State of Pakistani Economy - A Year in Review - Android

When the new government in Pakistan took over, there were great many expectations of sudden economic turnaround where everyone will… Read More

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When the new government in Pakistan took over, there were great many expectations of sudden economic turnaround where everyone will have a job and prices would be low and stabilized.
Managing economy at that stage was not that hard. However, certain wrong steps have made it harder to manage and difficult for the public and businesses.

The government was able to borrow almost USD10 billion in cash and credit. Apparently, there was a matter of the only USD6 billion more needed.

Government for one reason or the other had the plan to go to the International Monetary Fund (IMF) to borrow that amount. IMF as per its policy put up certain hard prerequisite conditions before they agreed to lend that amount.

Under the agreement between IMF and Pakistan, the latter will be loaned USD6 billion over the period of three years. If we analyze the merits and demerits of IMF loan deal, Pakistan is on the losing side.

The writer of this article over the past couple of years has been continually arguing that Pakistan will soon find itself into situation of stagflation.

Pakistan has been pushed swiftly further into this stagflation scenario because of the dictated terms of this Pakistan-IMF agreement. There were other options to get Pakistan out of the debt servicing and low foreign currency reserves crisis, rather than begging IMF for a loan, and further deteriorating its economic condition.

Other possible alternatives 

• Government of Pakistan should have had requested friendly countries, Asian Bank or Islamic Development Bank for this amount which writer is sure, they would have granted obviously because this is a relatively a small amount for the period of three years.
• The second option would have been to focus on and wholeheartedly worked on expanding the tax base. In the absence of current hyper-inflation, the writer is sure public and businesses would have been relatively easily willing to pay their fair share of taxes.
• Thirdly, the government should have concentrated on going after and retrieving embezzled money from politicians and corrupt bureaucrats.
• Fourthly, the government should have floated its own long term bonds at reasonable rates.
• Fifthly, the government came into being with the support of Pakistani diaspora. The government should have gone to its supporters to bring in funds and investment.

Any of these and/or other possible solutions/steps would have been better than going to IMF.

Terms Agreed with the IMF
The terms we have agreed to for this IMF loan are detrimental to the Pakistani economy. Let us visit one by one;

State bank has been directed to have a tight monetary policy to control inflation. Interest rate after recent 100 basis points increase is 13.25%, one of the highest globally!

How increasing interest rate will reduce demand and thus prices of daily use products which constitute a major portion of CPI basket items such as vegetables, milk, meats etc.?

This tightening of monetary policy will not much help control inflation. This increase in interest will however further deteriorate the economic growth and job-creating activities.

Pakistan already has a very low GDP growth rate of about 2.25%. With current economic conditions and policies in place it does not seem likely that the government will be able to achieve its intended goal to attain 7.5% GDP growth. For a developing country like Pakistan, it must grow by at least 7 to 9% annually in real terms.

Government’s effort to increase the tax base and tax collection will be made even harder and matter of fact the current tax collection amount will be reduced. Fiscal deficit will increase. Exacerbating government debt servicing issue.

Inflation mainly was due to the exchange rate drop because the IMF wants PkR to be kept at the free float. If some economic managers felt PkR was highly inflated then it should have been adjusted slowly to minimize the effect. This sudden drop in PkR value had a detrimental effect on the prices of electricity, gas, petrol, daily essentials like food, transportation, etc.

The increased cost of production inputs due to this exchange rate drop has considerably off-set Pakistan’s cheap labor advantage. This has resulted in Pakistan’s exports decreasing considerably.

Due to high inflation, the purchasing power of the public has decreased considerably, resulting in lower savings rates. Banks would have to give higher interest rates to attract more saving deposits. Since government competes in the domestic financial market to borrow, the interest rate it would pay would be higher thus it will further increase its debt, resulting in the higher fiscal deficit. Also will face higher debt servicing issues in short to medium term.

Given the planned reforms and planned retrieval of looted money, it was expected the stock market would go up swiftly. However, it went down instead. Stock market valuation has dropped from PkR 100bil to 42bill in the past year or so. This has added to low confidence in the economy.

As far dictated austerity measures, the government should have been able to do it on its own. Pakistan did not need IMF’a stick for that. It could have been disciplined on our own with a set of goals and a strict course of action.

If Pakistan got into this agreement so that the government would follow a disciplined course of action in fiscal and monetary policies then Pakistan would be paying a heavy price for it.

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