The scale of adjustments being demanded by the International Monetary Fund (IMF) is too large and accession to the programme is likely to be delayed. There is no chance that adjustments a sproposed by the fund can be made because of its political and socio-economic repercussions. It has put the government in a quandary because IMF programme is essential to unlock access to resources from other multilateral lenders like the World Bank, the Asian Development Bank, as well as from global financial market.
In the meantime government has procured some breathing space through bilateral support from Saudi Arabia and Abu Dhabi Fund for Development of another $ 3 billion deposit in the central bank in the coming days. In addition Pakistan may secure $ 2.2 billion from China for which the negotiations are on. But with the current account deficit running at more than $ 1 billion per month, these inflows will buy little more time. Eventually the IMF programme becomes necessary about the tough and immediately implanting condition of which the government is hopeful that something can be done to make them soft in the intervening period. But at the moment the chances seem slim, no matter how tough talk the government holds with the Washington based lender.
The IMF demand of raising the interest rate by 4.75 percent has already been met. But the condition of free-float exchange rate is difficult to be fulfilled. Pakistan’s foreign exchange market is thinly traded with $ 200 to $ 300 business and cannot be left the market forces which are prone to speculative activities which push the rate of exchange between rupee and the US dollar impacting the parity of local currency with other major foreign currencies as well. When Z.A Bhutto destroyed the economy by nationalisation of all types of private enterprises and banks, the succeeding government had to adopt a managed float of exchange rate. There is no country in the world which leaves the exchange rate completely at the mercy of market forces. Instead the government or the central bank intervenes to keep the exchange rate from running amok.
The IMF cites its disappointment in previous dealings with Pakistani governments for justification for upfront actions this time. The commitments made in the past were not fulfilled and the lender now wants the adjustments come before funds are disbursed. In the last programme the previous government obtained record number of waivers for failing to comply with its commitments pertaining to privitisation of bleeding public sector enterprises, expanding tax base and reduction of circular debt.
In the proposed programme, the IMF is asking for an adjustment of around Rs.1600 to Rs.2000 over a period of three to four years. Moreover, the fund wants substantial cut in current expenditure by axing the debt services, defense and subsidies. Previous governments used the recipe of slashing the development expenditure and reducing subsidies. Additionally the government will also be forced to seek partial reversal of provincial transfers under the next NFC Award.
As talks with the Fund sputter on, the government has launched hectic efforts to draw foreign exchange through other means. It hopes that the recent measures may increase remittances by another $2-3 billion and substantial increase in foreign investment. The government is optimistic that an increase in remittances and FDI will reduce the pressure on external front. A steep drop in oil prices is another unexpected windfall. Given some of the new realities opening up, the government expects that current account deficit may go down to $ 13 billion this year from $18 billion last year. But this miracle is only possible when there is continuing improvement in exports for which product sophistication is inevitable to make the exports competitive in the foreign advanced markets. Currently the economy is factor-driven and needs to be transformed into efficiency driven with the induction of latest technologies, skill development and significantly enhancing the level of research and development expenditure as percentage of GDP which has dropped from the value of which has dropped from 0.63 percent in 2007 to 0.22 in 2015.
Unfortunately, considering the exports composition of Pakistan and its evolution over the past few decades since 1972, the country is stuck in the vicious circle of producing less sophisticated products. Research and development is recognized as a vital component for the transformation of the country into producing more sophisticated knowledge intensive goods which have comparative advantage over the identical products of other countries in the international market and fetch high value.