IMF unwilling to budge

Despite fulfilling a plethora of conditionalities demanded by the IMF, there are no signs of a staff level agreement with Pakistan. However, surprisingly no official statement has ever even hinted at financial default with pays and pensions of governmental functionaries regularly paid for despite intense rumour-mongering about their non-payment.

The routine life in the country also does not show civil breakdown of any kind and things appear to be happening normally. One factor, however, that has made lives of people miserable is the unstoppable inflation that is now rated to have broken 59-year record and shows no signs of abating.

Imports are at their lowest as the policy of the incumbent coalition government wanted them this way and this fiscal control has slowly brought the fiscal deficit. On the other hand, however, exports have also declined pushing the government to heavily rely on increasing tax revenue but to its chagrin the FBR has not been able to come up to the mark.

It is not surprising that FDIs have massively dropped as the socio-political and economic uncertainty has made any investor reluctant to hazard investing in Pakistan.

The parleys with the IMF began in February but practically three months down the line, instead of arriving at an agreement the international financial lender is prevaricating beyond measure and has put the Pakistani finance managers in a spin.

The deal seems as elusive as it was at day one and there appears hardly any chance that things may change for the better. It is reported currently that the IMF is preparing to discuss Pakistan’s budget plans for the coming financial year and has termed this step as part of a process to unlock a crucial financing injection.

Though the wordings adopted by the IMF appear to be innocuous but the financial managers view this act as a deliberative new obstacle erected by the lender to releasing pending bailout funds amounting to $2.6 billion.

Now the eventuality has become obvious that the IMF programme will hang in balance till after completion of the yearly budget exercise. Observers believe that the alteration in IMF’s procedure is the offshoot of its apprehension that in an election year the ruling coalition government may utilise money provided by it to boost its electoral prospects. Very obviously the IMF would avoid providing funds to the government simply because a large part of it they suspect will be used to win forthcoming elections.

The matter has become extremely curious for Pakistan as the Fitch Ratings has estimated that Pakistan faces a total of $3.7 billion of debt payments in the next two months till the end of June as about $700 million in maturities falling due in May and $3 billion in June. In its assessments Fitch expected that loans and deposits to the tune of $2.4 billion will be rolled out by China but critics are of the opinion that it would foolishly optimistic to lessen Pakistani debt burden so easily and they mention CAOS’ visit to China as a bid to ensure such assistance.

As is the wont, opacity is inherent in such visit so no one could make out what will come out of this visit. For the moment, however, it is quite clear that Pakistan has already taken all the agreed steps to unlock the funding with external financing remaining the last hurdle.

It was required for Pakistan to give an assurance that its balance-of-payments deficit is fully financed for the fiscal year ending to secure the next tranche. Despite assistance from the UAE, Saudi Arabia and China the financing gap of up to $2 billion remains.

Further, the IMF seems averse to combining the remaining two reviews with the ninth review and release the entire amount at one go to keep the fiscal authorities in check. It is pointed out by analysts that the new conditions and the refusal to combine the reviews reflect the widening trust gap which is not surprising considering the multiple deviations from the programme in the past, particularly on last four years.

It is quite natural for Pakistan to enter into a fresh IMF programme and for this reason the country desperately needs to bridge the trust deficit.

The trust deficit could be gauged from the fact that the IMF has stated that the $1.2 billion 9th review of the bailout programme will be completed once the necessary financing is in place and the agreement is finalised, noting that there was an agreement on the issue between both the sides.

The stance taken by the IMF appears to negate the claim made by the incumbent PM and finance minister that all prior actions stand completed. Additionally IMF has asked to be satisfied about the policies it is devising including budgetary proposals that the Pakistani officialdom has termed as shifting goalposts.

Though the IMF has not mentioned the quantum of the necessary financing that Pakistan requires but just identifying a dichotomy in its point of view and the pronouncements of Pakistan is enough to gauge the widening trust deficit.

 

The situation is exacerbated when viewed in the backdrop that coalition government does not have a credible financing plan for July-December period of the next fiscal year despite the rising amounts of foreign debt to be honoured in the first six-month period of the next
financial year. It is mentioned that foreign debt payments for the July-December period amount to $11 billion and after adding the rollover of short term debts by China and Saudi Arabia, the country would still need over $4 billion to repay to the international creditors in the first half of the coming fiscal year that include the World Bank, the Asian Development Bank, Saudi Fund for Development, Islamic Development Bank and Chinese commercial banks.

Adding to the woes is the insistence of the IMF that Pakistan should further increase interest rates to stabilise inflation but this policy is considered by the experts to be hazardous for the country’s debt burden.

Since the start of the IMF programme in July 2019, Pakistan has doubled the policy rate. The IMF report said that where the policy stance was loose and inflationary pressures persisted, tighter monetary policy should be considered to stabilise inflation and inflation expectations.

At the start of the policy talks in January this year, the IMF had demanded increasing the interest rates by at least 6%. At that time, headline inflation was 27.6% and the SBP’s policy rate was 17%.

Pakistan’s growth rate is expected to slow materially from 6% in 2022 to 0.5% this year. The IMF said that growth in the region will accelerate to 4.4% in 2024 but it will hover around 3.5% in Pakistan. In Pakistan, inflation is projected to more than double to about 27% this year reflecting broadening price pressures.

The IMF hoped that Pakistan is expected to undertake meaningful fiscal consolidation including subsidy reforms. As a result, growth prospects are set to weaken as tighter monetary and fiscal policies are needed for macroeconomic stability.

IMF marginally lowered its projection for Pakistan’s current account deficit (CAD) for this fiscal year keeping it at 2.3% of the GDP which appeared unrealistic. It is estimated that Pakistan will miss the fiscal and debt reduction targets of this fiscal year and the situation will become worse in the next fiscal year with a budget deficit peaking at 8.33% of the size of the country’s economy.