FeaturedNationalVolume 14 Issue # 08

In search of IMF package

Pakistan has received a “big” package of aid from China, according to Prime Minister Imran Khan, but it is still looking for financial support from friendly countries after talks with the International Monetary Fund (IMF) failed to secure a deal. Experts say the Chinese support is not enough to avoid a crisis of payment, otherwise the government would not have used other options.


Some analysts say China has deliberately pushed Pakistan to seek a bailout package from the IMF, so that the international organization could oversee its fiscal performance, which China could not do in the past. On the other hand, the IMF has set tough conditions, which are not acceptable to the government. It seeks a devaluation of the Pakistani rupee as well as an increase in domestic electricity and gas tariffs to reduce Pakistan’s fiscal deficit. The IMF’s insistence that Pakistan fully disclose the terms of loans extended under China’s Belt and Road Initiative came as a last straw. Experts say the multilateral lender’s demand for full disclosure came at an awkward time for Pakistan and China when the US had criticized Chinese President Xi Jinping’s government for engaging in “debt-trap diplomacy” through the Belt and Road, leaving borrowers overextended and beholden to Beijing, which plans to invest more than $60 billion in the China Pakistan Economic Corridor (CPEC), a flagship Belt and Road project. “We don’t drown our partners in a sea of debt,” US Vice President Mike Pence said, in a clear swipe at China, during the Asia-Pacific Economic Cooperation meeting recently. Experts say if Pakistan were to reveal the loan details, it could give the world an indication of just how indebted Belt and Road countries can become.


The government has not revealed the quantum of financial support from China, as according to Prime Minister Imran Khan, the Chinese leadership has forbidden him, but experts say Pakistan is expected to receive $6 billion from it. It has already received a deposit of $1 billion from Saudi Arabia as part of a $6 billion package. Prime Minister Imran Khan also visited the United Arab Emirates for discussions on bilateral loans on easy terms. Experts say Pakistan will prefer to seek financial help from friendly countries instead of accepting harsh conditions from the IMF, which could overburden the people of Pakistan and make the government more unpopular after a recent wave of inflation has dented its credibility.


Experts say the government will have to make a fiscal adjustment worth Rs400-550 billion to qualify for an IMF package, which could be tough for the people after the government has recently increased prices of natural gas and electricity and brought a supplementary budget two months ago. Inflation has since reached close to 7pc even though the impact lag of energy prices, particularly the power tariff, has yet to come. Another round of energy price increase will follow soon to ensure 100pc recovery of gas and electricity costs from consumers and make up for an additional subsidy of Rs44b to export-oriented sectors. It will be on top of an earlier adjustment of almost 2.1pc (about Rs800b) introduced by the PTI government in the September supplementary budget, followed by additional adjustments of about Rs120b and Rs225b in gas and electricity rates, respectively, making almost 0.9pc of GDP. It will perhaps be the highest ever fiscal adjustment in a fiscal year, with a cumulative impact of about 4pc of GDP.


The IMF also wants an early make-up for a revenue shortfall of around Rs70b in the first four months of 2018-19 against the supplementary budget target. It also wants Rs100-120b additional revenue generation through an increase in the standard rate of general sales tax rate (GST), meaning 1-2pc hike in the existing 17pc GST. There is also a call for a steep increase in tax rates on petroleum products to normalise the GST rate from the existing 12.5pc on diesel and 4pc on petrol. Another round of energy price increase has to follow soon, beginning January next year, to ensure 100pc recovery of gas and electricity costs from consumers to make up for an additional Rs44b subsidy promised to export sectors in the shape of gas rates. The size of the adjustments will also depend on the success of the authorities in fighting Rs1.3 trillion worth of tax cases currently pending in courts and recovering about Rs900b outstanding electricity bills besides a campaign against energy theft and reduction in line losses.


The IMF wants complete exchange rate flexibility, full autonomy to the State Bank of Pakistan and further tightening of monetary policy in the immediate future to set roots for stabilisation, curb demand and then consolidate the economy during the three-year programme. This has to simultaneously dovetail the gradual long-term reforms for higher economic growth, improved governance, modern and equitable tax system, self-sustaining state enterprises and improved business climate. The IMF has also advised the government to surrender its power to notify electricity rates to an automatic price adjustment mechanism under the National Electric Power Regulatory Authority (NEPRA) as a key tool to end repeated emergence of circular debt and provide a targeted subsidy in line with the Benazir Income Support Programme (BISP) mechanism.


Experts say the IMF conditions will not serve Pakistan’s interests and it should look to friendly countries for help. It is also clear that the Americans are also using the IMF for pressing Pakistan for a full disclosure of conditions tied to Chinese loans. On the other hand, Moody’s Investors Service has warned that Pakistan’s reserves adequacy is among the lowest of rated sovereigns covering less than two months of imports as of September. In its Global Emerging Markets: Outlook report, the agency, which rates Pakistan at B3 Negative, expects the country’s external vulnerability indicator (EVI) ratio to rise to 153 per cent in 2019. This ratio indicates country’s immediately available foreign exchange resources sufficiency to allow it to make all external debt payments, even if there is a complete refusal of creditors to roll over debt due within a given year. “Maldives, Mongolia, Pakistan and Sri Lanka are particularly susceptible to shifts in external financing conditions,” it highlighted.


Experts say Pakistan still has two months to avoid the harsh IMF conditions. Its reserves provide it a cover on imports for at least two months and in the meantime, it can request for help from other friends. Under the circumstances, China could also rescue Pakistan. After Pakistan’s refusal to disclose its loans, China is morally bound to bail out Pakistan. Some say Pakistan needs to sign on to a new IMF loan programme to re-establish its credibility in global markets. An IMF package may improve the credibility of the country in global markets, but it will further erode the government’s authority to rule the country, because most people have already started questioning its ability to run the affairs of the country.