Whispers of the latest disbursement of the IMF package to Pakistan can be heard in Islamabad as the International Monetary Fund (IMF) plans to release $1.1 billion to the cash-strapped nation on September 30.
But what does this mean for the economy and, more importantly, the Rupee?
To figure that out, we must consider the historical relationship between IMF loan programs and the value of the PKR alongside other economic indicators.
The release of IMF funds signals the commitment of the country to IMF-stipulated reforms and financial stability. This will boost investor confidence as they will know Pakistan is committed to maintaining fiscal discipline and policy stability. The PKR, as a result, will appreciate as financial capital inflows to the country will rise.
With the availability of these funds, the State Bank of Pakistan (SBP) can partake in open market operations to artificially increase the value of the PKR. The SBP can buy PKR in circulation using the freshly gained foreign exchange reserves.
This move is likely to reduce inflation in the short term as well, leading to everyone breathing a much-needed sigh of relief because, as per the Finance Division of the Government of Pakistan, the Consumer Price Index inflation rate sits at an uneasy 26 per cent for July-April FY 2024.
As far as inflation is concerned, the IMF-mandated fiscal discipline will lead the government to take austerity measures. To put it simply, government expenditures will be slashed while taxation will increase.
The government is likely to want to retain the IMF’s goodwill to guarantee the disbursement of the remaining $5.9 Billion. These austerity measures will reduce consumer demand for goods and services, resulting in a decline in the inflation rate, thus easing inflationary pressures plaguing the economy.
While reduced government expenditure will result in a fall in the GDP growth rate initially, it’s not all doom and gloom.
The fall in government expenditures should help private investors, as the financial scale of Government projects will shrink, causing interest rates to decline.
This is true for two reasons.
Firstly, the government often borrows money from local banks at exorbitant rates, putting upward pressure on the interest rates. This crowds out private investments as investors are not keen to borrow money at high interest rates. If the government ceases to borrow money from local banks, interest rates are expected to decline.
Secondly, the decline in government expenditures will reduce inflation that was previously caused by expansionary fiscal policy. This will allow the SBP to target a lower interest rate, as inflation will be lower.
The main question for the curious reader, however, should be whether Pakistan is likely to ever get out of its debt problems.
Having spent the past 22 out of 30 years in bailout programs, Nadeem ul Haque doesn’t think so, as he called Pakistan an IMF addict. Prime Minister Shehbaz Sharif has, nonetheless, expressed hope and enthusiasm despite the quagmire the economy finds itself in.
“God willing, this will be Pakistan’s last IMF Programme,” he has claimed.
