9th review struggle with IMF

Since November of last year, Pakistan is still waiting for the release of the next tranche of $1.1 billion from the IMF (International Monetary Fund). In most part, the release of tranche has not happened todate due to lack of trust and transparency created by Pakistan as the country has always been coming short on fulfilling the agreed terms and conditions! During the last staff level meeting in Islamabad, Pakistan had agreed with the IMF high level team to have enough foreign cash reserves through other friendly resources (Saudi Arabia, the UAE, China) to meet its loan payment obligations to avoid the default.

Pakistan has met majority of the conditions that were outlined in November 2021 communique as highlighted below:

• Financial accountability & transparency

• Complete autonomy of the central bank (SBP)

• Market determined exchange rate

• Increase in tax collection & revenues growth

• Hikes in power & energy prices

• External debt reduction

• Increase in foreign currency reserves

• Carbon emission (CO2 & GHG) reduction road map for meeting COP26’s net zero targets

However, since the last many months, Pakistan has been struggling severely to have enough foreign currency reserves to satisfy one of the major critical conditions of the IMF. With time, the balance of payments crisis has become chronic as the foreign currency reserves have continually declined considerably. According to the latest reports, the reserves have fallen to cover less than four weeks’ of imports. Currently, these imports are vital and relate to the most essential items for survival, namely medicines, energy, food, and machinery.

Now the main stumbling block between the IMF and Pakistan has been to find about $6 billion funds from other resources to satisfy one of the basic IMF conditions in order to continue to support Pakistan and to conclude its 9th review that is going to expire in June of this year.

So far Pakistan has been successful in renegotiating the payment terms of Chinese loans and in some cases to roll them over until their next due dates.

In the recent past, many countries have gone through economic crises, mostly due to the aftermath of the COVID-19. Additionally, the energy cost escalations have put a lot of burden on many emerging economies not to mention the underdeveloped and sub-Saharan countries. Nonetheless, many of these countries (Sri Lanka, Bangladesh, Myanmar, Egypt, etc.) have been successful in navigating the choppy waters of the global economy by getting financial assistance from international agencies. In most part, they have been successful by agreeing with their lenders and by keeping their reforms very transparent. This strategy has clearly led them to secure their needed funds with little or no delays to revive their economies. In case of Pakistan, a lack of transparency has been the paramount concern (mostly related to implementing the necessary reforms that were agreed during their last negotiations) that has been raised many times by the IMF team members before their negotiating counterparts. This kind of behaviour has created further friction and erosion of trust between the parties and that has been the reason even after about six months: Pakistan has not been able to finalize its 9threview under the EFF (extended Fund Facility) programme of $1.1 billion that will be expiring by June of this year.

Even after repeated statements by finance minister Ishaq Dar that Pakistan has secured the needed funds ($6 billion) to meet the balance of payments obligations in the coming months, the IMF wanted to have it confirmed independently, like through the SWIFT, or directly through the lenders.

Last month, the IMF had said it needs to ensure financing assurances are in place in order to take “the next step with Pakistan”. This was re-accentuated again recently by Julie Kozack (IMF’s Director of Strategic Communications) that “Timely financial assistance from external partners will be critical to support the authorities’ policy efforts and ensure the successful completion of the review [with Pakistan].”

As Pakistan was resorting to give up its hopes, on May 17 Saudi Arabia communicated the confirmation of $2 billion funds transfer to the SBP (State Bank of Pakistan), and the UAE also confirmed transfer of $1 billion (another report says $1.3 billion) to the central bank (SBP). Last month, China had credited $1.7 billion to SBP and rolled-over $2 billion loans.

While the financial support from the friends to bail Pakistan out was unfolding, Dar announced lowering the petrol and diesel prices (Rs. 12.0 & 30.0/L respectively) effective immediately through the end of May 31, 2023. This action by Dar goes against the bailout terms & conditions and could lead to jeopardizing the release of $1.1 billion tranche and the conclusion of the 9th review with the Staff Level Agreement (SLA)!

Even if the IMF concludes the 9th review and releases the desperately needed $1.1 billion tranche before its expiration by end of June, it will not be the end of country’s fiscal woes. With the passage of everyday, the sovereign debt is continually ballooning, thus Pakistan will have no choice but to approach the IMF for its next bailout assistance. Based on the current struggle in meeting the economic reforms, it is clear that for the 10th review, IMF terms & conditions will be much sterner than the current ones.

Therefore, it is in the best interest of Pakistan and its policymakers that they should honestly implement all those reforms that IMF and other lenders are asking for and maintain transparency to help earn back their trust and support. These are the concerns that the author has many a time voiced in his previous articles for this publication. As a matter of fact, a similar opinion was expressed by this publication recently in its editorial. I hope this piece will serve as the springboard for the policy makers, finance minister and Pakistani leadership to bring its finances in order to revive country’s economic activity that will definitely bring in a steady stream of foreign exchange that Pakistan desperately needs.

Copyright Business Recorder, 2023