The prospect that the State Bank of Pakistan will not ease its money supply has grown after the news that the IMF has recommended that interest rates be kept high, so as to keep off any inflationary pressures. The relative easing of inflation had given hopes to the belief that the SBP’s Monetary Policy Committee would bring its benchmark rate below its present 11 percent. However, that seems not possible now that the IMF has imposed its veto. One factor was probably the improved growth forecast, with the ADB revising it upward. However, the growth forecast is not enough to create the jobs, or restore the business confidence, needed by the government to show its economic performance to the electorate. The interest rate is to be held steady for the rest of the financial year, and there may be a cut in the beginning of the next. Keeping the rate steady means keeping debt servicing costs high, which means that the benefits of lowering the inflation rate will be lost.
Apart from its advice about the interest rate, which will have the effect of strangling the economy, the IMF has revealed it has imposed 11 new conditionalities in its latest review of its EFF programme, bringing the total of 64. Among the new conditions are the publication of civil servants’ asset statements by year-end, and of a new action plan to end corruption by next October. Apart from corruption, the conditionalities include reducing power sector losses, improving governance and reducing CBR inefficiency. Clearly, the IMF has moved merely from economic management to more political areas. It is true that these areas affect the economy, but there is still no escaping the feeling that the IMF is intruding more than it should.
It has to be admitted that the present government has given it the space to do so. It should not be forgotten that the economics behind the URAAN programme also makes recommendation resembling those of the IMF, but it is insecure for a government to have its policies determined by an outside agency. Corruption and poor governance are both evils, and should be eliminated, but whether this should be the condition of a loan is another matter. The IMF should remember that the government might find itself forced to decide whether the IMF’s approval is worth the price of its veto. Though the government is committed to ending the dependency on the IMF, the word is already out that Pakistan will probably need another programme.
