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Two is a trend, they say, and twice in two weeks now the market has shrugged off concerns of international rating agencies – about a weak coalition government’s ability to negotiate a follow-up IMF program, threat of default, and all that – and posted healthy gains.

It “reversed overnight losses” amid “cherry picking” last Monday even as Fitch questioned if Islamabad would be able to secure a post-SBA (standby agreement) bailout facility in time to avoid another serious crisis of confidence in its ability to pay back its debt; rather have most of it rolled over for a little longer.

And it rose another 500-plus points this Wednesday, when Moody’s left its Caa3 (stable outlook) rating unchanged but also echoed Fitch’s warning that “political risks are high, following a highly controversial general election”, especially that “the forthcoming government’s electoral mandate may not be sufficiently strong to pursue difficult reforms that will likely be required by a successor program”. It also said, just like Fitch, that continued IMF support was necessary to “reduce default risk if it is achieved urgently and without further raising social pressures”.

Yet the market was more interested in “robust results and dividend announcements by companies”, further clarity about the next government, and talk of China rolling over $2 billion of debt. It probably reckons that inflation and interest rates have peaked, and the new government will have no choice but to accept a new IMF programme, most likely another EFF (Extended Fund Facility), so it’s a good bet to go long till Mar-Apr at least.

Some brokers also attribute its nonchalance to the SIFC (special investment facilitation council) effectively taking over the finance ministry even as democracy loving liberals sweat about the military’s direct involvement in economic matters; on top of its long shadow over all other important departments.

It will make sure that the government, no matter how weak or strong, will accept all of IMF’s “upfront conditions” – sure to be much harsher than the SBA’s – so there’s no doubt that the program will be secured and most if not all of the $27.47b of debt payment due in November will be rolled over.

But what then?

In layman’s terms, harsher conditions mean more taxes and less subsidies, which means harder times for households and industry. That’s where any sort of government, even a very popular one, would hit a brick wall. Because you don’t just come to power by promising power and freedom to the people and then give them the kiss of death because the IMF said so.

And even if the SIFC can keep the finance ministry in line, and guarantee all tax and tariff hikes, what will it do when the financial stranglehold turns into social and political discontent? That’s what Moody’s meant when it talked about “further raising social pressures”.

That’s when the SIFC will face the dilemma that the political elite has been brushing under the carpet since forever. IMF programmes have become so burdensome because they require additional revenue for structural reforms. And the government always squeezes that revenue out of the existing, very narrow tax base because nobody’s ever dared to tax the big fish in agriculture, real estate and retail trade who form the largest campaign funding base and backbone of all major political parties in this Islamic Republic.

SIFC does not have a political constituency or vote bank to worry about, so the million-dollar question is whether or not it will arm-twist the government into finally forcing these bloated sectors into the tax net. It will reduce the pressure on existing taxpayers, expand the tax base, increase national revenue and, for once, mean that the government is complying with its own tax laws.

It’s also going to be important for a market that will not want the euphoria from securing the bailout facility to blow away when its effects start to show. Because skyrocketing gas, electricity and fuel prices will definitely stoke cost-push inflation, perhaps enough to kill any chances of a dovish shift at the State Bank, and keep interest rates high amid low growth and rising unemployment.

The cold logic of the market demands clarity. And it’s already clear that another IMF programme, necessary as it is, will only work if serious tax reforms are implemented alongside it. The time has already come when any further burden on the tiny tax base will break the middle and lower working classes, possibly triggering rioting that could, in the worst-case scenario, freeze the EFF.

So the IMF programme will also test the SIFC as people desperate for fiscal relief and a market that requires black-and-white clarity hold their breath for what will come in April and later.

Copyright Business Recorder, 2024


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