IMF spell out term to unlock bailout funds

ISLAMABAD: The International Monetary Fund (IMF) on Monday urged Pakistan to adhere to the Constitution in order to settle its political disputes as Prime Minister Shehbaz Sharif reportedly contacted Managing Director Kristalina Georgieva to revive the derailed $6.5 billion bailout package in an effort to avert default.

The conversation between Shehbaz and Georgieva happened on Saturday as a result of the finance ministry’s inability to resolve the loan negotiations during the previous four months, according to information provided by official sources.

Two days after Shehbaz and Georgieva made their highest-level contact, Nathan Porter, the IMF’s mission chief in Pakistan, made an unexpected statement that shifted the IMF’s attention to the political sphere.

We acknowledge the current political developments, and although we refrain from commenting on domestic politics, we do hope for the discovery of a peaceful solution that aligns with the law and the Constitution.

The announcement followed a continuous crackdown on PTI employees, kidnappings, the violation of the 90-day constitutional deadline for holding elections in the two provinces, and the prosecution of civilians in military courts under the Army Act. Typically, the IMF stays silent on political issues.

Porter also outlined the requirements that Pakistan must satisfy in answer to inquiries in order to achieve an agreement with the foreign lender.

These include setting up foreign loans, approving a new budget that adheres to IMF guidelines, and restoring the correct operation of the foreign exchange market.

Prime Minister’s Instructions:

According to the sources, the prime minister chose to step in because he believed that the IMF was his only remaining option for preventing a default.

The prime minister gave the finance ministry instructions to inform the IMF of the upcoming budget’s specifics following their conversation.

A day before Finance Minister Ishaq Dar launched another verbal attack on the international lender, contact established.

Dar, during a private TV program, stated that delaying the 9th assessment would highly biased and embarrassing for the IMF at this stage.

The prime minister had contacted the IMF managing director and asked her once more to help overcome the impasse, a top finance ministry official disclosed,

The review negotiations eventually began in February after the prime minister called Georgieva earlier to ask for her help.

Despite the ongoing insistence by Pakistani authorities that the IMF can expedite the review completion period by convening a board meeting within two weeks of the staff-level agreement notification, time is running out for the Pakistani side. With only one month remaining before the program expires, the situation is becoming critical.

Porter said that for Pakistan to preserve macroeconomic stability, “maintaining strong policies and obtaining sufficient financing from partners remain key.”

IMF Programme:

In order to facilitate a board meeting before the present programme expires at the end of June, the IMF staff continues to engage with the Pakistani authorities, he continued.

The focus of this engagement will be on restoring the proper functioning of the foreign exchange market, ensuring the adoption of a budget for FY24 that aligns with program objectives, and securing sufficient funding.

Pakistan, according to the sources, does not now meet all three requirements.

The rupee valued at about Rs 316 to the dollar in the open market but traded at Rs285.41 on Monday in the interbank market.

According to the sources, the new budget departs radically from a plan that the IMF had considered.

More generally, Porter stated that in order for Pakistan to achieve strong and private-led growth, it would require continuous policy efforts and reforms.

The IMF mission chief emphasised that improving domestic revenue mobilisation and eradicating SOE losses to free up fiscal space are also essential for ensuring long-term sustainability, reducing inefficiencies that affect the private sector, and enabling an increase in social and development spending.

PM directs IMF:

According to the sources, the prime minister told the IMF director that Pakistan had met every need set down in the February agreement and that the fund should now make a staff-level agreement public. However, sources claimed that the IMF MD requested specifics about the revised budget.

Due to the 9th review’s concern for the period of July to September 2022 and the IMF’s request to see the budget for the following year, the finance ministry has previously declined to release the budget specifics for the next fiscal year.

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.

Financial Gap:

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 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 govt’s revised estimate of around $4 billion to $4.5 billion.

Govt Budget:

According to initial reports, the government wanted to announce 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.

Bailout around 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 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.