IMF-Pakistan agreement: What is behind the delay?

Pakistan is facing growing economic difficulties with more pressures exerted on its economic management to find ways that may further put pressure on its already harassed people. The chances of obtaining financial succour from international lending agencies like IMF and friendly countries are getting dimmer by the day, the policy makers find it extremely difficult to make ends meet.

Further complicating the situation is the political uncertainty that has now given rise to nationwide violent agitation retarding economic activity. The impact of the turmoil-ridden environment is on revenue aspects as they recede to the point where it is almost impossible to convince the donors about the financial viability of the state.

Keeping in view the current situation, the revenue collection has radically decreased and there are hardly any prospects of reversing this trend either in the short or middle term.

The coalition government appears to have been badly flustered by the crisis and its much hyped-up economic czar has been badly exposed as an ineffective fixer who had been presented as an economic genius.

The prospects of avoiding further economic pain are virtually nil and it is getting difficult for the government to provide even a scant relief to the hapless population.

Bringing amply to fore the almost impossible economic situation is the latest reports about the IMF pointing out that Pakistan needs significant additional financing for a successful completion of the long-stalled ninth review of its bailout package.

This public avowal of the global lender is a tough reminder of the avenues getting scarce for the Pakistani economic managers.

The IMF emphasised that obtaining commitments of significant additional financing is essential
before the IMF approves the release of pending bailout funds that are crucial for the country to resolve an acute balance of payments crisis. It is well known that staff-level agreement to release a $1.1 billion tranche out of a $6.5 billion IMF package has been delayed since November, with nearly 100 days gone since the last staff-level mission to Pakistan. It is pointed out that it is the longest such gap since at least 2008.

In financing context the IMF acknowledged the financing already committed by Pakistan’s external partners with the UAE, Saudi Arabia and China coming to Pakistan’s assistance in
March and April with pledges that would cover some of the funding deficit.

Still the IMF is not convinced about adequate provisioning of Pakistan’s financial needs as is evident about the current foreign exchange reserves of the country that stood at $4.38 billion, barely a month’s worth of imports.

It is reported that the IMF functionaries are deeply concerned about Pakistan facing very challenging situation as it is now exposed stagflation along with being badly battered by a series of shocks including severe floods.

To add to the woes are the political considerations that an extremely wobbly coalition government is under the weight of that made it to announce a subsidy on fuel prices that put a spanner in the dealings with IMF that does not agree with granting subsidies.

In March, the coalition government had proposed charging affluent consumers more for fuel with the money raised used to subsidise prices for the poor who have been hit hard by inflation.

The proposed scheme was seen as one of the reasons for the delay in implementing the IMF bailout. IMF however has now acknowledged that Pakistan has committed not to implement a cross-subsidy programme that would be in line of agreement with the IMF.

Actually, the government also will not introduce new tax exemptions and will durably allow a market-based exchange rate for the rupee currency.

Pakistan is badly cash strapped with rupee falling 2.91 per cent against the US dollar to close at a new low of Rs.298.93. Keeping in view this drawback the IMF has expressed reservation pointing out the debt-to-risk cost is very high and in this situation it is very difficult to see
how Pakistan manages to service its debt over the next few years.

Financial experts point out that risk premiums were more likely to rise than fall and due to them there are a few countries that may not make it over the near to medium term.
Pakistan is on that list next to Egypt and Kenya and it may not be possible to get out of this situation until some sort of debt restructuring is undertaken.

These factors compel the incumbent finance minister to repeatedly proclaim that Pakistan is not going to default but it is now widely conceded that most of his enunciations are nothing more than hot air.

On the other hand, Pakistan is trying hard to break the deadlock over revival of IMF’s loan programme as the delay is costing dearly in the shape of economic loss to the country along with badly hurting the competence and reputation of the coalition government particularly
its financial managers.

The incumbent finance minister has not come down from his haughty pedestal as he insisted that it was the responsibility and the obligation of the IMF to support Pakistan at this point in time with urgent signing of the agreement, followed by the board’s meeting. Pakistan has publicly been blaming the IMF for the delay while claiming that it has met all prior conditions compelling IMF to issue a curt rejoinder negating Pakistan’s claim that it had met all prior conditions for ninth review of the Extended Fund Facility (EFF).

IMF pointed out in this context that the deal could only be reached once the necessary financing was in place. For the past four months, Pakistan has remained unable to meet some of the critical conditions set by the IMF staff for reaching a deal, although it had met the conditions related to implementation of a mini-budget, increase in electricity, gas and petrol prices and leaving the exchange rate with market forces.

However, the government has not met the most crucial condition of arranging $6 billion in additional loans aimed at bridging the gap. Pakistan had earlier informed the IMF that it would
comfortably arrange the remaining $3 billion from the World Bank, the Asian Infrastructure Investment Bank (AIIB), European and Gulf-based commercial banks and out of Geneva pledges but the coalition government could not arrange those funds.

It is accordingly reported that one crucial concern of the multilateral institutions and foreign investment banks was the country’s economic viability post-IMF programme that is ending
on 30 June. Pakistan’s fiscal woes are fast multiplying as the federal government’s fiscal position has turned negative after servicing domestic and external loans and providing shares to the provinces.

Debt servicing ballooned to Rs.3.58 trillion in the first nine months of the current fiscal year till the end of March 2023 against the net revenue receipts of Rs.3.4 trillion consuming the whole revenues.

This makes it clear that the federal government is left with no choice but to borrow to meet all other expenditure heads.

Deepening political uncertainty has also played a role in not getting foreign loans and reaching a deal with the IMF as it is not clear what direction Pakistani politics will take as was made abundantly clear by the recent spate of turmoil in the country after PTI’s leadership was arrested.