It has been forty days since the IMF’s (International Monetary Fund’s) technical talks concluded, but there have been no signs of the pending Staff Level Agreement (SLA) taking place.
At this point, IMF agreement seems unlikely. It appears that the government itself is pushing the country to the brink and hoping to make the IMF a scapegoat for its failures. The government’s intentions are no longer so sanguine, as evidenced by the recent announcement of untargeted and price-distorting subsidies.
One after the other, authorities have tried to pass the buck of its lapses onto the Fund. It started with the Supreme Court taking suo motu action on the apparent delay in elections or two provincial assemblies. Soon after, the Prime Minister himself announced that the IMF deal may not happen in ten days, despite the fact that he and the finance minister previously claiming that the IMF deal would happen in 2-3 days.
Meanwhile, Islamabad was rife with whispers that the IMF is forcing Pakistan to compromise its nuclear assets. On probing, it appears that such talks were initiated by the finance ministry, and these reports were then covered (without attribution to source) by business journalists. The rumor spread, and one coalition partner senator publicly demanded clarity on threats to strategic nuclear assets. Intentionally, it seems a conspiracy theory was fueled, and later the Fund had to issue a clarification.
In another case, the Election Commission’s explanation for the delay of elections referred to finance secretary indicating that funds to hold elections were unavailable due to financial restrictions imposed under the IMF program. Again, the Fund’s country representative had to clear the air by issuing a statement, denying all such claims.
The government should stop selling these fantasies. The PDM (Pakistan Democratic Movement) government, especially the finance ministry under Ishaq Dar, must bear the blame for failing to resume the IMF program despite passing the inflationary burden on to the masses. Almost all conditions have now been met; energy prices have been revised upward, GST has been raised, new taxes have been imposed, currency has been adjusted, and interest rates have increased. Yet program resumption eludes us.
The government has failed to bridge the financing gap, which was assured in the last review when Miftah Ismail was the finance minister. At that time, Saudi and other GCC partners offered verbal assurances in the IMF’s board meeting that they would inject the pledged deposits or provide funds in some other form.
However, between September 2022 and March 2023, there has been a change of heart. They are not offering any commitments on shoring up SBP’s (State Bank of Pakistan’s) foreign exchange reserves before the IMF’s board meeting, and without that, the IMF SLA will not happen. In fact, one partner has outrightly denied any new loan issuance.
The writing is on the wall. The government has lost the IMF’s and GCC partners’ trust due to its mishandling of the economy over the last few months. It is crystal clear that the government’s top priority is to neutralize Imran and his party, PTI (Pakistan Tehreek-e-Insaf).
This may well be Pakistan’s internal conflict which has nothing to do with lenders but being at loggerheads with the country’s most popular leader (approval rating of 61 percent in a recent survey) cannot help restore macroeconomic and political stability. Without those, there is no guarantee that the government will follow the economic stabilization path agreed with the IMF.
Perhaps seeing this, the GCC countries are shying away from injecting money into Pakistan’s economy. This is in line with the Saudi finance minister’s statement at Davos a few months ago, where he clearly said that the kingdom is changing the way it provides aid, moving away from direct grants and deposits provided unconditionally in the past. Thus, Pakistan must sell its case through prudent economic management and find a way to meet or placate Saudi’s foreign policy demands.
Against the backdrop of the government’s increasing non-seriousness towards the IMF, last week saw the announcement of a few new subsidies. None of them are direct, and their motives are purely political, with the potential to create price distortions.
For example, provincial governments provide cheap Atta (flour) to the public, but this can lead to leakages and corruption during disbursement. Furthermore, people have been forming long queues to receive free wheat flour, with some even dying in their quest for free essential item.
Another scheme involves cross-subsidies on fuel. This planned programme has been disapproved by the IMF due to the distortions they would cause. In fact, the Fund’s representative has recommended giving direct cash to subsidy recipients instead.
Overall, the government’s economic management is failing to show a clear pathway forward, which is essential for securing the IMF’s support. According to the writings of some former Saudi and American diplomats, the only way to achieve political stability is through fresh elections.
However, the PDM government may not support this approach and may try to avoid elections at all costs. This poses a growing risk of a disorderly default and painful debt restructuring.
Copyright Business Recorder, 2023