Negotiations with IMF


We are in the midst of negotiating an IMF deal, which is intimately tied to this country’s survival. Our reserves have dipped to historic lows, the rupee continues to deteriorate by the day and inflation has skyrocketed beyond all reasonable proportions-it is safe to say that we no longer have the bargaining power to rewrite the IMF’s rules to appease our own needs. Raising the price of petrol only to issue a fuel subsidy days later is a sign that the government doesn’t know what it wants.
Negotiations with the IMF have dragged on for months now against a backdrop of an increasingly restless public that demands answers. For each step taken in the right direction, we appear to take three backwards. Just last year, Khan’s government made the incredible misstep of introducing a 1.5 million fuel subsidy, confident that it could defend its decisions in front of the IMF. Unpredictably, this backfired. Despite making substantial progress towards our policy commitments this year, Sharif’s failure to consult the IMF will likely delay a final staff-level agreement even further.
Our policymakers lack the capacity to see the bigger picture-while increases in prices for basic commodities have made life difficult for lower-income communities for the time being, the reform of price subsidies is ultimately necessary to improve economic efficiency and more crucially, facilitate pro-poor economic growth.
In fact, a one-time adjustment of prices to eliminate subsidies can yield immediate budget savings and quickly correct distortions in resource allocation compared to a gradual phasing out of subsidies that may actually end up receiving more public opposition because it feels endless. This does not mean that we should neglect the poor altogether-it is absolutely crucial to compensate lower-income groups for the elimination of subsidies, a job that is typically handed to social protection instruments that Pakistan famously lacks.
Instead of introducing new subsidies, the government should look towards creating a social safety net for those worst affected by the loss of subsidies-targeted cash transfers, for instance, might be a good option during this time. It is more crucial than ever before to think long-term and establish institutions that can protect vulnerable groups amid all the brutal belt-tightening measures we’ve seen this year.