The recent International Monetary Fund (IMF) press release sheds light on Pakistan’s economic landscape, revealing a staff-level agreement on the first review of a $3 billion bailout. While the agreement signals a nascent recovery and international support, it also raises critical questions about the distribution of responsibility for ensuring budgeted external inflows and the challenges posed by rating agencies.

The International Monetary Fund (IMF) has achieved a staff-level agreement with Pakistan regarding the initial review of a $3 billion bailout. Following approval from the Fund’s Executive Board, Pakistan is set to receive $700 million. The IMF executive board had greenlit a crucial nine-month standby arrangement (SBA) with Pakistan in June, aimed at supporting its economic stabilization program. The approval allowed an immediate disbursement of $1.2 billion, with the remaining amount scheduled for phased release over the program’s duration, contingent on two quarterly reviews.

The current agreement awaits approval from the IMF’s Executive Board, and upon acceptance, approximately $700 million will be disbursed, bringing the total disbursements under the program to nearly $1.9 billion. The stabilizing policies embedded in the SBA have triggered an incipient recovery, supported by international partners and improved confidence indicators, according to the IMF mission chief. Execution of the FY24 budget, ongoing adjustments in energy prices, and renewed inflows into the foreign exchange market have collectively eased fiscal and external pressures.

While the mission chief anticipates a decline in inflation in the coming months due to receding supply constraints and modest demand, he emphasizes Pakistan’s vulnerability to external risks, including geopolitical tensions, rising commodity prices, and global financial tightening. The need for continued efforts to enhance resilience is underscored.

Macro-economic sustainability and establishing conditions for balanced growth remain pivotal priorities under the SBA, according to the mission chief. The staff-level agreement on the first review of the nine-month, $3 billion IMF Stand-By Arrangement aligns with expectations, contingent upon the fulfillment of three politically challenging conditions.

These conditions involve the unpopular yet economically rational decision to raise utility tariffs, especially for electricity and gas, and a shift from a controlled exchange rate policy to a market-determined one. The rupee’s recent fluctuation, strengthening post-currency speculator crackdown but weakening after a State Bank of Pakistan (SBP) decision in October, raises considerations about maintaining a market-determined exchange rate.

The mission’s press release cautiously signals the importance of allowing the rupee to be market-determined for sustained relief from external pressures. The authorities aim to enhance transparency and efficiency in the foreign exchange market while refraining from administrative actions influencing the rupee. Notably, the press release highlights the authorities’ commitment to respond resolutely to near-term price pressures, including second-round effects on core inflation or renewed exchange rate depreciation.

Regrettably, despite efforts, the authorities were unable to convince the IMF that adjustments in the discount rate have limited impact on inflation in Pakistan. The IMF remains concerned that rate hikes may reduce private sector borrowing, leading to adverse effects on productivity, unemployment, and ultimately contributing to a rise in the poverty rate, which currently stands at 40 percent. It fails to clarify the question: whether the responsibility for ensuring budgeted external inflows lies solely with the International Monetary Fund (IMF), as this is not explicitly stated in the Stand-By Arrangement (SBA) documents. Unlike previous Extended Fund Facility program documents, it remains unclear whether the onus rests entirely with the Fund or with the Pakistani authorities.

While the IMF acknowledges a nascent recovery propelled by international support, it underscores the urgency of timely disbursement of committed external support to bolster the authorities’ policy and reform efforts. However, a pressing concern for the authorities arises from the decision of rating agencies not to upgrade Pakistan after the staff-level agreement (SLA) on the SBA on June 29, 2023. This departure from the usual practice following IMF program approval jeopardizes access to external market financing, including borrowing from commercial banks abroad and issuing sukuk/eurobonds totaling $6 billion. This critical issue is somewhat buried in the statement citing Pakistan’s susceptibility to financial risks such as geopolitical tensions, surging commodity prices, and global financial tightening.

Despite the laudable increase in social protection allocations, budgeted at a third higher than the previous year, the per-beneficiary disbursement remains insufficient to cover even one week’s kitchen budget for a family of four. The Fund acknowledges the creation of the Sovereign Wealth Fund and the operations of the Special Investment Facilitation Committee (SIFC), noting the application of “high governance and transparency standards.” However, it is unclear whether this is a recommendation or part of the briefing.

In conclusion, the press release, guided by the IMF’s experience with Pakistani authorities over 23 previous programs, highlights the consistent weakness in implementing agreed conditions, especially regarding politically challenging reforms in the power and tax sectors. The emphasis throughout the press release is on “continued fiscal consolidation,” “further reforms to reduce costs,” “proactive monetary policy,” “building financial sector resilience,” and “continuing state-owned enterprise and governance reforms to improve the business environment, investment, and job creation.” While the economic ship may have set sail, according to the Fund’s press release, it is far from reaching its destination.

The IMF’s extensive experience with Pakistan underscores the need for sustained efforts in implementing agreed conditions, especially in politically sensitive sectors. The emphasis on fiscal consolidation, cost reduction, proactive monetary policy, financial sector resilience, and ongoing reforms highlights the arduous journey ahead. The decision of rating agencies not to upgrade Pakistan poses a significant hurdle, threatening access to external market financing. While the economic ship may have set sail, the destination remains elusive, requiring a concerted and transparent effort from both the IMF and Pakistani authorities to steer the nation towards stability and growth.