The International Monetary Fund (IMF) has criticized the Pakistan Tehreek-e-Insaf (PTI) and the Pakistan Democratic Movement (PDM), namely under the economic leadership of Shaukat Tarin and Ishaq Dar, for irresponsible budgetary expansion and exchange rate manipulations, respectively, and described the unsuccessful four-year Extended Fund Facility (EFF) as a “missed opportunity”.
The $3 billion Standby Arrangement was signed following the publication of an IMF staff report that described the $6.5 billion EFF’s step-by-step “stop and go” cycles over the course of over four years.
The programming time was divided roughly into three sections by the fund: an early phase that was very successful in stabilizing the economy; a pandemic phase; and a third extended stop-and-go phase.
The initial project goals were no longer attainable due to the series of shocks (Covid-19, the Ukraine crisis, and the 2022 floods) combined with compounded policy reversals in the second half of the programme.
The government’s forceful policy implementation quickly reversed Pakistan’s significant imbalances after July 2019, enabling the first review to be successfully finished in December 2019. Due to the orderly transition to a market-determined exchange rate and consistently good fiscal performance, external adjustment advanced fast.
Early EFF buffers, prompt funding from the $1.4 billion Rapid Funding Instrument, the Debt Servicing Suspension Initiative, and assistance from other partners all helped Pakistan lessen the impact of the severe pandemic shock, and the government’s initiatives were crucial in sustaining the economy.
At this point, Shaukat Tarin, the previous finance minister, enters. The authorities departed from the EFF course by passing an expansive FY22 budget in the midst of the strong recovery.
Before the authorities changed course with the passage of a mini-budget in January 2022, the EFF remained off course throughout 2021 (the end-June fiscal target had been missed), according to the IMF. However, external imbalances had begun to build up amid the poorly timed fiscal expansion and a delayed monetary policy response to rising inflationary pressures.
In addition, the government disregarded staff advice and believed the terms-of-trade shock was only temporary, with foreign exchange interventions helping to moderate trend depreciation.
The fund claimed that after political unrest and a change of leadership, the new administration decided to keep subsidies in place for several months until putting the EFF back on track in June 2022.
A consensus FY23 budget was adopted, the policy rate was dramatically raised, post-tax fuel subsidies were eliminated, fuel taxes were increased, and electricity rates were raised.
The authorities also requested an extension of the EFF through June 2023 to demonstrate their commitment to restoring macroeconomic stability. This request was granted, supported by financing guarantees from bilateral partners to close a $4 billion funding gap after the completion of the combined 7th and 8th reviews in August 2022.