The Shehbaz Sharif-led coalition seems to have learnt it the hard way. His government is reported to have finally requested the International Monetary Fund (IMF) to send over its mission to Islamabad — preferably by the end of this week — for discussions around all the ‘thorny’ issues that have held back progress on its ninth programme review for almost four months, delaying disbursement of the next loan tranche of $1.2 billion.

Reports suggest that the government has finally realised that the early resumption of the stalled IMF bailout programme is also crucial to unlock other promised official multilateral and bilateral financial assistance needed immediately to push back the possibility of a sovereign default.

As opposed to its previous stance, the finance ministry has now expressed its willingness to discuss the country’s return to a market-based exchange rate, increase electricity and gas rates, impose additional taxes to make up for the revenue shortfall in order to contain the budget deficit within the original programme targets, and, possibly remove the import restrictions as demanded by the lender of last resort.

Yet it still isn’t clear if the government is ready to go the route as demanded by the Fund. According to the reports, the only thing that the prime minister wants is to insulate the man on the street from the impact of these adjustments. How far he can succeed in saving the inflation-stricken people from the new fiscal and other adjustments is anybody’s guess.

Friendly countries and allies need to see Pakistan taking corrective measures before they are willing to pledge more aid to fix the country’s mistakes

What has caused this change of heart in the government that had until now so afraid of taking the difficult IMF-mandated decisions because of fear of losing more political capital?

Even though the prime minister and others tasked with the job of managing the nation’s finances have, during their appearances at various international forums and meetings with the Fund, consistently pledged to work with the IMF and complete the ongoing programme, the government has appeared lacking in its commitment with the targeted reforms.

This became even more evident when the IMF refused to relax its conditions in the aftermath of the devastating summer floods. That increased the frustrations at the Q bloc with the lender, as was evident from Finance Minister Ishaq Dar’s scorn against it in early December.

He had told a popular TV show host that he was not ‘concerned whether the IMF team arrived or not for the ninth review of Pakistan’s programme. “… I have to look at the country’s interest first. I don’t care if they come. I don’t have to plead before them,” he had said, adding he would manage the things without the Washington-based lender.

At that time, his optimism that he could manage the economy without the IMF stemmed from his belief that the so-called friendly countries would step up to help Pakistan in its difficult times, especially in the wake of the devastation caused by the floods.

That is where the pressure for repairing ties with the IMF came from in recent weeks, with a British minister urging Islamabad to stick to the macroeconomic reforms and swiftly conclude the ninth review of the IMF programme to ensure confidence among its partners and investors.

“It would be much easier for the world to help Pakistan if Pakistani taxpayers are seen to be playing a core part in this effort,” British Development Secretary Andrew Mitchell said at the Geneva conference earlier this month.

Saudi finance minister Mohammed Al-Jadaan’s statement at the World Economic Forum that future support from the kingdom to its allies would be aligned with multilateral agencies and would also depend on the countries’ willingness to revamp their economy indicates that the investment and other financial support plans announced recently by the ‘friendly’ countries for Pakistan are not likely to materialise without the IMF on board.

“We used to give direct grants and deposits without strings attached, and we are changing that. We are working with multilateral institutions to actually say we need to see reforms,” the minister said.

“We are taxing our people, we are also expecting others to do the same, to make their efforts. We want to help, but we also want you to do your part,” he said.

The coalition led by the PML-N has been faced with mountainous issues ever since it took over in April: an acute balance of payments crisis, massive currency devaluation, spiralling inflation, increasing energy prices, etc.

The tensions with the IMF and the depletion of foreign currency reserves on drying foreign loans have brought the country to the brink of default.

This is in spite of stringent restrictions on imports that have grounded economic growth to a virtual halt, causing a traffic jam at the Karachi port and shuttering factories, as well as curbs on repatriation by foreign companies and their sales revenues and profits. The government’s troubles have been exacerbated by political turmoil in the country.

There is no doubt that implementation of the IMF loan conditions will further erode the ruling PML-N’s political capital ahead of provincial assembly polls in Punjab and Khyber-Pakhtunkhwa, as well as the fast-approaching general elections. Also, the impact on inflation will be huge.

Prominent economist Hafiz A Pasha says the revival of the IMF programme will push consumer inflation to 35pc. But, he adds, the default will induce inflation to rise above 65pc.

The ruling coalition stands to pay a political price in either case. The IMF can buy it some time to at least start fixing the structural issues of the economy, stabilise it and thus somewhat recover their political capital going forward.

Published in Dawn, The Business and Finance Weekly, January 23rd, 2023