As Pakistans reserves rose to record highs of nearly $17 billion, it seemed that the government acquired a state of near complacence.
Where the fate of the reformed GST still remains undecided, certain sections of the local media were circulating reports of a possibility of the Stand-by-Agreement with the IMF being prematurely scrapped. How far this can be materialised and to what extent remains to be seen yet.
The reasons for doing so may be more skewed towards a populist stance as the government confronts the problem of dealing with the conditions of the IMF.
Besides the imposition of an RGST, these conditions included power sector reforms, including doing away with the circular debt issue, reduced inflationary monetization and reducing the countrys fiscal deficit.
Unfortunately, however, the RGST fiasco is not hidden from anyone, and, though electricity tariffs have been brought up at the back of the Funds requirements, the circular debt issue and failed reforms continue to stymie the power sector.
Tax-to-GDP ratio staggers around a low 9-9.5 percent, and around 1 percent of the population are registered tax payers. This evidently leaves the fate of fiscal reforms in murky waters.
Similarly, the IMFs quantitative target of zero-net borrowing from the SBP is a pain in the neck for the government in these times of fiscal constraints.
Nonetheless, the government borrowing toll which has increased by over a trillion rupees in past three years or so to Rs 1.4 trillion has to be brought down to sane levels. The IMFs net-zero quarterly target at least warrants it to stay at current levels. Although the government is not meeting this target, but going off the IMF programme can be a replay of FY08, when the government borrowed Rs689 billion in just one year.
The fact that these borrowings are directed more at the governments budgetary expenses than any developmental initiative makes them all the more inflationary than beneficial for the countrys economic growth.
If the government decides to scrap the agreement with the IMF as it chickens out from meeting all the requirements, it might save itself the trouble of ensuring the implementation of these self-rectifying conditions.
But the IMF is not on a philanthropic spree of dishing out loans, and wishes to see Pakistan come out of its macroeconomic instabilities. Scrapping the programme and hence denuding the country of the needed pressure to implement the above-mentioned reforms will be more detrimental to Pakistan in the long run.
The gravity of the situation will be augmented when repayments to the IMF begin, imposing another critical scenario on the government. By 2014, the government has to pay back $8.7 billion to the IMF starting from 2010.
The government might be able to pay off the initial two, smaller instalments of 2010 and 2011. But come 2012 with the first hefty instalment of $2.4 billion, and one won be surprised if a request for another loan agreement with the Fund is chipped in.
The IMF Stand-by Agreement (SBA), with all its terms and conditions, had been designed to rectify the diseased areas of the countrys macro economy. Scrapping off the deal might avert imminent strains and win populist support, but this momentary contentment will not be sustainable for long.