IMF spells out terms to unlock bailout

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ISLAMABAD: The International Monetary Fund (IMF) on Monday urged Pakistan to follow the Constitution in order to resolve its political disputes, as Prime Minister Shehbaz Sharif contacted Managing Director Kristalina Georgieva to revive the derailed $6.5 billion bailout package apparently in a last-ditch effort to avoid default.

The discussion between Shehbaz and Georgieva took place on Saturday after the finance ministry could not break the deadlock over the loan talks during the past four months, official sources told Daily City News.

Two days after the highest-level contact was established between Shehbaz and Georgieva, IMF Mission Chief to Pakistan Nathan Porter gave an unusual statement, expanding the IMF’s focus to the political arena.

“We take note of the recent political developments, and while we do not comment on domestic politics, we do hope that a peaceful way forward is found in line with the Constitution and rule of law.”

The statement came on the heels of an ongoing crackdown against the PTI workers, adductions of people, breach of the 90-day constitutional limit to hold elections in the two provinces and trial of civilians in military courts under the Army Act. Usually, the IMF does not comment on political matters.

In response to questions sent by Daily City News, Porter also spelled out the conditions that Pakistan has to meet to reach an agreement with the foreign lender. These include arranging foreign loans, approval of new budget in line with the IMF framework, and restoration of foreign exchange market’s proper functioning.

The sources said that the prime minister saw the IMF as the last resort to avoid a default and that was why he decided to intervene. After the conversation with the IMF chief, the prime minister instructed the finance ministry to share details of the next budget with the IMF.

The contact was made a day before Finance Minister Ishaq Dar criticised the global lender again. “We are at a point where it would be extremely biased and shameful for them [IMF], if the 9th review doesn’t take place now,” Dar told a private TV channel.

A top finance ministry official confirmed to Daily City News that the prime minister had contacted the IMF managing director and requested her again to play a role in breaking the deadlock.

Earlier, the prime minister had telephoned Georgieva and sought her intervention to start review talks, which eventually took place in February.

Time is against the Pakistani side as only one month is left in the expiry of the programme, although Pakistani authorities still insist that the IMF can shorten the review completion period by calling a board meeting within two weeks from the date of announcement of the staff-level agreement.

“Sustaining strong policies and obtaining sufficient financing from partners remain key for Pakistan to maintain macroeconomic stability,” Porter stated.

He added that to this end, the IMF staff continues engagement with the Pakistani authorities to pave the way for a board meeting before the current programme expires at end-June.

“This engagement will focus on the restoration of foreign exchange proper market functioning, the passage of a FY24 budget consistent with programme goals, and adequate financing.”

However, the sources said that Pakistan was currently not fulfilling all three conditions. The rupee was traded at Rs285.41 in the interbank market on Monday but its value was around Rs316 to a dollar in the open market. The new budget is completely off track to a framework that the IMF had discussed, the sources said.

Porter said, “More broadly, overcoming the present economic and financial challenges would require sustained policy efforts and reforms for Pakistan to regain strong and inclusive private-led growth.”

The IMF mission chief emphasised that strengthening domestic revenue mobilisation and eliminating state owned enterprises (SOE) losses to create fiscal space are also critical for ongoing sustainability, reducing inefficiencies which affect the private sector, and allowing a scaling up of social and development spending.

The sources said that the prime minister informed the IMF chief that Pakistan had fulfilled all the conditions agreed in February this year and that the fund should now announce a staff-level agreement. Sources, however, said that the IMF MD sought details of the new budget.

Earlier, the finance ministry had refused to share the budget details on the ground that the 9th review pertained to the July-September 2022 period and the IMF’s demand to see the budget for the next fiscal year was unjustified.

A staff-level agreement might be possible after presentation of the budget provided it is in line with a mutually agreed fiscal framework, according to a senior government functionary.

But some initial details suggested that the under-discussion budget was expansionary in nature and has to be slashed down to bring it in line with the IMF’s requirements.

The prime minister has also set up seven committees to bring the proposed budget in line with his political priorities, including the one headed by Defence Minister Khawaja Asif, to recommend an increase in salaries, pensions, and allocation of subsidies.

The IMF had asked Pakistan to arrange the $6 billion fresh loans to bridge the financing gap till June this year but so far the government has obtained assurances for $3 billion from Saudi Arabia and the United Arab Emirates (UAE).

Dar said that the understating was that Pakistan would arrange $3 billion before the staff-level agreement and the remaining $3 billion after the agreement. He added that Pakistan was ready to share the details of the budget and the foreign exchange policy with the IMF.

The $6.5 billion programme remains derailed since November last year and it is going to expire on June 30. Of the $6.5 billion, the IMF has not yet disbursed $2.6 billion, including $1.2 billion tranche linked with the completion of the 9th review. Dar said on Sunday that “our understanding is that the IMF would complete the 9th review”.

Pakistan has only $4.1 billion foreign exchange reserves, which are not sufficient to make $25 billion repayments in next fiscal year. In absence of the IMF umbrella, other lenders are also not giving loans to Pakistan.

The sources said that there was still a difference of opinion on the issue of the current account deficit for this fiscal year, as the IMF has not yet accepted the government’s revised estimate of around $4 billion to $4.5 billion.

According to initial reports, the government wanted to announce an expansionary budget of around Rs14.6 trillion with a deficit of around 7.4% of the gross domestic product (GDP) or Rs7.8 trillion.

Under the $6.5 billion bailout package, the IMF had targeted Pakistan achieving a primary budget surplus – a measure that shows that government revenues are higher than its expenditures, excluding interest payments. The primary budget surplus had been boasted as a strategy to reduce public debt.

For FY 2023-24, the IMF has in August last year assessed a primary budget surplus of 0.6% of the GDP but the finance ministry has worked out the budget on the basis of 0.1% of the GDP surplus. The FBR’s proposed revenue target of Rs9.2 trillion is equal to 8.7% of the GDP, which is also significantly lower than the IMF’s framework.

The IMF’s Fiscal Monitor report released last month showed that during FY 2023-24 the budget deficit can go to as high as 8.3% of the GDP. In August last year, the IMF had projected the budget deficit for the next fiscal year at 4% of the GDP.

But the finance ministry till last week was proposing an overall budget deficit of around 6.9% of the GDP or Rs7.3 trillion.

The sources said that the allocations for the interest payments may remain around Rs7.5 trillion, or 7% of the GDP. This means the government will have to significantly increase the revenues to show a primary budget surplus to the satisfaction of the IMF.

In his television interview, Dar said that Pakistan was against clubbing the 9th review with the 10th and both should be dealt separately. In a tweet on Monday, Shehbaz said: “We do face the economic challenges but the doomsday scenario is past us.”

Sincere efforts were being made to address the challenges through economic belt-tightening and timely policy interventions, according to the prime minister, saying Pakistan was also working with friends and partners to bridge the financing gaps where needed.

 

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