The International Monetary Fund is to review Pakistan’s budget and macroeconomic prospects following catastrophic flooding during talks with senior Pakistani officials in Washington.
The meetings are set to focus on the future of Pakistan’s $10.66bn IMF programme agreed upon in 2008, which faced hiccups over meeting the fiscal deficit target even before the floods hit.
The disaster is set to compound Pakistan’s economic problems as the government is forced to deal with more than four million homeless and widespread damage to crops and infrastructure.
Here are some scenarios that could emerge from the meetings:
The IMF agrees to ease targets
The talks will evaluate the economic impact of the flooding, assess the measures needed to address the damage and discuss ways in which the IMF can help. If help translates into lowering some of the targets of the loan programme, that may only provide a short-term sigh of relief for Pakistan’s government.
The government will still be under IMF pressure to implement fiscal reforms as the country tries to recover from one of the worst catastrophes in its history. It could take years.
The reconstruction phase may offer the government a chance to improve its image after it was heavily criticised for its perceived slow response to the flooding. That may not be possible without a long-term economic safety net from the IMF. In the short and medium term alone, millions of flood victims will be expecting new homes, livestock and farmland from the government.
If it doesn’t deliver soon, Islamist charities with suspected links to militants, who have already been far more effective in providing relief than the state, may gain more supporters.
IMF abandons programme and opts for disaster-relief loan
That could be great news for Pakistan’s government, depending on the size of the relief loan.
Pakistan had been struggling, even before the floods, with its fiscal deficit and been granted a waiver on several occasions as it has one of the lowest tax-to-GDP ratio in the world and authorities have not been able to cut back expenditure.
Pakistan’s government – still accused of being lax more than three weeks into the flood crisis – could save face by telling Pakistanis it had persuaded the IMF to come to the rescue of millions of flood victims.
Abandoning the programme could also allow the government to avoid some politically-explosive measures the IMF had been demanding such as the elimination of food and energy subsidies and raising electricity tariffs to counter its fiscal imbalances and keep inflation in check.
The government fails to deliver on the ground
Anger over the government’s handling of the crisis is growing and hardships could get far worse. Pakistanis have long accused their government of widespread corruption. Flood victims have already expressed doubts they will ever see any of the international funds that have been donated or pledged.
So the government, under immense damage-control pressure, will need to deliver, in a very public way, any assistance the IMF may offer. The military has done most of the heavy lifting in the aid relief effort, and unless the government wants to reinforce the view that only the army is reliable in times of trouble, it has to act now.