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IMF, inflation, debt: Economic woes loom large over poll day

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Pakistanis will head to the polls on Thursday (today) to elect a new government, amid a looming economic crisis that experts say requires urgent and tough measures.

The next administration will have to deal with a range of challenges, including securing a fresh bailout from the International Monetary Fund (IMF), reprofiling debt, reining in inflation, and implementing tough structural reforms.

When comparing the performance of the three major political parties throughout their most recent terms, it can be seen that Pakistan Muslim League-Nawaz (PML-N) and Pakistan Tehreek-e-Insaf (PTI) have outperformed Pakistan Peoples Party (PPP) on key economic indices. This is also supported by a recent Bloomberg analysis, which shows that PML-N has a superior track record of handling the economy compared with PTI and PPP.

According to the results of another survey, Pakistani finance specialists believe that the jailed former Prime Minister Imran Khan is the best option to manage the country’s cash-strapped economy’s recovery. Khan’s rival Nawaz Sharif came in second and Bilawal Bhutto Zardari in third.

Investors are more curious about whether the new government will form a weak coalition or obtain a majority, rather than who will win the election. No matter which political party wins power in Pakistan, people want fixing the economy should be its top priority.

“A smooth transfer of power to an elected government will help overcome concerns of bilateral and multilateral lenders, including the IMF, at a time when Pakistan is facing a severe external debt repayment challenge,” said Topline Securities in a report issued last month.

“We think that in case one party gets 50 percent plus seats that will definitely boost investors’ confidence and markets will react positively. This will also give a positive signal to the IMF and other lenders,” it said.

“On the contrary, a coalition government with the support of smaller parties will remain fragile and may struggle to implement the much-needed economic reforms,” it added.

Apart from skyrocketing inflation, the new government will have to deal with an economy that is struggling with, sluggish growth, falling foreign exchange reserves, a weakening currency, and rising repayments of external debt.

Negotiating New IMF Programme

With a last-minute $3 billion bailout package from the IMF, Pakistan barely avoided sovereign default in July 2023. However, the lender’s support expires in March.

“The economic issues faced by the incoming government in the short-term are of course to ensure the nascent macroeconomic stability strengthened by gliding into a new IMF programme after completing the current programme. That would be the biggest short-term challenge,” said Dr Khaqan Najeeb, a former finance ministry advisor.

The CEO of the Pakistan Business Council, Ehsan A. Malik, stated that the next government needs to prioritise suffering before prosperity.

In the first two to three years of its mandate, make the difficult decisions, swallow the bitter pills, and carry out reforms. Then, in the last two years, enjoy the fruits of your efforts while you prepare for the next election.

“It [the new government] must immediately secure IMF’s continued support through a longer and larger Extended Fund Facility (EFF),” Malik said.

“The 24th IMF Programme, needs to be more reform-centric and the government must not lose time in negotiating it,” he added.

In the past, IMF has set front-loaded targets, which have failed to address the fundamental flaws in the economy. For example, tax targets are met by taxing the already taxed, instead of broadening the tax base, he noted.

Also, the IMF’s prescription of higher energy tariffs to manage the circular debt addresses the symptoms rather than the fundamental flaws of excess generation capacity, transmission gaps, transmission and distribution losses, theft, and under-recovery, Malik said.

According to analysts at Topline Securities, investors will be eager to watch the finance team of the next government given the unsatisfactory experience with the PML-N nominated finance minister in the last opposition-led government of the Pakistan Democratic Movement (PDM).

To finalise a new IMF programme that calls for numerous difficult reforms, the new government and its finance minister can play a big role in negotiations with friendly nations over debt rollover and debt re-profiles. Debt profiling

Pakistan’s debt reprofiling is another big challenge for the incoming government, according to Najeeb.

“How do you make the $25 billion next three-year payment more sustainable,” he said.

“Pakistan’s debt may be sustainable if the right adjustments are made and the debt reprofiling requires Pakistan to be talking to its bilateral partners and its friendly countries about how the rollovers could be changed on the maturity side and then ensuring enough projects so the multilateral flows are improved.”

Malik says there are no home-grown remedies that can assure forex solvency. “In that regard, external debt will need to be reprofiled concurrently with the new IMF programme,” he said.

“There is a funding gap of $6.5 billion for FY24 and of $25-28 billion for debt maturing in each of the following two years. The government must also avoid adventurism in exchange rate management. Exchange rates must remain realistic,” Malik said.

Countering inflation and fiscal prudence

With record-high interest rates having a bigger impact on living expenses fuelled by rising energy prices and a declining value of the rupee, Pakistan’s inflation rate decreased in January. The country still has the fastest inflation rate in Asia, though.

Consumer prices clocked in at 28.34 percent in January, compared with 29.66 percent in the previous month.

“Any new government will need to take on the challenge of countering inflation. This will entail tighter fiscal prudence, cut in non-development expenditure,” Malik said.

“The resulting reduction in borrowing and the likely cut in policy rate would assist in managing the fiscal account,” Malik added.

“The Programme will also call for stemming leakages on account of losses of the state-owned enterprises and energy circular debt.”

Party manifestos are shy on privatisation. The preferred route of parties is restructuring but even in public/private partnership mode, this will take a long time, according to Malik.

Najeeb thinks that formulating a budget that exhibits some reforms,

particularly in the area of expenditure reforms, will be a greater challenge for the new government.

From there, of course, the problems are deeper, involving the National Finance Commission (NFC) review and reducing the fiscal deficit over the years to a much more manageable level—from roughly 7.5 percent to 3.5 percent on a sustainable basis.

“I think these will be the more fundamental issues that the economy has to overcome so that the fiscal becomes sustainable as that would put macro stability on a path where we can start seeing the banks’ lending move away from the public sector to the private sector and we can get some growth going in the economy,” Najeeb said.

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