'Best anchor', 'encouraging': Economic experts weigh in on IMF programme revival

The International Monetary Fund’s (IMF) approval of the seventh and eighth reviews of Pakistan's bailout programme is nothing less than a lifeline for the cash-strapped nation, which is suffering from devastating floods which have inflicted damage of at least $10 billion.

The board allowed for a release of over $1.1 billion to Islamabad and also agreed to extend the programme by a year and increase the total funding by 720 million special drawing rights, or about $940 million as per the current exchange.

The country’s foreign exchange reserves have fallen to levels that cover only a month of imports and its economy is wrangled with a massive current account deficit and high inflation.

The go-ahead from the IMF board will open other multilateral and bilateral avenues of funding for Pakistan, which were awaiting a clean bill of health from the Washington-based lender.

When Geo.tv reached out to economic experts, they were of the view that the revival of the stalled programme will give a much-needed breather to the jittery markets.

‘Very difficult winter for Pakistan’

Shahrukh Wani, an economist at the University of Oxford, said the resumption of the IMF programme was "fundamental in achieving macroeconomic stability" for Pakistan's economy.

He said that IMF's debt combined with bilateral investment flows from the Middle East, debt rollover from China, and loans from multilateral agencies such as the World Bank will collectivity secure financing needs in the near term.

“This will provide some confidence to the markets,” he told Geo.tv, highlighting that Pakistan, however, remains incredibly economically fragile due to a combination of domestic factors, such as political instability, floods and low export potential, and external factors, such as energy prices.

He elaborated that for example, Pakistan must find the fiscal space to invest in the rehabilitation of the millions displaced due to floods while providing broader support as the cost of living continues to rise.

“Despite the IMF programme's resumption, it will likely remain a very difficult winter for Pakistan,” he maintained.

‘Favourable impact on market’

Terming the approval as “encouraging development”, Sustainable Development Policy Institute (SDPI) Deputy Executive Director Vaqar Ahmed said that this news will have a “favourable impact on the market”.

He mentioned three immediate relief outcomes, which include:

1. The pressure on the rupee, due to which it has been devaluing, will reduce in the next few days.

2. Other donors and developing partners, including the World Bank and Asian Development Bank, are now expected to resume their lending to Pakistan.

3. Bilateral partners, particularly gulf countries, wanted to invest in Pakistan in the medium term but they were waiting for IMF approval. So now their companies will be engaging with local companies for investment, particularly in the energy sector.

‘Pakistan should use this breather wisely’

“The IMF is the best anchor for Pakistan considering the balance of payment challenges as well as the uncomfortable position of $7.8 billion of SBP reserves, which could cover just a month of the country’s import,” Dr Khaqan Najeeb, former advisor to Ministry of Finance told Geo.tv.

He highlighted that the delay in reaching a staff-level agreement and the need to combine the seventh and eighth reviews have resulted in markets remaining jittery.

“This led to a disorderly movement of the rupee as well the rising of the rate on Pakistan's Euro bonds as well as a rise in the credit default swaps of Pakistan,” he recalled, adding that it is now hoped that the revival of the IMF programme will also funnel moneys from multilateral and bilateral partners as well as commercial loaning.

The economic expert elaborated that this would give a boost to the supply of dollars in the country as well as giving confidence to the jittery markets that the worst dollar credit crunch that Pakistan faced over the past couple of months is now over.

“One hopes that the markets would take solace and there would be more comfortable and more orderly movements in both domestic and international markets,” he maintained.

Dr Khaqan, however, added that it is most important for the leadership to use this breather “wisely” and undertake the necessary reforms to control the losses in the energy sector, employ a conservation strategy at the same time boost its agriculture production as the floods recede so that the inflationary path is managed through the supply side and the “economy is able to reach a softer landing in the coming months.”

He further added that it is also important to ask IMF for an adjuster for spending on relief and rescue efforts for the flood as well as some money under the rapid financing instrument available with the Fund which the country has previously also tapped for $1.4 billion.

'Special applause for Miftah'

Talking to Geo.tv, development economist Maha Rahman said the revival of the programme is a reassurance and a hard-fought moment for the federal government.

"The loan disbursement was approved at a time when floods have wreaked havoc across the country and Pakistan's financing needs are now much greater," she said.

The economist said that Finance Minister Miftah Ismail deserves "special applause" for persevering against all odds and hoped he could continue to do so as the government now steps up to implement the promises made now that the floods have massively added to the financial woes.

"The politics, both internal to the ruling party, and external needs to lend way to the IMF program's successful completion. Having said that, the government will need to fulfil the financing gap that has now arisen in light of the floods," Rahman added.

— Thumbnail and header image of the International Monetary Fund's logo seen inside the headquarters at the end of the IMF/World Bank annual meetings in Washington, US is a file photo taken from Reuters.