THE government is now at a crossroads and whatever path it chooses, it is likely to create history. The crossroads has been reached with the resumption of the IMF program, and the choice the government must face is whether to continue on the path of deficit reduction as it has committed to the IMF or to chart a course. way keeping in mind the upcoming elections. The two cannot go together for very long because the first is to tighten the belt and the second involves increased spending, so a choice has to be made.
Editorial: The government cannot grow the economy quickly if it is to implement tough IMF stabilization policies
If they choose to stick to the commitments former Finance Minister Hafeez Sheikh made to the IMF that got IMF board approval on March 24, they will have to cut spending significantly, increase electricity and fuel prices, raise taxes and roll back the many supports they have provided to industry since the Covid crisis, supports that people in the industry have become accustomed to.
The prime minister is under increasing pressure within his own party to allow his MPs to spend more in their constituencies to help solidify their electoral prospects in the next election. In order to be ready to face their constituents and constituents in 2023, a reality they will face in less than two years, they say they must start spending immediately on recovery programs and projects. So far, Hafeez Sheikh has kept tight control over such spending, making him a deeply unpopular figure within his own party. He was more aware of his commitments to his creditors than of the demands of members of his party.
Increasingly now, there are signs that the government intends to try to renegotiate the terms of the Fund’s program.
Increasingly now, there are signs that the government intends to try to renegotiate the terms of the Fund program that Sheikh signed. However, it’s hard to imagine how this can be done, given that the board has approved the pledges and the first $ 500 million tranche against that approval has already been issued. Hammad Azhar said in his first press conference that the Fund deal could be reviewed while Imran Khan said at the launch of a UN report on Tuesday that he would seek a second IMF package .
It is not known what exactly these words mean. Is Hammad talking about the routine reviews that all IMF programs undergo as they are implemented? Or does he want to review the commitments before embarking on implementation? And by the second package, is Khan referring to another set of commitments under the existing program? Or does he intend to apply for another loan like the one they got last April when the Covid lockdowns began, the $ 1.4 billion from the quick finance mechanism that came without any strings attached? ?
Either way, it will be a big achievement if they manage to persuade the IMF to change the goals envisioned in Sheikh’s commitments to the IMF before he left. I cannot recall another time when the objectives of a Fund program were renegotiated so soon after the approval of the boards of directors and the disbursement of the tranche.
If they stick to their commitments, they will go down in history as the first government in at least a quarter of a century, if not more, to undertake an IMF-mandated adjustment twice in a single term. All previous governments have followed the same path: they come to power, find foreign exchange reserves depleted, turn to the IMF for emergency aid, implement a painful adjustment for one or two years (sometimes even three) , accumulate reserves and fiscal space. , then switch to election mode and spend a lot to try to shore up their electoral prospects, a move that again depletes reserves and worsens deficits.
No government has managed to get re-elected for at least the past three decades, which means that each government ends up leaving behind a depleted treasury and large deficits for its successor who then takes the same path. We have seen this story repeat itself since at least 1988, when our story of eternal return to the IMF began. What we have never seen, however, is that a government undertakes adjustment twice, much less engages in adjustment just as the shadows of the next election begin to loom.
It is hardly surprising that they are cold-eyed about the implementation of commitments made at the IMF by Sheikh. We do not know what these commitments are because the Fund had not, at the time of writing, published the program documents. Standard practice is for these documents to be released within a few days of board approval. But more than 10 business days have passed since the board’s approval on March 24, and there are still no signs of them so far. IMF says their operation has slowed down due to Covid-19 and the workload has accelerated due to ongoing spring meetings in Washington, but these began on April 5, over seven working days after approval by the board of directors. The delay in releasing program documents is puzzling to say the least.
On the other hand, if the government decides to renegotiate these commitments, it runs the risk of preparing the ground for a new balance of payments crisis within a year or two. Already, the budget deficit is expected to reach over 7%, and the trade deficit is growing faster than exports and remittances on a monthly basis. If they decide to pump growth in the next budget, as Hammad Azhar tweeted that they plan to do so, it will accelerate that and create new deficits again. In this case, this government could make history by being the first government to face two balance of payments crises in a single term.
It’s not an enviable crossroads they find themselves in right now, and how things play out with the IMF is critical to how the political scene will evolve.
The writer is a business and economics journalist.
Posted in Dawn on April 8, 2021
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