FeaturedNationalVOLUME 17 ISSUE # 42

IMF’s tightening stranglehold on Pakistan

According to the 7th and 8th programme reviews released recently by the IMF, Pakistan could not implement 16 of the 28 conditions that the Fund had set for its $1.1 billion tranche, including the principal condition to increase foreign exchange reserves.

Reacting to the failure of the Pakistan government to fulfil its commitment, the IMF has imposedeight more conditions on Pakistan in addition to giving fresh deadlines to meet the actions that remained unimplemented.

Some of the conditions that were required to be implemented during the last quarter of the fiscal year were missed due to slippages that occurred before the coalition government came into power. The PTI government gave a tax amnesty scheme, days before its ouster. It also allowed tax exemptions and failed to push forward the reforms agenda.

But the incumbent PDM government has not performed better either. Resultantly, the IMF board had to give a waiver to pave the way for the revival of the derailed programme and the release of the $1.1 billion tranche.

Among others, Pakistan missed the conditions to increase its foreign exchange reserves and reduce the primary budget deficit to a sustainable level. It also failed to adequately spend on health and education, remained unable to pay the tax refunds and could not cut the power sector losses.

To quote the report, “Overall programme performance has remained weak since the completion of the last review (February 2022) and until recently. Several quantitative criteria were missed and gaps in implementing particularly the fiscal and structural reform agenda arose amid challenging circumstances, including domestic political turmoil and spillovers from the war in Ukraine, but also a waning decisiveness to push forward agreed reforms”.

Pakistan missed the main condition of restricting the net international reserves to negative $4.7 billion by June this year. Instead, the country’s net foreign exchange reserves remained negative by $10.8 billion. This exposed Pakistan to the risk of default due to negative reserves levels. The condition to restrict the primary budget deficit to Rs25 billion by June was also missed due to fiscal slippages. Instead, the country booked around Rs2 trillion primary budget deficit. The IMF said that the reserves and deficit conditions were also missed for the end-March period.

Another IMF condition missed by Pakistan was not to impose exchange restrictions and discourage multiple currency practices. It also failed to meet the condition of not imposing import restrictions. Pakistan also missed the condition to distribute Rs250 billion funds among BISP beneficiaries. The federal and provincial governments were required to spend Rs2.1 trillion on health and education but the actual spending remained Rs218 billion short of the target.

On the other hand, the Federal Board of Revenue had failed to meet the condition of stopping accumulation of tax refunds arrears and instead added Rs147 billion more to the refunds pool.

It may be noted here that the IMF had allowed to add Rs166 billion more to the circular debt in the previous fiscal year but the actual increase in the power sector payment arrears was Rs536 billion. Out of 10 structural benchmarks set to bring reforms, Pakistan missed seven. The government also could not ensure timely approval of the new state-owned enterprise (SOE) law. It also could not establish an asset declaration system for public office holders and civil servants.

In view of the dismal performance of the government, the IMF has now revised the targets and also added new conditions for qualifying for the next loan tranches, amounting to $3 billion. Pakistan will also have to fully implement the Rs7.91 per unit increase in electricity prices by the start of October to reduce circular debt, which is already under implementation.

According to another condition, the government will have to adopt a comprehensive strategy to address high levels of non-performing loans (NPLs) in some banks, including by requiring bank-specific plans for reducing NPLs, and to write-off fully provisioned NPLs. This condition should be met by June next year.

The government will also have to initiate orderly liquidation of either or both of the two currently undercapitalised private sector banks by end-May 2023 after these banks failed to meet capital requirements. The government will have to submit a plan to the federal cabinet to align Pakistan’s early intervention, bank resolution, and crisis management arrangements with international good practices, in line with IMF staff recommendations by end-October 2022.

Among other things, Pakistan will have to publish a comprehensive review of the anti-corruption institutional framework, including the National Accountability Bureau, by a task force with participation and inputs from reputable independent experts with international experience and civil society organisations by end-January 2023. It remains to be seen how well Pakistan responds to the new conditions and targets set by the IMF. Going by the past record, the prognosis is not very encouraging.