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Sunday, May 28, 2023
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EditorialIMF deal finally in sight

IMF deal finally in sight

It’s the first week of the month – which means salary time, and grocery shopping time for most households. And, people must have surely gotten a shock. Prices of daily-use items had shot up, leaving many families no choice but to either skip some items, reduce their quantity, or raise their budgets. Whichever class they belonged to, every person was scratching his or her head at the exorbitant rise in the cost of living. Increased taxes, in some cases short supply, and increased production costs were the major reasons behind the process surge.

But the main reason for an increase in prices was the government’s desperation to fulfill the International Monetary Fund’s condition to secure the much-needed loan to save itself from default. The latest major condition it fulfilled was to raise the interest rate to its level of 300 basis-point surges (bps). The country had fulfilled all the prior conditions required for staff-level agreement with the IMF for disbursement of the $1.2bn tranche.

It had introduced the mini-budget, under which new taxes were imposed to collect an additional Rs170 billion. Some other significant policy actions that the government completed were allowing the exchange rate to operate freely and continuing with an almost 10pc increase in power rates permanently through a special surcharge.

The free exchange rate can be gauged from the fact that a day earlier the rupee fell to an all-time low of Rs285.09 against the dollar due to delays in the IMF agreement. However, it recovered by around Rs6.63 after indicators pointed to the IMF deal. It has been learned that the government and the Fund were working on finalizing the Memorandum of Economic and Financial Policy (MEFP) text and targets for the program implementation that could be presented to the IMF’s executive board for approval.

The IMF mission is expected to present the case before the executive board “in the most agile fashion possible” against a normal process of about six weeks. The two sides are also engaging with lenders and financial institutions. The good news is that the IMF is facilitating this coordination, which is giving confidence to the lenders.

The most critical condition was the continuation of the special surcharge on electricity. On the IMF’s advice, the government approved the continuation of up to Rs3.23 per unit special surcharge on consumers that would generate Rs335 billion for debt servicing in the next fiscal year. It is believed that the surcharge was critical to support the power sector and divert the government finances to only budgeted subsidies.

Brushing aside rumors of default, Finance Minister Ishaq Dar stated that negotiations with the IMF were in their final stages and a state-level agreement was expected to be signed next week. A few days back, the government expressed annoyance over the delay in the IMF deal. But, lately, confidence was evident from the face of the country’s financial wizard.

He said that the reserves were almost $1 billion higher than four weeks ago even after making all external payments and economic indicators were gradually moving in the right direction.

Finance Minister Dar also announced that Pakistan was expecting $1.3 billion in financing from the Industrial and Commercial Bank of China Ltd in the coming days, which will further shore up to help shore up foreign exchange reserves.

If all goes well, and with more funds coming in, the reserves would get healthier. What is now required is a sincere effort on the part of our rulers to devise a permanent economic strategy that would help save the country from getting trapped in this quagmire again.

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