Euphoria must not give way to despair

The nation is in a state of euphoria since it successfully clinched an International Monetary Fund’s (IMF’s) $3 billion 9-month Stand-By Arrangement (SBA) a couple of days ago.

Ironically, Euphoria may soon give way to despair, if we do not immediately and systematically capitalise upon this breather and strictly comply with the terms and conditions that we have agreed with the fund.

The IMF has unlocked crucial funding for the troubled economy. Reportedly, $1.2bn would be given upfront while the “balance amount” of $1.8bn would be transferred to State Bank of Pakistan (SBP) after two reviews in November 2023 and February 2024.

“So in that regard, I want to share the information that the upfront payment of $1.2 billion, the IMF has transferred into the State Bank of Pakistan’s (SBP) account,” the Finance Minister said, adding that been a $4.2bn increase in the SBP’s reserves during the week. “So I am expecting that our forex reserves will close at $13-14bn by tomorrow. The SBP will give the exact numbers,” according to the finance minister.

Kristalina Georgieva, Managing Director and Chair of IMF, after its board meeting, made a statement which demonstrates a lot of empathy for the plight of the Pakistani nation. She stated: “Pakistan’s economy was hit hard by significant shocks last year, notably the spillovers from the severe impacts of floods, the large volatility in commodity prices, and the tightening of external and domestic financing conditions.

These factors together with uneven policy implementation under the EFF combined to halt the post-pandemic recovery, sharply increase inflation, and significantly depleted internal and external buffers.

The authorities’ new Stand-By Arrangement, implemented faithfully, offers Pakistan an opportunity to regain macroeconomic stability and address these imbalances through consistent policy implementation.” In the same note the IMF has fixed four specific conditions for the implementation of the programme.

The programme will focus on (1) implementation of the fiscal year 2024 budget to facilitate Pakistan’s needed fiscal adjustment and ensure debt sustainability, while protecting critical social spending; (2) a return to a market-determined exchange rate and proper FX market functioning to absorb external shocks and eliminate FX shortages; (3) an appropriately tight monetary policy aimed at disinflation; and (4) further progress on structural reforms, particularly with regard to energy sector viability, SOE governance, and climate resilience.

The above four focal points have always been the crux of the IMF programme to help Pakistan achieve fiscal and economic stability, notably, the ‘point-4’ is related to the drain of nation’s financial resources to sustain a badly performing power sector and the State Owned Enterprises (SOEs).

The issue has always been side-tracked by successive governments and has been a source of irritation to the IMF. This time, IMF appears adamant by short-listing just four points - easy to track and presumably base its next tranche on its fulfillment or accomplishment.

These four points are valid and in the nation’s interest - having been responsible for much of the decline of the nation’s fiscal and economic viability. The circular debt stands at Rs 2.7 trillion despite repeated and significant increase in electricity tariffs. The amount of loans and guarantees stands at nearly Rs 6 trillion to sustain loss making SOEs, year after year.

The approach of two governments (Pakistan Tehreek-e-Insaf-led coalition government and Pakistan Muslim League-Nawaz-led coalition government) to current IMF programme, since its inception in 2019 to date, has been characterized by political expediency instead of overall public and national interest.

The time ahead with caretaker government, general elections and arrival of a new elected government is a period of great political uncertainty and if major decisions to implement IMF’s four points are not acted upon diligently and honestly, there could be trouble.

The IMF has planned a review in November 2023 to release the next tranche; much-needed steps are therefore required to be taken to continue to attract the sympathy of the IMF Managing Director. Otherwise, needless to say, it would be very tough situation to manage. Pre-emptive measures have to be taken now to avert this eventuality.

The approval of IMF SBA by its board and a visible improvement in the country’s foreign reserves are the factors that have caused a positive sentiment in the market. Pakistan’s sovereign dollar bonds gained as much as 1.7 cents, according to Tradeweb data, after the International Monetary Fund’s (IMF’s) Executive Board approved a $3 billion SBA. Moreover, the 2024 and 2027 maturities notched the strongest rallies, with the latter rising by 1.75 cents.

There is a surge in the Pakistani rupee and the stock market, and the country’s rating upgrade by Fitch. The state must build up on these positive indicators, overriding political considerations. This nation has a long history of missed opportunities – hopefully, this time would be different.

Copyright Business Recorder, 2023