Balancing Act: Pakistan's Budget Dilemma with the IMF

The relationship between Pakistan and the International Monetary Fund (IMF) has a long history of back-and-forth. Recently, both sides have exchanged statements that need to be understood in the context of appeasing their respective audiences.

The IMF's Mission Chief to Pakistan, Nathan Porter, made a statement acknowledging recent political developments in the country. While the IMF typically avoids commenting on domestic politics, Porter expressed hope for a peaceful resolution in line with the constitution and rule of law.

However, this statement from the IMF serves little purpose and may even hinder the goal of getting the IMF program back on track. Given the government's existing economic and political pressures, it was bound to respond, which it did.

In the grand scheme of things, these statements hold little meaning for the outcomes of the Extended Fund Facility (EFF). The ninth review of the program was already facing external financing gaps long before these exchanges took place.

Nonetheless, such statements can reinforce the perception that the IMF is influenced by political factors when setting conditions and implementing programs. This raises concerns and could provide the government with an excuse to pursue a budget without effectively engaging with the IMF. To avoid this, both sides need to calm down.

The IMF should provide clarification regarding its statement, while the government should pay attention to other parts of the statement, particularly those related to exchange rate market flexibility and aligning the budget with committed economic reforms. This is crucial to keep the engagement and the remaining program alive. Although the program ends on June 30, it should ideally conclude on a positive note.

The government of Pakistan now faces the challenging decision of choosing between a budget with the IMF or without it, amidst economic, political, and climate crises. In either case, the budget will be inflationary and negatively impact the people.

A budget with the IMF would involve implementing strong reforms, such as reducing subsidies, increasing energy prices and taxes, and curtailing spending to manage deficits. In this scenario, the government would need to demonstrate a primary surplus.

However, these measures would slow down economic activity and exacerbate the already high inflation rate, further reducing people's purchasing power. Unemployment and poverty are on the rise, which may cost the government votes in the upcoming election scheduled for October.

Considering these factors, the government may be reluctant to align with the IMF during budget preparation as it seeks to protect its interests in an election year.

The government's approach will depend on several decisive factors. Firstly, its commitment to holding elections on schedule, which is stated to be on October 8 according to the election commission. If the government plans to proceed accordingly, it may lean towards an "election budget," making it the last budget before the polls. Otherwise, ongoing reforms may continue regardless of the IMF's involvement.

Secondly, the government, particularly the PML-N, will assess the probability of forming a new government after the elections. If it believes it has a high chance of winning, it may adopt a more sensible approach to budget preparation, intending to maintain a thread of engagement with the IMF for negotiating a new program in the future. Conversely, a lower probability of victory may push the government towards expansionary policies and a populist budget to maximize votes and seats.

Thirdly, the government will evaluate the likelihood of receiving external financing support from bilateral partners in both scenarios—with or without the IMF. If friendly countries advocate for continued engagement with the IMF, which has been significant thus far, the government is more likely to prepare a budget with the IMF. This is especially crucial considering the substantial debt repayments that cannot be managed without the IMF's assistance. However, any unconditional support from friendly countries would lead to the opposite outcome.

Considering the context outlined above, it is probable that the government will choose to remain engaged with the IMF. The upcoming budget is expected to be partially aligned with the IMF.