Daily Times

On the 18th of August, 2018, Imran Khan took the oath of office and promised to give the nation just about every good thing that it could imagine. The wish list included the construction of five million new homes within his first 100 days, discovering new tourist destinations, swiftly recovering $200 billion of looted wealth and creating 10 million new jobs during his first term. In other words, he would create an Islamic Welfare State.

Nine months into Imran’s tenure, none of these promises have been realized. Three months ago, the World Bank noted that leading economic indicators were suggesting that a contraction in demand had begun. “Large scale manufacturing, which accounts for 65 percent of overall industrial output, contracted by 2.3 percent between July-January FY19. In agriculture, four of the five major crops have witnessed a y-o-y decline in production, due to water shortages and a decline in production area. The exchange rate has continued to depreciate…[leading to] demand side pressures and higher fuel prices, inflationary pressures have increased, and average headline inflation reached 6.8 percent in the period between July 2018 and March 2019 [almost double the 3.8 percent number in the same period last year]…. Current Account Deficit (CAD) reached 3.3 percent of GDP in Jul-Feb FY19 compared to 3.7 percent in Jul-Feb FY18. Overall imports contracted by 1.6 percent (y-o-y) but exports also declined by 0.1 percent (y-o-y) in spite of the exchange rate depreciation…By mid-January international reserves had fallen to US$6.6 billion (or 1.3 months of imports). With short term financing from the Kingdom of Saudi Arabia, United Arab Emirates and China reserves increased to US$10.5 billion (or 2.0 months of imports) by end-March 2019. Meanwhile, the government continues to negotiate a support package with the International Monetary Fund. Large increases in debt servicing and defense expenditures resulted in higher fiscal deficit in H1-FY19 which reached 2.7 percent of GDP (compared to 2.2 percent in H1-FY18). The FY19 fiscal deficit is projected between 6.8-7.0 percent of GDP, a slippage of 2.7-2.9 percentage points compared to the budgeted target.”

It concluded, “Growth is projected to decelerate in FY19 and FY20, as the government tightens fiscal and monetary policies.”

In late April and early May, the International Monetary Fund (IMF) visited Pakistan and concluded: “Pakistan is facing a challenging economic environment, with lackluster growth, elevated inflation, high indebtedness, and a weak external position… Decisive policies and reforms, together with significant external financing are necessary to reduce vulnerabilities faster, increase confidence, and put the economy back on a sustainable growth path, with stronger private sector activity and job creation.” IMF has agreed in theory to provide a three-year Extended Fund Facility in the amount of $6 billion over three fiscal years, beginning with FY20 and running through FY22.

Economist Kaisar Bengali, said that the IMF has a single point agenda in Pakistan, and that is to privatize all the assets which will lead to large-scale unemployment

Just about all the nation’s leading economists have criticized the IMF loan. S Akbar Zaidi, author of the leading text on the economy of Pakistan, said that this was the worst IMF program Pakistan has ever signed. Adding that all IMF programs are bad, he noted: “This is the worst.”

Another economist of note, Kaisar Bengali, said that the IMF has a single point agenda in Pakistan, and that is to privatize all the assets which will lead to large-scale unemployment. Dr. Bengali added that the World Bank and the IMF are now in total control of Pakistan’s economy. He said that the finance minister, Dr. Hafeez Shaikh, was being obstinate “because he knows he is just answerable to Washington.” He said the economy is failing because non-productive expenditures, such as the creation of a ministry of national reconciliation, have reached unprecedented heights.

Equally critical was Dr. Ashfaque Khan. Since interest payments and defense expenditures cannot be cut, the axe of spending will fall on developmental expenditures. Dr. Khan added that the IMF program will bring more harm than good to the economy. Echoing Dr. Bengali’s sentiments, he said the international financial institutions are in total control. He said there was a serious conflict of interest since Pakistan’s economic team was drawn from the same institutions with which it was getting the loans.

What will be the specific impact of the IMF loan on Pakistan? Dr. Hafiz Pasha, Shahid Kardar and Muhammad Imran (PKI henceforth) have answered that question in a recent paper. Their prognostications, all grim, are based on simulations with the author’s macro-econometric model of Pakistan.

PKI say that the over-arching goal of the IMF program is to lower the budget and trade deficits. The IMF program, will provide $6 billion to Pakistan over three years, beginning in FY20 and running through FY22.

But before the money will be provided, several pre-conditions will have to be met. In particular, loan payments due to China, Saudi Arabia and the UAE will need to be rescheduled. PKI estimate that these liabilities amount to $18 billion over two years.

Once the IMF provides the loan, it will require that the budget deficit, currently at 2% of GDP, be reduced sharply. It should fall to 0.6% in the first year of the program. In the second year, it should turn intoa surplus. In the third year, that surplus has to amount to nearly 1% of GDP.

The other requirement is a reduction in the current account deficit, which currently stands at $19 billion, or 6.1% of GDP. It will need to be lowered to under 2% in the next three fiscal years.

PKI project the following impacts of the IMF loan. The investment rate was 16.4% of GDP in FY18. It is expected to fall to 15% in FY19 and to further drop to 14.5% in FY20.

Inflation, which was 3.9% in FY18and is currently estimated at 8.2% and could reach double digits — 16% — in FY20.

The number of people below the poverty line will rise by 9 million and the number of unemployed will rise by 51% between FY19 and FY20.The unemployment rate in FY21 will be just under 8%. This contrasts with PTI’s promise of creating 2 million jobs annually for a total of 10 million in five years.

When all is said and down, Pakistan’s GDP measured in dollar terms will display negative growth in FYs18-20.

Such a bleak outcome will contrast sharply with the progress achieved under the previous government. Of course, these are just model projections. But what happens if they are realized? The PTI will be dealt a body blow. Those who installed Imran in office will begin looking for a scapegoat.

The writer can be reached at ahmadfaruqui@gmail.com