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Engaging IMF

The government has decided to engage the International Monetary Fund (IMF) as an internal working suggests that benefits of getting its bail out package outweighs the cost Islamabad may have to pay, including some compromises on economic sovereignty. After an in-house analysis, spanning over two weeks, authorities have decided to invite IMF staff-level team. Sources in the finance ministry revealed that the Finance Minister Asad Umar has contacted IMF Director for Middle East and Central Asia Jihad Azour.

The staff-level team of IMF wills visits Pakistan at the end of this month. However, the finance minister still argues that staff-level team visit of this multilateral donor agency should not be linked with any kind of formal programme talks. He said in case Pakistan plans on getting the IMF programme in future, the upcoming engagement would save time that is required for exchange and validation of macro economic numbers. The minister underscored that IMF staff-level visit did not mean that Pakistan has decided to avail a fund programme. IMF, s Resident Representative to Pakistan Teresa Daban said, “The conversation is happening all the time on routine basis at different levels.” She said such contacts are normal between the IMF and its member countries.

The decision to request the IMF to send a staff-level delegation is rooted in an in-depth assessment of Pakistan’s gross external financing needs for the fiscal year 2018-19. The assessment envisages costs and benefits of availing an IMF programme. The joint assessment was made by the State Bank of Pakistan and Ministry of Finance. It showed the external debt repayments of 11.7 billion dollars. Gross external financing requirements have been estimated at $ 31 billion. This evaluation is based on the assumption that current account deficit will touch $ 18.5 billion. Against these payment obligations the available financing is only $ 20 billion, which is inclusive of 13.2 billion projected borrowings and roll over of short term debt of $ 2.8 billion, still leaving the gap of $ 11 billion.

The cost of not availing the IMF programme will be higher pricing of international borrowings and credibility of economic reforms will be low. Pakistan can avoid surge in short term debt by availing long term IMF lending. It could immediately avert the balance of payment crisis. This will also open cheap financing lines from the World Bank and Asian development Bank. The programme will increase the country’s credibility in the eyes of international creditors.

It is now generally recognized that the government faces a herculean task of external obligations. However, what is less widely understood is that the structural factors underlying the massive current account deficit and rapidly growing debt repayments have made the present crisis deeper and more protracted in nature. In the short term the external financing gap presents a more formidable challenge with more immediate requirements are likely to be $ 28 billion for the current fiscal year. And fiscally irresponsible budget for 2018-19 approved by the PML-N government at the tail end of its tenure is expected to worsen both the external and domestic macroeconomic imbalances, which were worse in last fiscal year and previous government ignored the World Bank and IMF warning in September 2017 to effectively address them. Rather the sane and timely advice of international donors was rejected with ridicule with shallow verbosity by the pseudo-economist the Planning Minister Ahsan Iqbal. Bringing mini budgets as corrective measures for increasing revenue from domestic sources will be more daunting economically and risky politically. It is because of expected public anger that gas tariff increase of 46 percent was deferred for the time being.

The IMF programme has become unavoidable because no amount of external flows from friendly countries and investment bonds taken by overseas Pakistanis will suffice to meet the financing requirements of $ 75 billion over the three years. The die was cast sometimes ago and while soft loans have been provided by China, dithering and procrastination in starting meaningful discussion with the IMF will weaken our negotiation position with each passing day. This time it will be difficult to find an escape route from the tough conditions of bringing back the skipped out active taxpayer into the tax net, non- utilization of the available data of potential tax payers, imposition of agriculture income tax and offloading the burden of huge losses incurring public sector corporation, which devour Rs. 1100 billion taxpayers money.

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