IN a gradual policy shift from relative stability to growth, can possible disagreements between Islamabad and the IMF lead to an early termination of the fund’s current stabilisation programme?

Despite record foreign exchange reserves and the falling oil import bill, it may not be easy for the country’s economic managers to take such a risk, nor may it suit the IMF given the high vulnerability in the existing global financial environment. The IMF has used its waivers liberally to accommodate Islamabad whenever it missed agreed-upon targets.

But the possibility of Pakistan seeking an early exit from the IMF programme cannot be totally ruled out as it becomes increasingly difficult for the country’s economic managers to tread an ambitious growth path under strict terms dictated for stability — unless, of course, the IMF remains accommodative via its waiver policy.

An insider in the finance ministry confirmed that “the ministry is conducting a cost-benefit analysis of ending the IMF programme prematurely”.

“This is a great chance for us and we must not entertain any pressure that could compromise our chances of capitalising on it,” said former finance minister Dr Hafiz Pasha, who is the vice-chairman of the Institute of Public Policy, while commenting on the need for enhanced public financing for CPEC projects and the suffocating conditions under the IMF’s loan agreement.

However, the country’s economic team would have the first option to persuade the IMF with the -cost-benefit analysis for temporary relaxation of agreed stipulations.

Pakistan’s expected GDP growth is higher by a good 1-1.5pc over the donor’s projections. Their projections are probably based on the assumption that Islamabad will chop development spending to keep the budget deficit within the agreed limits.

Islamabad has secured a waiver on the budget deficit limit in the 9th IMF review, but the prospects do not appear to be promising. The deficit is expected to balloon to 5.5pc given the downward energy-rate adjustments and the cost of the government’s current and expected relief packages.

The privatisation of state-owned enterprises is also wrought with complexities and might prove to be politically costly to the ruling party.

“With trade unions wrestling their street power and the opposition’s populist stance, I do not see much activity on that front in the near future,” a senior officer accepted. The Senate has already passed a resolution rejecting the PIA’s privatisation.

According to people in the know of things, the Public Sector Development Programme (PSDP) will need a boost of Rs200-250bn in next year’s budget to finance the rupee component of CPEC-related projects. In the absence of a major gain in internal resource mobilisation and the expected build-up in demand by provinces and security institutions, deficit-financing appears to be only plausible option.

In a meeting held a few weeks back, an IMF spokesperson sounded all gung-ho about the country’s economic prospects while talking to a select group of journalists. “Pakistan’s economy can and should do much better.”

IMF resident representative Tokhir Mirzoev was on leave, but the fund’s office promptly responded on request for comment on the country’s economic outlook.

In an e-mailed message to Dawn, the donor’s representative said, “An important government priority, supported by the IMF, is for Pakistan to continue with gradual fiscal consolidation while finding adequate space for public investment projects, including CPEC-related ones. The current budget strikes that balance, and efforts centre on achieving the budget targets”.

On the future of the Pakistan-IMF relationship, there was no direct answer. “The government has shown strong commitment to its economic programme, which the IMF has been supporting. In December, Pakistan passed the 9th quarterly review under its IMF-supported programme. While undoubtedly many economic challenges remain, the authorities have put in place successful policies for economic stabilisation following a near crisis in 2013 and have begun to set in motion economic reforms that lay the ground for higher, more inclusive growth,” the fund said.

Assuming improved stability in the political and security situation, economic recovery can pick up speed if the government succeeds in tackling some of the challenging problems: galvanising the investment-shy private sector; coping with global commodity price slump; containing spillover of the cotton crop’s failure; guiding trade to ramp up exports; and managing financing for CPEC projects.

The performance of the capital, currency and commodity markets in the new year hinges on the government’s policy choices, most analysts believe.

The benefits of cheaper oil, strong forex reserves and the low inflation and interest-rate environment have lessened short-term vulnerabilities. This allows a space for manoeuvrability for the economic team to justify claims about its management skills.

For the people, the year may be relatively less stressful. And while the benefits of growth are not expected to be shared equitably among social classes under the current economic framework, the democratic government cannot afford to be completely oblivious to the peoples’ needs and expectations.

Without displeasing the power-wielders, with an eye on the next general elections, the federal and provincial governments are expected to be inclined to increase ‘pro-poor spending’ of exhibitionist nature.

The contained inflation and rising development spending by the government may generate a perception of higher disposable incomes and better job prospects. The demand for men and material generated by CPEC projects and the availability of cheaper credit has created ripples in the economy. If all this leads to higher investment and consumption, it can kick start a spiral of higher economic activity.

Meanwhile, the downside risks to the economy emanate from the cotton crop’s failure, faltering exports and the tax machinery underperformance.

Dr Pasha told this scribe from Lahore that a loss of 1m cotton bales will compromise GDP growth by about 0.4pc because of the size and weight of the segment in the overall economy.

Published in Dawn, Business & Finance weekly, January 4th, 2016