Pakistan’s economy is at a critical juncture. Inflation has doubled and is now running at 25 percent, the value of the rupee has fallen by a third since March, and foreign exchange reserves are down to worrying levels. All this is occurring against the backdrop of the worst international economic crisis in sixty years.
These are precisely the type of circumstances in which member countries look for support from the IMF. And so did Pakistan — resulting in the approval on November 24 by the IMF’s Board of Directors of a $7.6 billion loan in support of the authorities’ economic stabilisation programme.
The content and conditionality of the IMF’s financing is fully set out in the public eye. All the loan documentation is available on the IMF’s website. Here, let us examine how the IMF sees the economic and financial challenges facing Pakistan, and the contribution it can make to help address them.
The first point to stress is that given the difficult international economic situation and the weaknesses inherent in Pakistan’s own economy, overcoming the current economic crisis will require hard choices and sustained action over the coming year. And no doubt this will entail some economic hardship — albeit much less severe than the disruption and job losses that would have come from a full-blown economic crisis. Fortunately, the strategy set out by the Government, on which the IMF’s support is based, provides a sound basis for addressing the challenges.
The objectives are clear: first, restore overall economic stability and confidence by acting on key macroeconomic imbalances, and second, do so in a manner that ensures social stability and adequate support for the poor during the adjustment process.
Translating these objectives into concrete policy decisions will entail difficult tradeoffs within the Government’s programme. For example, it is clear that the fiscal deficit, which has risen to the unsustainable level of 7.4 percent of GDP in 2007-08, will have to be brought down to a more manageable 4.2 percent in 2008/09 — in line with what it was two years ago.
Fiscal consolidation is essential to put public finances on a sustainable path and eliminate State Bank of Pakistan (SBP) financing of the government. But achieving this will require implementation of policies to phase out energy subsidies, prioritise government spending, and strengthen revenue mobilisation through tax policy and administration measures.
Even with these changes on the fiscal side, there will be a continued need for financing the government deficit. Over the past two years, much of this financing has come from money creation by the SBP, in turn fuelling inflation and the dramatic loss of foreign exchange reserves. The Government’s programme commits to switch deficit financing from the SBP to commercial banks, but this will require an increase in interest rates, which has its own cost to the private sector. Again, there is a hard choice between controlling inflation, which hurts the poor, and raising interest rates, which affects borrowers.
A second point is that while the necessary macroeconomic tightening will clearly involve some pain, it is important that the burden of adjustment should fall least on the most vulnerable members of Pakistani society. And that is why for the IMF it was crucial that the Government’s programme includes key social protection measures. Expenditure on the social safety net will be increased to protect the poor through both cash transfers and targeted electricity subsidies. And to draw upon the best international experience in using safety nets to reach the needy, Pakistan is working with the World Bank to prepare a more comprehensive and better-targeted social safety net programme.
Third, it is important to point out that the programme — and its conditionality — is based on the targets and measures that the authorities have themselves set for the next two years. And all the conditions associated with the IMF’s loan are transparently set out in the public domain. The IMF is convinced that the best-implemented programmes are the ones that are home grown and fully owned by the country.
Fourth, the success of the programme hinges on sustained and forceful implementation. IMF financial support will help relieve Pakistan’s immediate balance-of-payments needs, but strong and determined implementation of the reforms included in the programme will allow the country to get its economy back on a sustainable path. Strengthening public sector institutions and governance will need to be a key dimension of this effort. In this respect, building domestic consensus around the measures included in the authorities’ package constitutes a key factor in the period ahead.
Finally, while the key to success lies in the hands of the Government and people of Pakistan, the international community also needs to support these efforts. To this end, the financing from the IMF will help to ease the path of adjustment and will provide a strong signal of support to the international community. Of the $7.6 billion loan, $3.1 billion has already been made available by the IMF to strengthen the reserve position. And the regular monitoring of the economy by the IMF will show how the macroeconomic objectives set by the Government are being met and whether they need to be adjusted in the light of changing circumstances.
Alongside the IMF’s financial support, other international agencies and bilateral donors are also providing support, but more financing is urgently needed to strengthen Pakistan’s resilience to potential shocks, help finance the expanded social safety net, and allow for higher spending on development programmes. The IMF stands ready to participate in any donor meeting to provide the economic and financial analysis that could underpin this expanded support. Working together, we can help Pakistan revitalise its economy and protect the poor during these difficult times.
The writer is Director, Middle East and Central Asia Department of the International Monetary Fund. This article was written exclusively for Daily Times
Reproduced by permission of DT