Economic experts of Opposition parties fear that IMF will impose Egyptian model through Mr. Reza Baqir who overseen the implementation of the current IMF program in Egypt which was proved in November 2016 and will end later in 2019. However, the fear is not valid and Pakistan’s case is not acute like Egypt. The Egyptian program had two contours, that is, free float of currency and reduction in energy subsidies. By studying Egypt’s Economic Crisis it is revealed that they have controlled Exchange rate from a longer period and have acute shortage of foreign reserves whereas in case of Pakistan, Government already depreciated Pak Rupee by almost 30 % which resulted in Real Effective Exchange Rate around 100 where as in Egypt it was over 130 before IMF program installed, however free float condition of IMF can bring Dollar vs Pak Rupee to settle between Rs. 160 to Rs.165 by December 2019. Egypt had given huge subsidy on Petroleum products and energy whereas Pakistan has given no subsidy on petroleum however subsidies on Energy bills will be reduced gradually to check circular debt. Government showed its commitment to IMF about Circular Debt which will be reduced to 50 Billion Rupees by July 2020, therefore, Energy Sukuks are being issued. Unlike Egypt, Pakistan has more public institution to be privatized to generate funds therefore it seems that privatization process will gear up.
Tough conditions of IMF can be tackled through measures taken by government to counter each condition technically. This will not only help Pakistan to conclude IMF program successfully but can bring economic prosperity at the end of program which will help us never entering the same again unlike predecessors
On similarities, Government of Egypt is witnessing high rate of budget deficit and public debt which in case of Pakistan is no different. However present government from day one of assuming power trying to bring down these two factors but still a gap between revenues and expenditure is increasing rapidly where budget deficit to exceed 7% in Financial Year (FY) 2019. IMF has imposed condition on Government of Pakistan to increase tax revenue together with increasing gas and electricity tariffs. In this regard it is expected that the energy price will soar further by 25% which will bring inflation to double digit by FY 2020. Government of Pakistan is in talks of implementing unified Value Added Tax regime, single window tax collection, increase of taxes on fuel, mobile usage and to bring down income slab rates for salaried class. Moreover, further taxes on large corporates cannot be ruled out similar to Super Tax imposed by previous government. Furthermore, tax exemptions to the tune of Rs.700Billion to withdraw in next two years. This will increase tax revenue but will bring inflation while disposable income to reduce further, making more people under poverty line. Resultantly interest rate hike is very likely and perhaps discount rate may touches to 12 % in Year 2019. Further Economic slowdown is expected from IMF bailout in short run which bring down our GDP growth to near 2.9%.
Apart from negative outcome out of IMF program which will effect life of general public who voted PTI for Naya Pakistan, if IMF package may be proved, it will bring other financial institution on comfort level with Pakistan and in that case Pakistan would be able to fetch more loans from other international financial institutions like World Bank and Asian Development fund. It is expected that this IMF package to the tune of $ 7 Billion can attract around same amount from said financial institutions which will help Pakistan to tackle Balance Of Payment Crisis and to fuel economy. Pakistan has also experienced that whenever IMF package implemented, Stock Market performed well. Therefore it is expected PSX will move upward with a target range of 40,000-45,000 index, providing total return of 12%-26%. This will further strengthen the investor’s trust and investment will flow towards Large Corporates resulting a growth behaviour.
Pakistan if concludes IMF program will be able to control Tax collections and subsidy based segment of economy. More documentation of Economy will be observed and it will bring real value of economy upfront where Current Account Deficit will reduce to minimum and devaluation of currency will bring Trade Deficit down significantly. However, inflation and economic slowdown will disturb lives of general public which will result in disposable income to reduce together with increase in unemployment. To check this situation government need to focus on improving conditions of Small and Medium Enterprises and agriculture by promoting Made in Pakistan products at local and international level. Consumer preference of imported products to change through locally made substitutes by implementing better quality controls. Put all efforts not only to increase value added exports that will bring more margins in shape of better price but more international markets to explore by giving export targets to Foreign Embassies working abroad. Pakistan should not only make efforts to bring Foreign Direct Investment inflow through Multi-National companies (MNC) but to make its own MNC elsewhere in the world where Pakistani products can attract larger share due to its quality and uniqueness. Dams are very important to reduce energy cost in long run which will bring down tariff for general public and industries which otherwise would have been increased due to IMF program. It will also ensure availability of Water for agriculture purposes. Renewable energy sources other than water are also very important which includes Solar and Wind Power having no input cost. Tough conditions of IMF can be tackled through measures taken by government to counter each condition technically. This will not only help Pakistan to conclude IMF program successfully but can bring economic prosperity at the end of program which will help us never entering the same again unlike predecessors.
The writer is an Economist, Corporate Finance Specialist and a Chartered Banker UK