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For the past nine months, the PTI government has been saying that gaps with the IMF are being narrowed. But with things unfolding, it appears that the thinning gaps are one sided. Pakistan is moving towards the IMF targets while the Fund’s stance remains unmoved.

That is not success as was touted by the previous FM Asad Umar or Governor SBP Tariq Bajwa. The first economic team of PTI perhaps did not tell the reality as they were giving the impression that the deal has almost been finalized which is far from reality. In essence, nine months are wasted and no measure is taken on the fiscal side or energy front to give comfort to the IMF team that there is some home grown plan.

es, the front loading could have been higher had we entered into an IMF programme right at the onset of assuming power which was advised by a few experts who have past experience of dealing with the Fund. But Imran was not convinced and his team kept him blindsided to ground realities.

Now new team equipped with handling and talking in Fund’s terms is in action, the reality is seeping in. Rumor mill is brewing all sorts of stuff but at the time of writing this, there is nothing final yet. No one knows how much the quantum of front loading the IMF is warranting.

The Fund would never be explicit about currency or interest rates targets, rather these have to be implied by the targets of NFA, NDA and NIR and other conditions of having the pricing based on market demand and supply. But the journalist community has varying stance on it - few say that targets are being discussed and are close to Rs 160-170/USD, while the others are saying that the Fund is comfortable with REER pegging.

Similar is the story of interest rates - no explicit targets but implicitly rates can go up to 15 percent. Even if there is no more front loading on interest rates and exchange rate, they will move up in quarters to come. Certainly, energy prices adjustment and higher taxation would be inflationary in nature, and if oil prices remain high, inflationary consequences would be even higher.

The Fund may ask for keeping certain level of real interest rates based on headline inflation - although core is a better instrument, as based on 7 percent core inflation last month, the real interest rates are already 375 bps positive. How much more hike is warranted?

On exchange rate, REER is at 104 - it does not make sense of a steep depreciation at this point. But with inflation creeping in, REER would go up and to bring it close to 100, nominal exchange rate adjustment would be the case. This may bring more inflation, and more interest rate hike, and more exchange rate adjustment.

The rumors are that government has a soft agreement on exchange rate and interest rates. The issue is on energy and fiscal adjustments which may be too much for a politically weak government. But it is unfair to blame the IMF or this particular government or perhaps any government for tough fiscal adjustments.

The elite of the country has kept on seeking rent for decades and the country becomes a perpetual borrower of the IMF - entering the 22nd programme. Structural reforms never took place and the Fund had been lenient many times. Now under Trump, the US is becoming ruthless and is cutting its engagement with the world. The IMF is influenced by the regime, and there will be no more free lunches for countries such as Pakistan.

It is better to take the bitter pill and adopt these tough adjustments once and forever. This may teach a lesson as a nation, to start living within the means, and stop the rent seeking culture of elite.

Copyright Business Recorder, 2019


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