For better or for worse, Pakistan has reached a $6 billion deal with the International Monetary Fund (IMF), though this time around, it is assumed, that the succour is arriving with a set of the sternest possible conditions.

The possibility looks bleak for the government to get the “waivers of non-observance of performance criteria” under the new loan deal as was the case under the last programme that concluded in September 2016.

The question now is: will the people be able to ride out the storm?

Broadly speaking, the Extended Fund Facility (EEF) loan is likely to be packaged with extensive reforms in three areas: monetary, fiscal and structural reforms.

Implementation of these reforms will entail a complete liberalisation of the country’s exchange rate regime and interest rate determination mechanism, significant tax hikes, a full fuel and energy cost recovery, subsidy and other government spending cuts, and so on to help address internal and external imbalances.

It will lead to a substantial drop in the value of the rupee, stoke massive inflation and push interest rates in the short to medium term. The cost of these adjustments for people is going to be very high.

Similar adjustments made after November 2016 in Egypt, for example, pushed the price inflation in that country to 33 per cent for most part of the first year of the $12 billion EFF programme, pushing many households into poverty.

The long-term solution to Pakistan’s economic problem lies in strengthening its industrial sector that is part of the global value chain, and encouraging the production of capital and intermediary goods not only for the domestic industry but also the foreign market

The headline inflation in the African country is reported to have decelerated after more than two years of the programme. Yet the price growth continues to hover around 10-11pc.

There is every possibility that the prices in Pakistan will not rise as steeply. Still, the country’s middle class households will see their real income fall significantly, cost of life rise sharply and their purchasing power erode rapidly as the present trend of job losses and pay cuts in the private sector is feared to get further entrenched over the next two years to three years on slowing economic growth.

Indeed, a very large number of families will find themselves impoverished by the time the programme concludes, denting the political support of the ruling PTI and its leader Imran Khan.

Many analysts agree that the programme implementation will help improve nation’s balance of payments situation through a build-up in the foreign exchange reserves and reduce strains on the budget through spending cuts in the short to medium term.

But will it lay down a strong foundation for a long-term economic recovery and prosperity? That is a question. Many argue that the country cannot overcome its periodic, recurring balance of payments crises that have forced it to return to the IMF every few years in the last 30 years.

Businesspeople interviewed for this article argued that the IMF deal will at best fix the country’s immediate problem. However, the long-term economic recovery and external sector stability largely depends on deepening the base of the industry to boost exports and substitute imports.

Many of them fear that the government could roll back the concessions it has given the export industry, especially in Punjab, during the last several months.

Some large textile business groups that had announced to invest one billion dollars in capacity expansion in the value-added textile and technology up-gradation over the next one year have already put their plans on hold.

There has been a fear of withdrawal of energy and interest rate subsidies for exporters ever since the staff level agreement of the IMF deal was announced. Their withdrawal will cause a sharp rise in their cost of doing business. A substantial devaluation of the rupee in the weeks leading to approval of the loan by the IMF executive board has also been experienced.

The IMF recipe should help the economy get out of the present financial crisis and even restructure the economy to a certain extent. Nonetheless, the long-term solution to Pakistan’s economic problems lies in strengthening its industrial sector that is part of global value chain, and encouraging the production of capital and intermediary goods not only for domestic industry but also for foreign markets.

Published in Dawn, The Business and Finance Weekly, May 20th, 2019