After rolling back and forth for eight months, Islamabad and International Monetary Fund have finally reached a staff level agreement for another loan programme.
Under the latest IMF programme, awaiting formal approval from the IMF’s executive board in Washington, Pakistan will get $6 billion from the Washington-based lender over the next three years.
The money will help Pakistan shore up its dwindling dollar reserves, which stand at $9 billion. We need these dollars to plug in our trade loss, over $2 billion per month, and repay previous debt (also in dollars) because our current foreign exchange reserves are not enough to meet these external financing needs.
IMF dollars, however, come with conditions that require painful economic reforms, which affect everyone from the government to business people and ordinary citizens of the country. The loan will not only wreak havoc on our economy, but the government will have to continue taking measures that will result in higher inflation and unemployment rates.
To meet the targets set by the IMF, the government will have to increase its revenue and decrease its expenses to narrow the gap between its income and expenditure. In the fiscal year 2018, the government’s deficit was over Rs2,000 billion. The following are some of the things to expect in the months to come.
Living cost to go up
To increase its revenue, which mainly come from taxes, the government may introduce new taxes in the upcoming budget later this month or increase rates on the existing ones. Similarly, to reduce its expenditures, it may cut back on development spending – the money spent on schools, hospitals, roads, and parks — and stop subsidising your gas and electricity bills and even increase taxes on petrol. Much of this will be clear in the budget, scheduled for May 24.
Another condition of the program is having flexible exchange rates. This means the government should not intervene in the foreign currency market and let the forces of demand and supply decide the dollar’s rate against the rupee.
In the previous government, former finance minister Ishaq Dar had artificially inflated the rupee at a time when all currencies pegged against the dollar were depreciating. The dollar has already become 25% more expensive since December 2017, but experts say its rate may increase by another 5% to 10% under the IMF programme. As we type this report, the dollar has already increased to Rs143.5 the open market on Monday, up Rs1 from the previous day’s tally.
These measures may sound familiar because the government has been doing all of this since it came to power in August last year. Referring to these policy measures, the IMF then said they were steps in the right direction, but not yet sufficient to stabilise the economy.
These policy measures have already resulted in a five-year high inflation rate at the end of March. Experts say the inflation rate, currently 9%, may enter double digits by June 30. However, under the IMF programme, they are expecting further hike in prices across the economy, which will increase costs of living as well as doing business.
Job market to remain under pressure
Since the economy was overheating on the back of higher spending, which was creating inflationary pressures and causing drain of dollars in import payments, the State Bank of Pakistan has been raising interest rates since September, 2018. The objective is to curb spending and slow down economic growth—that is, achieve stability.
The SBP policy rate has already surpassed its highest level in five years and is hovering at 10.75% but market analysts expect another hike in the central bank’s benchmark interest rate. The monetary policy rate affects every interest rate in the market, making borrowing more expensive for individuals, businesses and the government.
Simply put, factories hold off investment and new expansion and freeze hiring, some even go for layoffs to cut costs and keep up with rising costs (expensive power and gas) of doing business. The government also cuts back on development projects. All of this puts the job market under pressure.
The analysts we spoke to say that the construction sector is likely to see more pain along with industries allied with it, such as cement and steel. Rate hikes will also mean a slowdown in the automobile sector.
Given IMF has put a special emphasis on privatisation of loss-making government companies, some of their employees may also see the axe, especially if these companies turn increase revenues.
The country has already seen mass layoffs across various economic sectors last year and that phase is likely to continue for another year.
Provinces likely to take a hit on their budget
The IMF has asked the government to rebalance revenue sharing with the provinces under the National Finance Commission awards. In simple words, it is suggesting Islamabad to cut the money it gives to provinces.
Here is how it could happen.
The government’s main source of revenue is tax, which is collected by all provinces and the center from across Pakistan. This money, called the “divisible pool”, rests with Islamabad. The centre keeps 42.5% of this money and divides the rest (57.5%) among the provinces according to a formula agreed upon in the 7th NFC Award.
The IMF’s press release doesn’t explicitly state what it means by rebalancing, but experts familiar with the issue say the center may revise the provincial share to less than half of the divisible pool and increase its own share. This means provinces, especially Sindh, which gets more than 70% of its revenue from that pie under federal receipts, will take a big hit. This is the money Sindh spends on its people’s well being (education and healthcare for example).
Tough year ahead
There is a contraction [economic slowdown] in the beginning of an IMF programme, but later on things improve, experts say. The economy has already slowed down a lot with growth forecast revised to 2.9% for the next fiscal, they say, adding that this lethargic growth phase may last another year and things will improve after that.