IMF report

The IMF staff report on the seventh and eights review of the Extended Fund Facility (EFF) afforded to Pakistan and its accompanying documents are important publications in that they record and present in one convenient package the state of play. Much of the information covered by the dossier is already public knowledge. However, while purportedly an authoritative document on the state and prospects of Pakistan’s economy, the dossier inexplicably fails to mention even in passing the biblical cataclysm that Pakistan is still experiencing in the shape of monsoon flooding. This is especially inexplicable because the tragedy was already unfolding in the country when the core of the dossier – the staff report itself – was completed on August 16, 2022.

On the other hand, the report does put on record Pakistan’s exact position – as of before the flooding – as well as the Fund staff’s appraisal and policy discussion. It surfaces in clinical detail how the policy slippages by the previous government left the economy in an unenviable shape; it bears repeating that Pakistan’s economy was a train-wreck in slow motion when the incumbent government took over. The report also documents how meticulous and driven the incumbent government has been since it assumed control.

The report speaks of a need for broad-based action to “(i) reinforce fiscal discipline by mobilizing revenues and controlling current spending to strengthen debt sustainability and make space for more infrastructure and social spending; (ii) reduce inflation through an appropriate monetary policy stance; (iii) maintain the market-determined exchange rate and rebuild external buffers; (iv) restore the financial viability of the energy sector; and (v) advance structural reforms, including by resolving problem banks and improving monetary policy transmission.” And yet it fails to take into account the climate disaster that has hit Pakistan. It fails to see the economic impact of the catastrophe which left a third of the country under water at one point. It also fails to see that the floods are still surging, not receding in the lower Indus plain.

What it does take into account is important too: the war in Ukraine and the Russian gas blockade of Europe. The spiral of conflict in that theatre continues to send strong inflationary waves Pakistan’s way – sending oil prices soaring and all but pricing LNG out of Islamabad’s reach. Also covered are the repercussions Pakistan suffered from the Covid-19 global pandemic. However, given that the report already identifies social unrest as a source of risk because of widespread social discontent and political instability as well as rising and volatile food and energy prices, it is easy to imagine how much this risk has increased given that the flooding has shaven off nearly a quarter off of the country’s agricultural sector. The floods have washed away food stores and standing crops and disrupted the supply chains at a time when inflation is already at a historic high level. More spending is unavoidable on relief and rehabilitation of the flood survivors as well as on the social safety nets for the vulnerable population in general in the face of high inflation. Food imports have become indispensable and reconstruction needs will require funds, inevitably subjecting the economy to unprecedented inflationary pressures and fiscal burdens. One would have expected the Fund to at least moot the idea of a supplementary funding facility – of say a billion dollars spread over two years – to help Pakistan weather this perfect storm, but sadly, that was not to happen.

Here's hoping that the Fund still has time to realize that as of September 2022, Pakistan’s economic lot simply cannot be evaluated without taking the flooding disaster into account, especially because the crux of the problem boils down to global warming and climate change. Pakistan may be a good candidate for debt suspension in the vein of the Debt Service Suspension Initiative (DSSI) instituted to help the less affluent and highly indebted nations weather the Covid-19 pandemic. It is a foregone conclusion that the government cannot humanly stick to the tight fiscal management baked into the current fiscal year’s budget and any departures from the agreed plan should be by mutual and prior consent. In particular, Pakistan must remain committed to instituting the structural reform necessary to turn around its economy. Unless we succeed on that count, everything will be an exercise in futility.