Tough Times Ahead

After derailment of four arrangements with the International Monetary Fund in the last decade, Pakistan is in the process of negotiating another balance of payments support programme with the Fund. Until the conclusion and approval by the IMF Board of such a programme, assistance from the World Bank, Asian Development Bank and Islamic Development Bank-led consortium will remain suspended or closed. Donor assistance is, therefore, contingent on the outcome of the present round of talks with the IMF. Both the stocks and currency markets have very little chance of coming out of depression without a new IMF-led programme. Officials also hope this bailout package will help revive market confidence.

Facing a $ 4.9 billion current account deficit, Pakistan appears to want a new assistance larger than the last $ 1.6 billion facility with the IMF. As this will not be able to cover the gap, some kind of debt-rescheduling is the key concession Pakistan is seeking from international lenders. However any bailout package is unlikely unless Pakistan agrees to new conditionalities which will most likely be tougher than before. Already the IMF insists on a uniform exchange rate; local currency will have to be adjusted according to prevailing economic conditions. This in turn means devaluation. Broadening of the tax base and full implementation of the general sales tax at retail level are other areas where IMF insistence is well known and its emphasis well placed. It is also calling for revision of user charges and an end to the long-standing controversy with the independent power producers.

In the meantime, the country's efforts to reduce the trade deficit are coming to naught in view of large scale over-invoicing of imports and under-invoicing of exports. An unprecedented spread between the official and open market dollar-rupee rate stands in the way of reducing nearly $ 2 billion trade deficit. A new arrangement with the Fund or other lenders may provide some breathing space for putting together a sustainable bailout strategy. But the country's economic managers have so far only been talking about it and not yet spelt this out in detail. What is clear is that there is going to be no free lunch and officials needed to prepare themselves before they can prepare the public for the tough times ahead.

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