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EditorialIf no IMF review…

If no IMF review…

It is critically necessary to complete the ninth review of the IMF programme to release the following tranche of roughly $1.1 billion as prospects of help from friendly Saudi Arabia are bleak. Mohammed al-Jadaan, Saudi finance minister, says that the kingdom’s support depends on its alignment with multilateral organisations and the completion of necessary investment and fiscal reforms. The message is clear: there is no free lunch anymore. The onus is squarely on the shoulders of policymakers to enact credible reforms that will result in long-term macroeconomic stability.

According to the governor of the State Bank of Pakistan, dollars will begin to arrive next week. Our foreign exchange reserves have fallen to $4.3 billion as of January 6, or less than the equivalent of a month’s imports. In these difficult circumstances, the government is fixated on pegging the currency’s value, while the coalition government is trying not to be distressed after the dissolution of the provincial assemblies of Punjab and Khyber Pakhtunkhwa, as well as the upcoming elections scheduled for the next 90 days.

It is not just the currency value and depleting reserves; large manufacturing units, such as car assemblers, pharmaceutical companies, textile exporters, and a slew of other large and small firms, are facing a partial or entire shutdown. The inflation rate, which is now at 24.5 percent, shows no signs of abating, and necessities such as medical supplies are running out. According to the most recent Pakistan Bureau of Statistics data, inflationary pressures are increasing. This time, it is being driven less by the global commodity supercycle and more by supply chain constraints caused by the currency’s artificial peg and the resulting shortage of foreign exchange to purchase inputs for production.

Amid the storm of problems, the government must take necessary measures to meet IMF pledges aimed at implementing such reforms. While the government often says to follow through on their commitments, it has so far refrained from taking concrete steps to assure the review’s conclusion. This could be because it would further diminish the ruling coalition’s political capital at a time when provincial assembly elections are scheduled to take place within the next three months.

The inaction increases the possibility of a disorderly default during the next 6 to 12 months. At a time when Pakistan’s access to foreign credit markets is virtually closed, officials should ideally allow the currency rate to fluctuate and raise policy rates to limit consumption and generate the necessary savings to service the external debt. Alternatively, the government can approach creditors and launch a debt restructuring procedure. This will be at the expense of meeting extra conditions agreed to by the creditors, who will shoulder the cost of restructuring. No doubt that debt restructuring causes significant economic hardship and would result in sluggish economic growth in the near to mid-term and necessitate deeper and more extensive structural reforms than the existing IMF programme. The country has to make some difficult decisions, but delaying making any would raise the expense of all of them.

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