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Default: last hour?

Negotiations with the IMF (International Monetary Fund) have entered the final round. The plans and proposals prepared by the government have been deemed inadequate. Now the IMF has come up with its nine tables on fiscal, energy, gross financing requirement, monetary and other areas. The government doesn’t have any option but to accept the IMF numbers, as all other options are exhausted. The IMF knows it alone holds the key for Pakistan to avoid default.

Until last week, the PDM (Pakistan Democratic Movement) government was living under the illusion that the way forward is to suppress Imran Khan (IK) and his party Pakistan Tehreek-e-Insaf (PTI). The rumor mills in Islamabad suggest that elections are going to be delayed in Punjab and KP. The political rhetoric of PML-N leadership is to do the same to IK and team of what the then government (PTI) did to its opposition. On the flip side, all lenders (whether friendly countries or the IMF) are demanding political consensus to steer the economy out of the crisis. And how can any consensus be evolved without agreeing to what IK is asking i.e., fresh elections. No political consensus can be achieved without engaging with the most popular political leader in the country.

According to a professional who has dealt with the IMF multiple times in the past, incompetency in dealing with the IMF hurts Pakistan’s case. It takes much more coordination and preparation to get the program right. He thinks incumbent finance minister Ishaq Dar has more experience of dealing with the IMF than other participants from the Pakistani side. Many political observers believe that Dar has lost his touch. This shows how bad the situation is in Islamabad.

The PDM government has no game-plan per se. Thus, the IMF’s proposals must be agreed to by signing on the dotted line. That is a remarkable shift in the finance ministry. Back when Miftah Ismail was still finance minister, Dar would call him to insist that you must take on the IMF head on. And later, Dar publicly exhibited similar sentiments after he became finance minister. Unsurprisingly, his statements did not bode well with the Fund and now Dar has no option but walk on an even narrower path from what could have been the case earlier.

And now, the PDM team is trying to pass its incompetence on to IK by insisting that a political consensus is required by the IMF and IK does not agree to it. There are certain priorities of the Fund. First is to agree on numbers and conclude technical review. Then it’s a policy review. Once these reviews are completed, political consensus comes into play. And only four working days are left to sign a deal, as the IMF team is flying back on Thursday night. At least, get the technical and policy reviews done and later bring IK back to the equation over the next two weeks.

Both the government and the establishment need to think through on what political consensus and clarity mean which key lenders are now demanding vociferously. The IMF wants an end to post-disbursement betrayal. There have been far too many incidents – all linked to politics; the first was when Hafeez Sheikh was replaced by Shaukat Tarin as IK wanted to have a high growth year with a plan to go in early election by December 2022 (18 months from the time Tarin joined). Second was at the time of VoNC (vote of no-confidence) when PTI overturned the agreement to avoid losing power. And now it’s Dar’s turn. Perhaps, it is the worst of all.

The IMF does not want this to continue. Sentiments of Saudi Arabia are similar. Why was this all happening? Why did IK ask Tarin for an expansionary budget to call for early elections by Dec 22? Why was VoNC executed? Why did PDM shy away from tough actions right away upon assuming office when the commodity super cycle was at its peak? All these questions must be probed. The government and other powers in the country need to think straight. They must call a spade a spade.

The blame game must end. Lately, an impression is gaining strength that the unsustainable economic situation has been created over the past 12-18 months. That is not true, as such crises are not created in such a small period. There are long-standing structural weaknesses, which are now being exposed. The inflection point has been reached, and is now blowing up. The traces of unsustainable policies are at least visible since 2007 – the last year of the Musharraf regime. Back then, the collapse began with political uncertainty, judicial activism, and media independence that took things too far.

Thereafter, there has been precious little good news on the economy to write home about. All stakeholders must share the blame. The judiciary must bear responsibility for not letting Steel Mills privatization deal and for the mess in the Reko Diq mining project. And since 2008, there has been no meaningful effort for privatization. There is no or little foreign direct investment in a true sense. There is a case of constant buildup of energy circular debt without any resolution. Even CPEC (China Pakistan Economic Corridor) was ill planned with low focus on Thar coal and railway lines. It was all about adding IPPs (independent power producers) on imported fuel and foreign loans without any consideration on how to pay them back. There have been no structural tax reforms. And the list goes on.

This all needs to be fixed. And the only silver lining is that the IMF and other lenders would force us to go that route. That may be painful in the nest 2-3 years; but if it is done right, it can take the economy out of this perpetual crisis. And to do so all stakeholders must limit themselves to their respective jurisdictions and have a government with a public mandate. There is a limit to short fixes. That era seems to be over.

Ali Khizar, "Default: last hour?," Business recorder. 2023-02-06.
Keywords: Economics , Economic change , Economic aspects , Economic Corridor , Default , Imran Khan , Ishaq Dar , PDM , VONC , CPEC

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