The IMF has laid down stringent conditions of fiscal discipline for Pakistan.
News that Pakistan will receive a 39-month Extended Fund Arrangement for about $6 billion from the International Monetary Fund (IMF) - geek speak for a $6-billion loan deal - was met with a virtual bloodbath on the stock market yesterday, with the benchmark KSI 100 index shedding 816 points to close below the 34,000-mark for the first time in more than three years. It was no state secret that the country, which is facing "economic difficulty" according to the IMF, was in talks with international lenders including the IMF, World Bank and Asian Development Bank to bridge a $12-billion hole in its finances. Now, IMF offering to plug half of that should have, ideally, calmed market fears instead of resulting in a sea of red on the bourses (of the 314 shares listed on the Karachi Stock Exchange, 263 ended in the red yesterday while 13 remained unchanged).
So, what happened? The devil, usually, lies in the detail, and it certainly does in this case. The IMF has laid down stringent conditions of fiscal discipline for Pakistan, terms that will necessitate that the country imposes heavy taxes on consumers and slashes subsidy on utilities and fuel. These inflationary moves are expected to be rolled out as part of the upcoming budget announcement later this month (May 22), and thus the market panic. To be fair, the market's fears aren't completely unfounded. This will be Pakistan's 22nd loan since 1958 from the IMF alone, together amounting to more than $33 billion at current prices (including the latest one). While some of the past loans were actually bailouts, others were fund arrangements like the current one, extended with a view to stabilise Pakistan's economy and reduce the fiscal deficit.
The IMF's conditions this time are perhaps more stringent than in the past, but the fact that this short-term pain can lead to a stronger and prosperous financial future for the country would have been the primary reason for the government's acceptance of the terms. The Imran Khan administration should now ensure that the country doesn't end up squandering this package and pushes through the ambitious structural reforms agenda for a brighter future.