The deal with the International Monetary Fund (IMF) was expected to ease market jitters and pave the way for a climate conducive to productivity and growth. The first reaction of the stock market to the deal announced on Sunday by the Advisor to the Prime Minister on Finance Dr Hafeez Sheikh on state-run television was positive however later the market plunged by around 900 points raising questions about the deal. The question is why?
The stock market's first reaction was based on the deal finally being signed after eight-and-a-half months of dithering by the government. The U-turn by the market was when it realized that the state-run television did not ask the right questions and, as a consequence, many critical questions remained unanswered. Dr Hafeez Sheikh stated a 12 billion dollar financing gap in meeting our debt obligations for next year - obligations that include repayment of previous multilateral/bilateral and commercial loans as well as debt equity acquired through issuance of sukuk/Eurobonds. However, the proposed IMF loan is 6 billion dollars for 39 months and even if the Fund has agreed to frontload the loan by releasing 50 percent in the first year, or 3 billion dollars, with as per Dr Sheikh, another 2 to 3 billion dollars expected from World Bank and Asian Development Bank over the package period, assuming he succeeds in getting the higher amount, the disbursement in year 1 of the IMF programme would be 1 to 1.5 billion dollars, there would still be a yawning gap of about 8 billion dollars. This amount is more than 60 percent of the gap and the Finance Ministry needs to take the public into confidence as to the source of possible funds which would bridge this gap.
The IMF extended the loan as per Pakistan's remaining quota: with 5.8 billion dollar repayment due to the Fund 6.2 billion dollars was all that the Fund could extend to Pakistan given our quota of 12 billion dollars. The advantage of going on the Fund programme even though Pakistan will have to rely on other sources is two-fold: (i) it would release around 2 to 3 billion dollar programme lending from the World Bank and ADB, multilaterals that would not commit any programme lending (though project support may continue) unless we are on a Fund programme. The Advisor did not mention the Islamic Development Bank and one would assume that perhaps another half a million dollars maybe generated from that source; and (ii) issuing sukuk/Eurobonds would be at a lower rate of interest than if Pakistan was not on a Fund programme. Both these sources of funding would increase our debt which has to be repaid though the repayment period maybe staggered over three years.
Be that as it may, the government is clearly relying on other sources of dollar earnings. The amnesty scheme is projected to generate over 250 billion rupees, 1.7 billion dollars at today's exchange rate - an amount that appears to be grossly over-optimistic based on the experiences of past amnesty schemes. On 31 January 2019, Prime Minister Imran Khan launched Pakistan Banao Certificates with three- and five-year maturity period with 6.25 and 6.75 percent rate of return, respectively, with minimum investment of 5000 dollars and no upper limit. The rates are better than what are available in other countries, however so far the outcome has not met the Prime Minister's expectations, with his close associates maintaining that this may be due to the then finance minister Asad Umar not proactively marketing the product - a factor in his eventual removal.
The most optimistic estimates would still give a foreign currency shortfall of around 5 billion dollars which is perhaps the reason for the continued jitters in the stock market.
The IMF website indicates that an agreement to bring down the primary deficit to 0.6 percent of GDP has been reached, with the current government estimates at 1.9 percent. The total GDP at market prices (provisional) as per the State Bank of Pakistan website for 2017-18 was around 34.397 trillion rupees and the projected growth rate for this year is, as per IMF projections, 2.9 percent or around 1,000 trillion rupees additional. This would imply a slowing down of the growth rate with negative repercussions on taxes collected as well as on reducing employment opportunities. Additionally, the agreed contractionary monetary policy would further slow down growth.
To conclude, the sacrifices that would have to be made by the general public may be too steep for the government to bear politically. One would only hope that the budget for next fiscal year envisages sacrifices not only by the rich in the private sector, as stated by the Advisor to the Prime Minister on Finance, but also by powerful state institutions that are the major recipients of budget allocations.