The PM’s charm could not lure the IMF head Christine Lagarde in Dubai. The negotiations are not conclusive yet. The Fund wants a fully front loaded programme by applying a generic model - a copy paste of Egyptian model, which did not really work in Egypt. Some adjustments have already been made and a few (power sector) are pending. Rest, it should be glided adjustments, based on transmission of existing tightening and exogenous factors, as and when deemed fit.
The reform process should be slow and gradual as the economy may not have the capacity to sustain any more pain at this point of time. The issues pending are exchange rate, interest rates, taxation revenues, energy sector subsidies and these variables impact on twin deficit and inflation. The problem is that fiscal deficit cannot be further curtailed through demand management (interest rates hike); but certainly it would increase the debt servicing cost - further increasing the fiscal deficit would require further interest rate hike – it is a circular issue.
Similarly, further currency adjustment has a limited role in curtailing current account deficit in short to medium term. The economic slowdown is already visible which has compressed imports and any further tightening does not have much room in cutting down non-essential imports. In case of exports, the capacity constraints are limiting export enhancement in the short term. Textile and other exporters are in planning stage of expansion and this will take time to reflect in numbers while the increased market access is likely to help commodity exports. Any further currency adjustment might not help.
The one variable that nobody is talking about is unemployment - the number is not computed on quarterly basis and even yearly numbers are shoddy. The market pulse is that economy wide downsizing exercise is going on - ranging from MNCs to SME manufacturers and from media to retailing businesses. The story is same - firing people by making positions redundant and pay cuts by justifying imported cost push factor.
Inflation is yet to surface at alarming levels despite over 30 percent currency adjustment. Any hike in recent months is due to energy prices adjustments - power, gas and petroleum. The fear of high inflation is used as an argument to increase interest rates; but no one seems worried about growing unemployment. The economic objective is to have a balance between inflation and unemployment - the link is simply missing in Pakistan.
The IMF’s demand for further front loaded adjustments is illogical and the issue perhaps is political not economic. The government has to assure the IMF of its resolve on structural adjustments - through re-negotiation of NFC award, bringing untaxed into the net and brining efficiencies in current and development spending.
Once fiscal house is in order, it is easier to tame current account deficit. The pending problem is around Rs2 trillion energy and commodity sector circular debt - below the line deficit. The PM has rightly appointed the Finance Minster as head of Cabinet Committee on Energy (CCoE) that must take some bold steps to bring efficiencies in the energy sector. That is one way to demonstrate capacity and resolve by clearing the energy sector mess.
It is easier said than done. The need is to buy time, and try and ease the IMF conditions through politics - work on improving relations with the US and pledge Pakistan support in Afghanistan to safeguard US interest, after US exist from Afghanistan, against economic cooperation.
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