FeaturedNationalVOLUME 18 ISSUE # 19

IMF: Deal or no deal?

The IMF deal has become a conundrum. The matter has been hanging for the last several months but the outcome is still shrouded in uncertainty. The government has constantly changed its positions regarding the ongoing negotiations with the IMF. Despite Finance Minister Ishaq Dar’s repeated assurances, the deal is nowhere in sight.

In February, the government was hopeful as it inched closer to the preconditions of the International Monetary Fund (IMF) for the revival of the Extended Fund Facility worth $7 billion. But the hope was not realized. Last week the IMF clearly spelled out its position, saying that the renewal of its package deal depended on firm assurances from Pakistan’s external partners. Julie Kozack, the Fund’s Director for Strategic Communications, underlined this at a virtual news briefing on the talks the IMF has been holding with Pakistan. To quote her, “Discussions are ongoing between IMF staff and the Pakistani authorities towards a Staff-Level Agreement on policies to complete the ninth review of Pakistan’s extended Fund Facility. Timely financial assistance from external partners will be critical to support the authorities’ policy efforts and ensure the successful completion of the review.”

This is contrary to the expectation of Pakistani officials who thought that an agreement with the Fund on the completion of the ninth review of its loan programme would come first, unlocking the doors to inflows from friendly countries. Explaining the link between the required assurances and the IMF deal, Ms Kozack said that a Staff Level Agreement will follow once the financing assurances, which are a standard feature of all IMF programmes, are available. It may be added here that besides IMF’s support, Pakistan’s external fund facility (EFF) supported program receives financing from other multilateral institutions, including the World Bank, the ADB, and the AIIB and bilateral partners, especially China, Saudi Arabia, and the UAE. This means that until the financing assurances are in place, the IMF cannot take the next step with Pakistan to finalise the deal.

There are other hurdles in the way. According to the IMF’s resident representative in Pakistan, a few remaining points, including a recently introduced fuel subsidy scheme, need to be settled before a staff-level agreement could be signed. Talking to the media, she said that the Fund would ask the government for more details, including how the subsidy would be implemented and what protections would be put in place to prevent abuse. IMF conditionalities also require Pakistan to implement structural reforms and take actions to stabilize the economy and restore investor confidence.

While the IMF deal is elusive, the country is bearing the brunt of financial mismanagement by the government, with inflation estimated at around 40 percent by mid-March. In fulfilment of IMF conditionalities, the government recently imposed additional revenue measures worth Rs170bn, introducing a market-based exchange rate and hiking sales tax and federal excise duty. It also imposed a permanent surcharge of Rs3.82 per unit on electricity and adopted a tight monetary policy. All this has made life more burdensome for the common man but the economy remains shaky.

Although the IMF assistance will help avert default and pave the way for foreign inflows from bilateral and multilateral sources, we cannot get out of the present economic mess without undertaking long overdue strategic reforms in various sectors. The energy sector is ailing. The country’s circular debt has surpassed Rs4 trillion and is surging at a rate of about Rs129bn annually, reflecting rank inefficiency and corruption on the part of the authorities concerned. On the other hand, the fiscal deficit is estimated at Rs1.683tr for the first half of FY23 (2pc of GDP). The tax-to-GDP ratio of 9.2pc in FY22 underlines an economy in crisis. Formidable challenges also confront us on the external front. The country’s imports are twice its exports.

The IMF deal aside, ultimately we will have to find indigenous solutions to our problems. On a priority basis, we need to expand our exports and for this purpose all necessary incentives and subsidies should be provided. Our industrial base needs to be broadened and we should go in a big way for export diversification. The textile sector, which is our biggest foreign exchange earner, should be given a big boost through a new package of incentives. There is an urgent need to undertake measures to develop renewable sources of energy which will greatly help reduce the cost of production. We should also move towards a more austere system of governance and cut all wasteful expenditures, including royal perks and privileges allowed to bureaucrats and elected representatives.

As a nation we need to change our mindset. The IMF facility of $1.1bn from the IMF is no bonanza. It is a loan and will have to be paid back. Loan restructuring or rollover may provide a temporary respite. But the long-term solution lies in putting our house in order by learning to live within our means.