The argument for and against the IMF loan
That the prime minister shall sign the Letter of Intent (LOI), is one of eight key conditions that the International Monetary Fund (IMF) has set out for the next bailout for Pakistan. The current round of talks is set to close on Wednesday with the IMF set to offer between $4.5 billion to $5 billion to the Pakistan government to “balance its books.” The amount already appears excessive for a government committed to the slogan of “austerity” and “breaking the begging bowl.” The IMF has believed none of the current governments sloganeering after Finance Minister Ishaq Dar admitted that the government would need another loan to cover the budget deficit – and it would have to take its “option of last resort” i.e. the IMF. The IMF itself appears not to trust the Pakistani government too much – and therefore is insisting that Prime Minister Nawaz Sharif take full responsibility of implementing the conditions of the loan, instead of the finance minister or governor of the State Bank of Pakistan (SBP).
The critical days are Tuesday and Wednesday with regards to whether an agreement will be reached, with the IMF mission set to leave Islamabad on Wednesday. The IMF’s conditionalities are divided into two main sectors: the taxation side and energy. The IMF is also set to press upon Islamabad to jack up the discount rates in the months ahead, a move that goes against the logic proposed by the SBP. While the IMF has criticised the SBP’s monetary policy and asked it to increase interest rates to lure foreign inflows, the SBP Governor Yaseen Anwar has been reported to have told the IMF that “normal economic theories did not apply in the case of Pakistan” due to non-economic factors such as terrorist attacks and law and order situation which were keeping out foreign portfolio investment in the country.
The SBP’s argument is that a lower discount/interest rate keeps inflation in check, while the IMF appears not to care about inflation. The IMF itself appears to be offering similar conditions to those presented to Greece, where it has admitted “failure.” Nonetheless, the fact is that the government is in a financial crunch and does need an influx of funds to balance the budget. The question is: why can the response not be taxes for the rich? Surely, had the budget included measures to bring the rich into the tax net, increased the tax on the blooming real estate market and taxed rich agriculturalists, the budget deficit could have been brought down to the targeted 4.5 percent. And surely the SBP is right when it says Pakistan is not an “ideal economy” for the IMF to be presenting textbook formulas. The ball now appears to be in the court of Finance Minister Ishaq Dar and Prime Minister Nawaz Sharif. Whatever they decide shall define the legacy of their term.