Economic risks

The IMF bailout programme certainly comes with strings attached. The global financial institution has warned of exceptionally high ‘economic risks’ and has imposed stringent conditions for Pakistan. This is rather a charge sheet against successive governments over its poor handling of the economy.

Pakistan has accepted 10 major conditions as part of the standby agreement to secure $3 billion. The IMF has asked Pakistani authorities to further tighten monetary policy and stop interfering in its currency exchange apart from other economic reforms which include increasing power tariffs.

It has also taken the State Bank to task for its failure to respond to inflationary pressures. This eventually led to the highest inflation rate in the past 50 years. Eventually, the central bank was required to hike the policy rate to 22 percent. The inflation rate will remain at 25% till the fiscal year 2025 and IMF said the government is not sanguine about reducing inflation to a level of 5-7 percent.

The government also committed to increasing electricity prices before the end of July and that it would no longer grant any tax amnesty or concessions. The outgoing government will give burdened consumers a parting gift with even higher electricity prices in addition to prolonged power outages.

The IMF has also criticized the import restrictions which may have reduced the current account deficit (CAD) but stalled economic activity. The import ban has also stopped cash inflows, particularly remittances. The government has been commending itself for having a surplus for the past four months without realizing the economy has not come out of the woods.

Pakistan has also tightened the currency market, much to the IMF’s displeasure. There is also a huge difference between the interbank and open market rates. The IMF said the difference should not exceed 1.25 percent, which at the current rate is around Rs4. It will be an upscale task if money exchange dealers will comply given a foreign shortage of currency.

Despite the recent funds, the Pakistani currency has not appreciated significantly. The country received funds from IMF and friendly countries while Chinese banks have rolled over loans. This has done little to improve the economic situation. The economic growth would reach a modest 2.5% this year.

The IMF said that Pakistan’s economic challenges were complex and multifaceted, and risks were exceptionally high. With the government on its way out, it would be the responsibility of the next setup how it manage the economic situation.