s current account deficits surged dramatically from $2.8 billion to $18 billion between 2015 and 2018.

This occurred before the Ukraine war, which served as a pretext to shift focus from actual circumstances and contribute to the emerging New Cold War involving China and Russia. Notably, this deficit was not closely linked to the China-Pakistan Economic Corridor (CPEC) but rather stemmed from Pakistan’s diminishing competitiveness in the global market. The nation continued importing goods and services at a rate beyond its financial means.

The challenge Pakistan faces on the international stage isn’t primarily due to high labor costs. Despite benefiting from export promotion incentives, the textile industry has struggled to enhance labor productivity over the past four decades. Moreover, there has been a notable absence of concerted efforts, both in the public and private sectors, to upgrade the country’s technological infrastructure. Consequently, countries like Bangladesh, China, and Vietnam have surpassed Pakistan in textile productivity and exports over time.

Boosting exports in the short term poses a considerable challenge. Inadequate investments, both from private and public sectors, in Pakistan’s manufacturing industry have resulted in outdated technology and infrastructure. This outdated setup makes it arduous for local manufacturers to compete effectively with foreign counterparts. The conditions imposed by the International Monetary Fund (IMF) have exacerbated this issue by restricting the much-needed investment required for infrastructure upgrades and industrial advancement.

Another significant hurdle hindering export growth is the elevated cost of fuel, which, in turn, escalates transportation and logistics expenses essential for conducting business. These challenges have hindered local manufacturers from operating profitably, resulting in the closure of numerous factories and a decline in industrial output. The conditions attached to short-term IMF loans further solidify this challenging reality.