$7 billion IMF bailout falters as economy strains

The fundamental assumptions used to finalise the $7 billion deal with the International Monetary Fund (IMF) have gone haywire within a month of its approval, leaving the authorities concerned with an option either to renegotiate the package or keep suffocating the economy through more taxes.

Official statistics show that out of four key underlying assumptions for achieving the nearly Rs13 trillion tax target -– the economic growth rate, inflation, large-scale manufacturing and imports — three assumptions have already proven wrong by the end of the first quarter of the current fiscal year.

The federal government has also overly committed on behalf of the four provincial governments that, too, are struggling to meet their conditions soon after the deal became effective.

The official statistics for the first quarter (July-September) revealed that — from the Federal Board of Revenue’s tax collection target to provincial cash surpluses — everything has gone off the mark. Deputy Prime Minister Ishaq Dar has also publicly spoken against the market-determined exchange rate regime, which is another core objective of the $7 billion Extended Fund Facility.

The IMF is again pressuring Pakistan to let the rupee further devalue; although as per Dar’s views the rupee is already undervalued by at least 16%.

The IMF deal is facing serious implementation challenges even sooner than many had predicted, underscoring how badly it had been knitted by the negotiators from both sides. The Express Tribune had reported that Pakistan finalised a wrong deal with the IMF, which might soon derail.

The sources said that except for the GDP growth, which remains within the assumption range of 3%, the other three autonomous growth indicators – inflation, imports and large scale manufacturing – went off the mark in the first quarter.

As against the projected inflation rate of 12.9%, the average inflation in the first quarter remained at 9.2%.

The development comes amid the Ministry of Finance’s new inflation forecast for October. In its monthly outlook report, the finance ministry stated on Wednesday that “it is expected that inflation will remain within the range of 6-7% in October and further down to 5.5 – 6.5% by November”.

Nearly 17% import growth had been used for reaching out to Rs13 trillion tax target but the imports grew only 8% in the first quarter due to dampened demand. The large-scale manufacturing growth also remained at 1.3% in the first quarter as against the assumption of 3.5%.

The FBR has already sustained a Rs90 billion tax shortfall in the first quarter and an internal assessment showed that the tax shortfall may widen in the range of Rs350 billion to Rs400 billion by December this year.