IMF calls for Pakistan to make further power price hikes

KARACHI: Following an International Monetary Fund (IMF) report painting a bleak picture of Pakistan’s economy, the government finds itself torn between the IMF’s demands for a further increase in prices for gas and power, the domestic unrest that will likely arise as a result of meeting those demands, and the economic cost of not receiving the IMF’s bailout package, with Pakistan needing billions of dollars to service its external debt. 
“Pakistan is facing an increasingly difficult economic situation, with high fiscal and current account deficits, and low international reserves. This mostly reflects the legacy of an overvalued exchange rate, loose fiscal policy and accommodative monetary policy,” said Harald Finger, head of the IMF staff mission that visited Islamabad from September 27 to October 4, in a statement issued on Friday.
The IMF mission head said that a rapid increase in international oil prices, normalization of US monetary policy, and tightening financial conditions for emerging markets are adding to this difficult picture, suggesting that, as a result, economic growth will likely slow significantly, and inflation will rise.
Finger said: “The team welcomes the policy measures implemented since last December. These include 18 percent cumulative depreciation of the rupee, interest rate increases of cumulatively 275 bps, fiscal consolidation through the budget supplement proposed by the minister of finance, a large increase in gas tariffs closer to cost-recovery levels, and the proposed increase in electricity tariffs.
“Policies should include more exchange-rate flexibility and monetary policy tightening, further fiscal adjustment anchored in a medium-term consolidation strategy, and strengthening the performance of key public enterprises together with further increases in gas and power tariffs,” he continued.
Following the IMF statement, the Pakistan Stock Exchange reacted negatively with the benchmark KSE 100 index nose-diving by 860 points due to slow decision-making on the part of government and a drastic drop in the country’s foreign exchange reserves, which decreased to $8.2 billion.
Senior analyst Ahsan Mehanti told Arab News, “Stock fell sharply on investor fears amid a weekly fall in foreign exchange reserves of $627 million and dismal earnings outlook after the IMF end-of-mission statement, which called for policy measures including a further hike in gas and power tariffs and significant external financing”.
“Slow decision-making (about whether to accept the IMF’s bailout package) is the biggest concern of the market, because delaying the inevitable has its own cost,” Muhammad Sohail, senior equity analyst and CEO of Topline Securities, explained.
“The government is still trying hard to avoid the IMF, due to its harsh terms and conditions, but if, as a last resort, the government goes to the fund, we will have to face political fallout,” Senator Mohsin Aziz, PTI member of the Senate Committee on Finance, Revenue and Economic Affairs, told Arab News.
Professor Hassan Askari, a senior political analyst, said: “If the government goes to the IMF it will be subjected to lot of harsh criticism at home because so far the PTI has been staunchly opposed to the IMF program.”
Former finance minister Dr. Salman Shah said: “If they do not go to the IMF they will be in trouble, and delaying it will come with a certain cost. But If they do go to the IMF, people will have to face inflationary pressure, in which case they may shift some of the blame on to the shoulders of the previous government (as is the norm in Pakistan’s politics).”
As experts forecast another wave of inflation, the IMF advocates protection of some of the more-vulnerable segments of society through the Benazir Income Support Program.
Junaid Esmail Makda, president of the Karachi Chamber of Commerce and Industry,said: “An increase in gas tariffs will ultimately result in (increasing) inflation, which will terribly affect the lives of the poor.”
Senator Mohsin Aziz said: “In the post-IMF program period, the government would try to increase its revenue income so that vulnerable people and sectors could be compensated through subsidies and other means.”
Though no official was available to comment on the decision to approach the IMF, local media reported that the team negotiating with the IMF mission has told Prime Minister Imran Khan that the IMF bailout package is “the only viable option” and the PM is expected to give his consent within days.