Pakistan's Economic ComebackBy Masood Ahmed, Director of the Middle East and Central Asia Department, IMF
Published in Khaleej Times
December 11, 2008
Pakistan's economy is at a critical juncture. Inflation has doubled and is now running at 25 per cent, the value of the rupee has fallen by a third since March, and foreign exchange reserves are down to worrying levels. All this is occurring against the backdrop of the worst international economic crisis in sixty years.
These are precisely the type of circumstances in which the 185 members of the IMF look for support from this cooperative institution. And so did Pakistan—resulting in the approval on November 24 by the IMF's Board of Directors of a $7.6 billion loan in support of the authorities' economic stabilisation programme.
How does the IMF see the economic and financial challenges facing Pakistan and how can it help to address them?
The first point to stress is that overcoming the current economic crisis will require hard choices and sustained action over the coming year. Fortunately, the strategy set out by the government, on which the IMF's support is based, provides a sound basis for action. The objectives are clear: first, restore overall economic stability and confidence by acting on key macroeconomic imbalances—which means reducing the unsustainably high fiscal deficit and tightening monetary policy to bring down inflation and strengthen foreign exchange reserves. And second, the adjustment programme must be designed in a manner that ensures social stability and adequate support for the poor.
A second point is that while the necessary macroeconomic tightening will clearly involve some pain, it is important that the burden of adjustment should fall least on the most vulnerable members of Pakistani society. And that is why for the IMF it was crucial that the government's programme includes key social protection measures. Expenditure on the social safety net will be increased to protect the poor through both cash transfers and targeted electricity subsidies.
Third, it is important to point out that the programme—and its conditionality—is based on the targets and measures that the authorities have themselves set for the next two years. The IMF is convinced that the best-implemented programmes are the ones that are home grown and fully owned by the country.
Fourth, the success of the programme hinges on sustained and forceful implementation. Strong and determined implementation of the reforms included in the programme will allow the country to get its economy back on a sustainable path. Strengthening public sector institutions and governance will need to be a key dimension of this effort. In this respect, building domestic consensus around the measures included in the authorities' package constitutes a key factor in the period ahead.
Finally, while the key to success lies in the hands of the government and people of Pakistan, the international community also needs to support these efforts. To this end, the financing from the IMF will help to ease the path of adjustment and will provide a strong signal of support to the international community.
Other international agencies and bilateral donors are also providing support, but more financing is urgently needed to strengthen Pakistan's resilience to potential shocks, help finance the expanded social safety net, and allow for higher spending on development programmes. The IMF stands ready to participate in any donor meeting. Working together, we can help Pakistan revitalise its economy and protect the poor during these difficult times.
Masood Ahmed is International Monetary Fund's Director for Middle East and Central Asia Department