Pakistan’s bailout

The International Monetary Fund (IMF) is expected to approve an aid package for Pakistan making it the first country to succumb to the IMF in the current economic crunch. A lot is riding on whether the Fund's policy conditions help or hurt the economy – and early signs are mixed, says the Wall Street Journal.

The $7.6 billion loan package is intended to address a severe balance of payments shortfall, as import costs far outpace export values and financing the gap depletes reserves, and "restore the confidence of…investors by addressing macroeconomic imbalances through a tightening of fiscal and monetary policies." An interest-rate hike is part of the deal, as well as fiscal austerity and tax-base "broadening."

Some of these are measures Pakistan would have taken anyway. But with inflation in the double digits, the currency falling roughly 25 per cent since January 2008 and capital fleeing, Pakistan has few policy options, says the Journal:

  • In the plus column, Pakistan is interpreting "fiscal discipline" to mean fewer subsidies.

  • Earlier this year, the government reduced the food and energy subsidies that had pushed the budget deeper into the red while distorting the economy.

  • Unfortunately, the Fund isn't content to stop there; they want Pakistan to fix the "problem" that tax revenues amount to only about 10 per cent of gross domestic product (GDP).

  • The "solution" is to bring more sectors and individuals within the tax man's reach.

    Tax reform can be good if it results in everyone paying a little, but with a parlous economy, now is a bad time for the government to attempt this. Meanwhile, any move to increase revenue as a proportion of GDP essentially amounts to a tax increase; coupled with steep interest rates, this is a recipe for low or nonexistent growth, says the Journal.

    Source: Editorial, Pakistan's Bailout, Wall Street Journal, November 18, 2008.

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    FMF Policy Bulletin/ 25 November 2008

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