First and foremost, private sector activity is being compromised by high interest rates that increase the cost of borrowing, severe energy shortages and law and order problems that account for several profitable units' recent decision to relocate outside the country. In this context, a reduction in the rate of interest would undoubtedly fuel private sector borrowing, a long-standing demand of the sector.
However, the International Monetary Fund (IMF) is opposed to any decrease in the rate of interest as it argues that excess liquidity in the country needs to be mopped up which is mainly due to a massive rise in government expenditure through heavy borrowing domestically with external inflows drying up due to failure to implement the agreed economic reform agenda.
In the 29th November note on the IMF website it is disturbingly but accurately maintained that: "Monetary policy has accommodated large fiscal deficits. The SBP's direct lending to the government and provision of liquidity to facilitate bank purchases of government securities have accommodated higher deficits at the cost of higher inflation and currency depreciation. Citing declining inflation and weak investment, the SBP has also lowered its policy rate by a cumulative 200 basis points since July 2012... Financial stability risks exist. Banks' non-performing loans remain high at 15.9 percent at end-June 2012, and capital and liquidity indicators are being boosted by large holdings of government securities. At the same time, private sector credit growth remains subdued, with adverse consequences for growth".
Second, the dramatic rise in remittance income attributed to SBP's policy efforts is no longer considered sufficient to buttress our dwindling reserves to enable the scheduled repayment of around 700 million dollars under the stalled and later suspended (IMF) Stand-By Arrangement in the next two months. Thus in the event that the US does not extend the CSF on an emergent basis, Pakistan's options would be very limited. Pakistan-US relations, strained since the Salalah attack which killed 24 of our soldiers, have normalised in recent months which, according to analysts, implies greater US sensitivity to the government's economic needs.
However, while bilateral disbursements are shamelessly used as a leverage, the last disbursement by the US under CSF was made subsequent to the Nato goods transit agreement between the two countries, yet where cash disbursements are concerned bilaterals are increasingly looking to the IMF to determine whether the economy is embarked on a road to reform. Failure to get an IMF green signal usually leads to stalling of releases. For the IMF therefore to release the harsh note evaluating Pakistan's economic performance on its website at the same time that the economic team is in Washington DC to participate in the reactivated strategic dialogue with the US reflects a red flag as opposed to a green signal.
The composition of the economic team includes the Governor SBP whose focus is the monetary policy - a subject that is normally not within the purview of bilateral assistance. However, any agreement signed with multilaterals requires the active support of the Governor. This has led many to speculate that the team will also hold consultations with the IMF with the objective of seeking an extension of the repayment schedule till such a time as the CSF funds are released.
Others suggest that the government is likely to seek IMF assistance while still others maintain that the government is not likely to seek IMF support as it is gearing up for elections and therefore is unwilling to be held responsible for the harsh conditions that are almost a foregone conclusion. Whatever the way the wind blows the fact remains that without reforms that require immediate implementation the state of the economy would further deteriorate negatively impacting on indicators that matter to the common man namely inflation and unemployment.