The International Monetary Fund (IMF) is currently immersed in the inaugural review of the Stand-By Arrangement (SBA), navigating through discussions on the implementation status of agreed-upon conditions and structural adjustments. These measures were set forth by the eleven-party coalition government led by Shehbaz Sharif in June of this year. Despite the political unpopularity of decisions such as electricity tariff adjustments and petroleum levy increases, they are being executed in a bid to address the pressing issue of the 2.6 trillion rupee circular debt.

A noteworthy aspect of this economic landscape is the persistent challenge of striking a balance between unpopular but necessary decisions and the potential repercussions on inflation. The consumer price index for October stood at 26.9 percent, reflecting the impact of these decisions. A proposed solution to the circular debt issue involves empowering provinces to manage distribution companies, emphasizing localized management for enhanced efficiency.

Simultaneously, recent developments in the foreign exchange market have sparked discussions. The crackdown on exchange companies led to a strengthened rupee, but a recent reversal has prompted speculation about a potential shift in the agreed-upon market-based exchange rate policy under the SBA. This change may be an attempt to mitigate the impact of imported inflation.

Looking ahead, the looming issue of external resource mobilization adds a layer of complexity to the situation. It remains unclear whether a shortfall in this aspect would delay the release of the next tranche or if the IMF would introduce an adjustor mechanism to accommodate implementation deferment.

An interesting observation arises when considering the SBA’s scheduled conclusion on April 12, 2024. With a mere two and a half months remaining until the close of the fiscal year on June 30, no specific precondition has been outlined regarding the procurement of external funds committed by friendly nations. This lack of specificity raises concerns, especially if the shortfall in external resource mobilization persists due to the high cost of equity and commercial borrowing.

Following comprehensive data sharing, the IMF team is engaged in discussions pertaining to the execution status of time-bound conditions and structural adjustments. The ongoing implementation of administrative decisions is particularly notable, specifically in relation to electricity tariffs aimed at achieving full cost recovery. This includes absorbing the persistent underperformance of sector players spanning from generation to distribution companies, contributing to the current 2.6 trillion rupee circular debt. Simultaneously, efforts are being made to generate the budgeted 869 billion rupees from the petroleum levy.

Addressing the circular debt challenge, a concept supported by the past three elected governments involves allowing provinces to manage distribution companies. This perspective assumes that proximity to end consumers enhances management’s ability to identify and rectify system deficiencies.

Despite the crackdown on exchange companies that commenced on September 7, leading to a consistent appreciation of the rupee, recent developments have indicated a reversal. Some economists speculate that this shift may be linked to the Fund team’s concern that the market-based exchange rate policy agreed under the SBA might have been abandoned. This potential shift could be aimed at mitigating the impact of imported inflation in the country.

While the Consumer Price Index (CPI) decreased from 31.4 percent in September to 26.9 percent in October, attributing this solely to a decline in international fuel prices may not be sustainable. The protracted Middle East crisis casts uncertainty on the stability of these prices. Given that technical negotiations on the first review are yet to conclude, and subsequent policy negotiations will take place in the last two to three days of the mission, it remains uncertain if discussions on the rupee-dollar parity have been broached.

Reports suggest that the Fund team has sought information from the Federal Board of Revenue (FBR) regarding the progress of agreed-upon reforms. This includes widening the tax net to encompass those currently outside it, such as real estate players, builders, wholesalers, retailers, and affluent farmers. Additionally, concerns have been raised about the continued heavy reliance on indirect taxes, which disproportionately affect the poor compared to the affluent.

In essence, the government’s focus on achieving the 9.4 trillion rupee target agreed upon with the Fund in June under the SBA does not align entirely with the Fund’s priorities. This divergence is a stance that the public is likely to support wholeheartedly.

There exists some uncertainty regarding whether the deficiency in external resource mobilization serves as a prerequisite for the subsequent tranche release, or if the International Monetary Fund (IMF) would introduce an adjuster mechanism allowing for the postponement of the implementation of this condition.

An important observation comes into play. Given that the scheduled conclusion of the Stand-By Arrangement (SBA) is April 12, 2024, and with approximately two and a half months remaining until the close of the fiscal year on June 30, no explicit precondition has been outlined in the SBA documents concerning the anticipated procurement of external funds committed by friendly nations. This also extends to the incurrence of debt equity and borrowing from the overseas commercial banking sector.

In the scenario where the shortfall persists, primarily attributed to the elevated cost of equity and commercial borrowing, as Pakistan’s credit rating has not improved as anticipated since the approval of the SBA, there arises a significant concern. While achieving a staff-level agreement on the pledge of meeting all prior conditions by the second review is expected, if the deficiency continues in the subsequent two to three months, it may pose a challenge to the finalization of the second and ultimate SBA staff-level agreement. The persistent shortage may jeopardize the overall success of the program, requiring careful consideration and strategic planning to mitigate potential challenges in the later stages of the agreement.

In conclusion, as technical negotiations on the first review are underway, it remains uncertain whether discussions on the rupee-dollar parity have been initiated. The Fund team’s scrutiny of the Federal Board of Revenue’s progress on reforms, particularly widening the tax net and addressing the heavy reliance on indirect taxes, reflects the intricate challenges the government faces in meeting the 9.4 trillion rupee target agreed upon with the IMF. The alignment of priorities between the government and the Fund is a critical factor that requires careful consideration, especially as the SBA’s conclusion approaches. Balancing the need for unpopular economic decisions with broader economic stability remains a delicate challenge, emphasizing the importance of strategic planning and foresight in navigating the complexities of the current economic landscape in Pakistan.