We are at that point in the International Monetary Fund (IMF) program that the government must now take some very difficult decisions in order to retain the Extended Fund Facility (EFF) and keep the fiscal space that it so desperately needs. Surely it realised during the year or so in the wilderness – when the bailout program was suspended – that the country is just not in a position to try and survive on its own at the moment. Therefore, even though Prime Minister Imran Khan resisted all sorts of pressure to raise taxes and power tariffs for many months, he had to cave in eventually to get the tap to run again. And now, with news headlines shouting about another Rs1.3 trillion hike in taxes committed to the IMF for the next budget, on top of increasing electricity rates by almost Rs5 per unit for the remainder of the current fiscal year, it is clear to see just how much pressure the government is under and, at the same time, how desperate it is for some hard reserves. It doesn’t take too much to realise that all this will not sit very well with the people or the business community, of course, so it is also beginning to make sense just why the new finance minister made controlling inflation his top priority very recently. The government seems to be trying to soften the blow that will now surely start to build and get much worse with the next year. These are very difficult decisions for the government. There is of course the desperate need to restructure almost everything about the economy, from expanding the revenue base to fine tuning gas tariffs and adjusting the petroleum levy. Yet setting unrealistic targets, which always happens when we’re working with the IMF, should be avoided. To expect the Federal Board of Revenue (FBR) to really collect Rs5.963 trillion in the next fiscal is clearly wishful thinking more than anything else. Such estimates lead to cutting down the development budget even before the document is prepared, making the most needed aspect of budget making the first casualty of pleasing the IMF. It ought to really worry policymakers, therefore, that under the agreement the government is bringing down the current year’s development program from Rs1.324 trillion to Rs1.169 trillion. But it’s not really as if the government has much of a choice at this time. When it has to subsidise and sell expensive electricity cheaply, it has to bear the deficit itself, which adds to the circular debt. The reserves position simply does not allow this practice, which is also present in the gas sector, to go on any longer. In fact the way previous governments entered into contracts with Independent Power Producers (IPPs) laid the foundation for this problem. So it’s basically a choice between continuing to milk reserves, grant subsidies and allowing the circular debt to skyrocket or taking the bull by the horns now, hiking tariffs and initiating reforms. The government is truly in a Catch-22 situation. The IMF program might bail it out of a very sticky fiscal situation, but it is unlikely to do the people or the business much good in the near term. They are already struggling with high inflation and input costs. All this will only add to their problems. But there is an important lesson in this. When you live beyond your means for too long as a country, then you have to bend over backwards to please your lenders even at the cost of the people’s interests for a while. Hopefully things will start to improve during the next fiscal year. *