IMF programme in a limbo

Pakistan’s economic situation is showing no signs of improvement and fears are growing by the day that the country may experience unprecedented economic troubles in future. By the looks of it, the agreement with IMF is now considered to be in trouble and in its absence it looks extremely difficult for Pakistan to ward off the dangers of sovereign default.

It is well known that Pakistan’s balance-of-payments troubles spiraled into a full-blown economic crisis over the last almost one year that has stagnated economic growth and has given rise to skyrocketing inflation fatally denting the ability to pay of common people. Moreover, sustained political instability has further exacerbated the situation and the lack of political unity may prove to be very damaging for the economy.

Pakistan has borrowed heavily from just about everywhere to sustain the penchant of its citizenry for living beyond its means without ever thinking that the world could one day stop financing or subsidising their lifestyle.

The result is that no one is now willing to lend money to the country unless Pakistan makes a strong commitment to implementing reforms and fixing the structural lopsidedness.

It is reported that Pakistan’s external financing pipeline is drying up as multilateral, bilateral and commercial inflows went down by 38 per cent meaning that the monies that came in were just $8.1 billion in the first 10 months of the current fiscal year against over $13 billion during the same period last year.

It is pointed out that the received amount is just 35.5 per cent of the $22.8 billion full-year budget target for foreign financing. The obvious consequence is the highly worrying foreign currency reserves that are just enough to cover the bill of one month of controlled imports.

It has become quite clear that the IMF programme is in limbo simply because it is dissatisfied with Pakistan’s commitment to reform or its ability to arrange the required funds to meet external financing needs and this is a cause of serious worry.

The bilateral partners are now known to be very hesitant to lend money and they may not go ahead with their commitments unless some credible collateral is placed in front of them and this may take plenty of time, a time constraint that Pakistan could not afford.

The situation in this respect is dire as Pakistan will be required to make debt repayments or seek rollovers of nearly $75 billion over the next three years that is now considered to be a very tall order for the country to arrange.

As Pakistan’s options recede for the revival of the stalled IMF programme both sides will have to take tough decisions to break the existing deadlock but for Pakistani financial managers their side of the bargain is far too much to deliver.

It is getting clear that both sides are in a last ditch effort to save the programme before the commencement of the yearly budget and experts are of the opinion that if salvaging efforts do not succeed now then the IMF programme may be doomed.

However, the hopes are diminishing each day mainly because the ongoing programme of $6.5 billion under the Extended Fund Facility (EFF) will expire on 30 June, 2023 and negotiations between both sides continue but have proved futile.

It is quite obvious that if the deal is not struck in the next few days the IMF programme may end up a failure.

The delay originally is signing the Staff Level Agreement (SLA) started in November and then after February has brought new areas like the budget and Pakistan’s financing options beyond June 2023 into focus with the IMF. These are not easily answerable queries for a government managing an economy in a crisis-like situation.

It is the considered opinion of economic experts that Pakistan’s options are limited and without an IMF programme the default risk would stay elevated and the reserves weak but then the coalition government also has to weigh its options particularly in wake of the current political imbroglio the country is in and it cannot afford to further burden people with new measures aimed at increasing revenues as demanded by the IMF.

With their backs to the wall that there are very few options left to both the sides including signing the SLA immediately and forwarding Pakistan’s request before the IMF Executive Board for approving the next tranche of $1 billion and also securing an extension in the EFF programme period by a few months in order to accomplish the outstanding 10th and 11th Reviews.

The second option could be combining the 9th and 10th Reviews and for Pakistan to share upcoming budgetary numbers with the IMF. The SLA could then be signed after the announcement of the budget for 2023-24 and in case of its approval from parliament the IMF’s Executive Board could approve combined tranches and also grant an extension to the EFF programme for accomplishing the 11th Review by July or August 2023.

Though such options are reportedly on the table but they look very difficult to go for. The economic managers of the coalition government though outwardly confident are deeply aware that lack of IMF’s backing it will be next to impossible for them to arrange additional financing from friendly countries, rollovers and commercial financing at higher costs.

Whatever the results of this consistent haggling everyone is conscious that exigent solution will prove to be temporary as any interim or new setup would have to seek another programme support with the IMF since repayment needs $25 billion.

This would be in addition to monies for current account financing for the budget for coming year and this task cannot be achieved without the assistance of the IMF.

However, the incumbent finance minister has started to broadly hint at the impending failure of the IMF programme though he is citing time restrictions. The economic managers are deeply cognisant that the failure to successfully complete the ongoing programme will further widen trust deficit between Pakistan and the financial world.

Over the past almost four years, the programme has been derailed at least four times, including on two occasions during the tenure of the current coalition government.

In this context, it is now acknowledged that it has now been proven that it was a wrong decision on the part of former finance minister Miftah Ismail to get extension from the IMF instead of negotiating a new programme. It is reported that the coalition government has not yet come up with a credible alternative plan, which is creating panic in markets as the rupee is trading in the range of Rs.308 to Rs.313 to a dollar in the open market.

The markets and businessmen have been openly criticising the government’s approach to suffocate the economy and the industry by curbing imports which is only delaying the looming default.

Already the size of Pakistan’s economy has shrunk to $341.5 billion and its per capita income has slipped to just $1,568 in the outgoing fiscal year due to almost flat economic growth and
currency devaluation.

The economy shrank by $34 billion or 9% whereas per capita income also decreased by $198 or 11.2% and this is very worrying for the economic planners.