Pakistan’s IMF Review Held-up Amid Fiscal Slippages

The delayed visit of the International Monetary Fund (IMF) Monitoring Mission to conduct the 9th review of the ongoing Extended Fund Facility (EFF) Progarmme is increasing Pakistan’s balance of payments difficulties on a daily basis.  The global capital market – where Islamabad can sell bonds – has now closed its doors as all its globally traded bonds are currently selling at steep discounts.

Pakistan’s forex reserves fell to USD 6.7 billion, which could just cover four to five weeks worth of imports. With this, Islamabad is facing the real ‘currency crisis’. Amid concerns of Islamabad’s credibility, immediate needs are to import 2.5 million tonnes of wheat, 7 million bales of cotton, USD 6 billion worth of crude oil, USD 3 billion worth of machinery, USD 3 billion worth of LNG plus coal and medicines.  As its foreign exchange reserves have dried up, these imports are getting increasingly difficult.

Pakistan has seen several instances of initial public defiance to implement IMF conditions only to backtrack later realizing that the government’s economic difficulties are compounding. Prime Minister Shehbaz Sharif recently decried a “callous IMF”, saying that it had put shackles on the country because of which the government’s efforts for rehabilitation of flood victims and providing relief to the masses had become a huge challenge. But short of fulfillment of IMF conditionality, Pakistan’s credit rating may further plunge.

The visit earlier scheduled for October end has been delayed amid widening differences between Pakistan’s commitment to the IMF on fiscal consolidation and its actual decisions disregarding them. 

Pakistan and the global lender continued talks virtually but differences still persisted over tax collection targets, and non-starter energy reforms including hiking of gas tariff, rising circular debt, and expenditure overrun, making consensus harder to strike on a staff-level agreement for completion of the review.

Islamabad had submitted estimates for flood-related reconstruction costs in the current Fiscal at PKR 251 billion (USD 1.1 billion).  Terming these unrealistic and at variance with the Post Disaster Needs Assessment (PDNA) report, the IMF had asked Pakistan to include these costs in the current budget.

The IMF has also raised serious reservations against the recently announced package (PKR 1800 billion) by the Finance Minister for agriculture sector and PKR 110 billion subsidies for concessional electricity to export-oriented sectors, which is a clear deviation and violation of the 7th and 8th reviews.  The IMF had asked for their reversals.  It has also asked for detailed expenditure and revenue figures, including for flood response up to 30th June 2023, when the programme ends. 

Meanwhile, IMF’s Resident Representative for Pakistan Esther Perez Ruiz has asked Pakistan to review monetary and exchange rate policies.  She went on to add that the country needs to fix multiple economic indicators and re-examine the targets for fiscal discipline and deficit control.

Although the political leadership has agreed in principle to take additional taxation measures, they want to implement them in such a way that there is no extra burden on the common man amid higher inflation and low growth trajectory.  These measures are politically volatile, hence no political party takes the responsibility. 

Islamabad had created a “credibility gap” with the IMF. Pakistan is asking for softening IMF conditions citing flood related damages and expenditure over-runs, instead of providing clear picture of the economy as well as its plan of action for reforms. Islamabad’s non-action is irritating the multilateral lender.  The IMF has communicated that it requires completion of all end-quarter performance criteria and targets.

With the Finance Ministry being unable to furnish tenable answers for the IMF to commence formal negotiations on the 9th review, it may delay release of fund from the IMF. This is in spite of Islamabad’s lobbying with the US & UK, China and others for release of funds.  The delay could compel the IMF and the Pak Government to combine the 9th and 10th reviews together.

Talks between Pakistan and the IMF are at a stalemate with global lender pushing Islamabad on policies and reforms needed to keep the bailout programmes target on track and complete the pending 9th review. As things stand now, with the EFF programme stalled again and plummeting dollars inflows till it is revived. Finance Minister Ishaq Dar has no choice but to roll back politically motivated subsidies and agree to all the IMF’s conditions.

The pace of economic reforms in Pakistan is slow and macro-economic parameters are fragile. All these affect Pakistan’s credit rating. Major foreign businesses operating across diversified sectors in the country have lost confidence in Pakistan’s economy. The overall Business Confidence Score (BCS) dropped to a negative 4% from a positive 17% in the previous survey conducted in March- April 2022. 

In the past six-months, the top three reasons for decline in business confidence were political instability, rupee devaluation and high fuel prices. High electricity cost and ineffective commercial and trade policies are the other reasons for the decline in business confidence.

Pakistan’s external debt servicing for FY 2023 stands at 60% of its exports, up from 12% in FY 2011.  External debt servicing as a percentage of exports and remittances increased to 35% in 2022 from 10% in 2011. Pakistan would need USD 33 billion in financing during FY 2023 and require USD 73 billion to return the loans of maturity within 3 years.

What is making investors extremely nervous is the lack of a roadmap for recovery.  Islamabad is hoping for billions of dollars from Saudi Arabia  and other friendly countries. Hope is neither a strategy nor a roadmap. But Pakistan needs a strategy and a roadmap to avert the crisis. However, the good news is that Pakistan has not defaulted on the payment of its external debt obligations so far. But the bad news is that it could not convince the IMF.  Pakistan averted default with the help of development partners, but this cannot be used frequently.


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