The IMF Board’s approval of the next tranche of its $6 billion Extended Fund Facility to Pakistan has been received by the government as a cause of celebration, even though there are still some conditions which will be met before the review for the next tranche. The preconditions for this tranche were the passage of a mini-budget raising Rs 500 billion in taxes by ending sales tax exemptions, and of an amendment to the State Bank of Pakistan law giving it greater autonomy. Apart from other preconditions, such as a power tariff hike, the government managed to get those measures passed, and obtained the tranche, though its conditions for upcoming tranches are already onerous. It might be remembered that this tranche will go to paying previous loans before any celebrations, not for any development project.
There is a requirement that the country build its foreign exchange reserves to $5 billion by June. With the current account deficit likely to worsen, it seems out of the question that this will be possible without borrowing, which explains the anxiety of the government about Prime Minister Imran Khan being expected to go to China and borrow that money, as if China is expected to meet any need Pakistan has for forex. Also, if the current account deficit does not stabilize, the rupee’s value will decline. This will add to the pressure the middle class faces from inflation. As the IMF wants additional increases in the power tariff, that pressure will increase. As if it is not hard enough to make a budget on existing income, that income will decline when income tax exemptions are brought to an end.
Apart from the access that Pakistan will get to other borrowers, it is difficult to see how Pakistan really benefits. The real solution does not really lie in anything but increasing foreign-exchange producing activities, like remittances or exports, rather than merely borrowing more. Pakistan is approaching the crisis point with which even the IMF will not be able to help.
