Agreement with the IMF

The IMF staff and the Pakistani authorities have finally reached a staff-level agreement on the 14th of July on policies to complete the seventh and eighth reviews of the Extended Fund Facility. This agreement is subject to approval by the IMF’s Executive Board, probably in August, leading to the extension of a loan amount of $1.17 billion.

This agreement was delayed for some time and had created uncertainty. The coalition government had meanwhile taken a number of steps to facilitate the process. This uncertainty led to a significant fall in the value of rupee. External inflows visibly declined in May 22.

The result was a decline in the foreign exchange reserves to below $10 billion. Surely, the IMF should respond faster to countries facing a balance of payments (BoP) crisis.

The end-of-Mission press release recognizes the difficult position of the Pakistan economy. It emphasizes on the steadfast implementation of the FY 2022-23 budget. Further, it reiterates the need for a contractionary monetary policy and a market-determined exchange rate.

The continuing requirement for an IMF umbrella to enable the larger external inflows in 2022-23, has led to the request being placed to the IMF Executive Board for extension of the period of the programme from September 22 to June 23. In addition, access will be increased by SDR 700 million.

Five areas have been identified as critical to the successful implementation of the programme and achievement thereby the stabilization of the economy.

The first area relates to fiscal policy, with the key objective of generating a primary surplus in the 2022-23 budget and thereby restricting the growth in the level of government debt and aggregate demand in the economy.

The second area is improving strongly the functioning of the power sector of Pakistan. Due to low pricing, high system losses and building-up of liabilities the circular debt has increased by as much as Rs 850 billion in 2021-22 and put enormous pressure on the subsidy bill of the federal government. The programme will require a big adjustment shortly in the power tariff.

As highlighted above, the third area is strong and responsive monetary policy, with removal of subsidized interest rates on particular refinancing schemes and the prevalence of a market-based exchange rate.

The ‘human face’ of the programme lies in the support expressed for the two social safety nets, BISP and the Sasta Fuel Sasta Diesel, SFSD programme. The fifth area is governance. For the first time, emphasis is being placed on improving the institutional process against corruption.

The press release ends with a warning that in the presence of higher uncertainty in the global economy and financial markets there may be need for even more emergency actions during 2022-23.

There is need to recognise the efforts of the finance team of the government in reaching agreement with the IMF staff over an extended period of negotiations. The IMF team was particularly tough in clearly identifying the policy actions and their implementation.

The end-February subsidy on petroleum products and electricity by the previous government had greatly reduced the faith of the IMF in Pakistan’s steadfast commitment to the agreed reform process.

The detailed staff report on the seventh and eight review is awaited. The most important part of this document is the plan regarding the total financing requirements of Pakistan and the extent of financing from different sources. Following the sixth review, the detailed staff report of February 22 had estimated the gross external financing requirement at $35.1 billion in 2022-23.

The fundamental question relates to the agreement with the IMF on the balance of payments (BoP) projections for 2022-23 and, in particular, the target size of the current account deficit.

The projections for Pakistan in the latest World Economic Outlook of the IMF are based on an 8 percent reduction in imports and over 8 percent enhancement in exports. This implies that the expectation in 2022-23 is for a near halving of the current account deficit from the likely level of $16.5 billion in 2021-22.

A tough target on the cut in the size of the current account deficit in 2022-23 to reduce the external financing needs will be the most important target and require extraordinary resort to contractionary monetary, fiscal and trade policies. This is likely to keep the inflation at a high double-digit while suffocating the process of growth.

The detailed staff report will also contain the quantitative performance criteria and indicative targets on a quarterly basis for 2022-23, given the extension of the programme to June 2023. In addition, there will be structural benchmarks and prior actions.

Given the weak state of the economy, especially the very low level of foreign exchange reserves, the quarterly targets are likely to be exceptionally tough and the IMF is unlikely to provide waivers readily, given its somewhat intransigent attitude.

This increases the likelihood of mini-budgets in 2022-23. The Government and especially the Finance Team will have to ensure strict and full implementation of the policies in the programme to take the country out of a very fragile economic position.

Copyright Business Recorder, 2022