23 C
Saturday, September 30, 2023
Generic filters
EditorialPakistan’s journey to striking IMF deal

Pakistan’s journey to striking IMF deal

Pakistan has heaved a sigh of relief, finally. The long wait of around eight months has ended on a positive note. The country had been hoping to receive the $1.1 billion tranche under the ninth review of the $6.5 billion Extended Fund Facility (EFF) – that was set to expire on June 30 – but instead managed to secure $3 billion under the standby agreement.

With each passing day, hopes of getting any money from the IMF were fading and the threat of default started to loom large.

The agreement that has been reached is subject to approval by the IMF board in July. This deal provides some respite to Pakistan, which is confronted with depleting foreign reserves and balance of payments crisis.

The $3bn funding is higher than expected for Pakistan, which had been awaiting the release of the remaining $2.5 billion from a $6.5 billion package agreed in 2019. That programme was to expire on June 30.

After the presentation of the federal budget for fiscal year 2023-24 on June 9, the IMF had expressed its reservations on certain components of the budget.

The government then presented a revised budget in which it introduced new taxes through the Finance Act 2023 in order to satisfy the money lender. These taxes would apply on builders, developers as well as DAP fertilisers.

After fulfilling the requirements, Finance Minister Ishaq Dar revealed that the government was pursuing the release of the entire pending amount of $2.5 billion under a standby agreement.

A series of talks were held with the IMF for the release of the $1.1 billion instalment ever since the IMF team visited Pakistan in January this year, but one or the other factors were hindering a positive outcome.

The current government had to take unpopular decisions and compromise on its votebank; it had no choice. This very reason was the cause of the delay on the successful conclusion of the deal.

On July 3, 2019, the Executive Board of the IMF had approved a 39-month extended arrangement under the Extended Fund Facility (EFF) for Pakistan for an amount of around $6 billion to support its economic reform programme.

The programme aimed at helping Pakistan generate sustainable and balanced growth by reducing public debt, building resilience, introducing a flexible, market-determined exchange rate, increasing reserves, eliminating losses in the energy sector and strengthening institutions.

To achieve these targets, Pakistan had to take stringent steps. First, the country had to set its system in order by improving the taxation system and reducing subsidies. It had to cut down on useless expense, introduce a transparent financial system and bring down circular debts.

For this, unpopular decisions had to be taken, which no political party was willing to take.

The present coalition government wanted to pass on the minimum impact of the IMF conditions on the people in order to preserve its support, which was already at a low following the ouster of the Imran Khan-led government in April 2022.

In a statement issued following the state-level agreement, IMF Representative to Pakistan Nathan Porter said the new standby arrangement was built on the 2019 programme.

He recounted the various challenges being faced by Pakistan that had brought an economic crisis, including last year’s catastrophic floods and price hikes due to the war in Ukraine.

“As a result of these shocks as well as some policy missteps — including shortages from constraints on the functioning of the FX market — economic growth has stalled. Inflation, including for essential items, is very high,” he said in a statement.

He went on to say that although the government made efforts to reduce imports and trade deficit, the foreign reserves continued to decline to low levels.

“Liquidity conditions in the power sector also remain acute,” Mr Porter said.

The IMF representative hoped that the new arrangement would help meet these challenges and provide a “policy anchor and a framework for financial support from multilateral and bilateral partners in the period ahead”.

The press release said the standby agreement would “support the authorities’ immediate efforts to stabilise the economy from recent external shocks, preserve macroeconomic stability and provide a framework for financing from multilateral and bilateral partners”.

On the other hand, Prime Minister Shehbaz Sharif hoped that the $3 billion deal would be Pakistan’s last loan programme with the IMF.

He discussed in detail about his talks with IMF Managing Director Kristalina Georgieva, and how he had tried to convince her that all conditions for the release of the funds had been fulfilled. He said she raised certain concerns, including the $2 billion external financing gap, after which he met the Islamic Development Bank president who then announced $1 billion in funds for Pakistan.

Meanwhile, majority of the analysts were of the view that the latest agreement would enable Pakistan to thwart the threat of default and provide it with a short-term relief.

The IMF deal would also unlock more funds from other financial institutions, including the Asian Development Bank and the World Bank.

This whole IMF saga should serve as a lesson for the Pakistani leaders. It had been an uphill task securing loans, and if rationale prevails, the leaders should take all direly needed steps to revive the country’s economy, make use of the funds in a profitable manner and take the country forward in a positive way.

Self dependence should be achieved through a proper economic plan.

Subscribe Today





Get unlimited access to our EXCLUSIVE Content and our archive of subscriber stories.

Top News

More articles