Political uncertainty and impasse with IMF



March 19, 2022

Political uncertainty


Asrar Raouf describes a financial hold-up harmful for the country

Though there are no signs that the International Monetary Fund (IMF) is weaning away from Pakistan regarding its financial programme but there are substantial reservations conveyed by the agency about Pakistani financial management. Moreover, the political uncertainty also has made the situation murkier as both sides are waiting for results to emerge out of the political tussle. It is quite obvious that an unsettled political state adversely affects the Pakistan-IMF financial engagement and may cause untoward complications. The looming political crisis has accordingly delayed ongoing staff-level review talks between IMF and Pakistan with the decision on the next loan tranche unclear till the crisis is resolved one way or the other. In the absence of political certainty Pakistan and the IMF will continue holding ongoing parleys for an indefinite period for striking consensus on many thorny issues.
It is more than clear that no time frame could be given for finalising the current negotiations held in respect of completion of the 7th review. The last two reviews combined the third, fourth and fifth reviews with the sixth review under the Extended Fund Facility (EFF) arrangement and took almost nine months period each time for completion. The uncertainty of the current situation has made it abundantly clear to both sides that they do not possess the luxury to carry on parleying for long and that they are now constrained to conclude the ongoing talks by the end of the ongoing month for meeting the deadline to forward the staff report before the IMF’s executive board by next month to meet the deadlines of the programme. It is also well-known that in the future there are three outstanding reviews including 7th, 8th, and 9th of the programme under the existing EFF arrangement which would expire by September 2022.
The impasse with IMF has however more financial underpinnings than just political uncertainty. The main issue is the disaffection of the IMF with many deviations Pakistani financial managers have resorted to during the running IMF programme. In this context the first and foremost problem appears to be a substantial hurdle created by the Prime Minister’s Relief Package for slashing down petrol, diesel and electricity prices as well as granting tax amnesty for the industrial sector. It is quite obvious that the timing and the content of these measures belied rational assessment of the prevailing economic situation with clear opportunistic streak hidden in these measures irritating the IMF team. It was widely reported that the IMF insisted that Pakistan was bound not to grant any tax amnesty as it is part of a continuous structural benchmark. However, Islamabad breached this continuous structural benchmark which now requires a waiver from the IMF’s Executive Board for completion of the 7th review and release of the next tranche.
This opinion is diagonally contested by simply going against the stance taken by official financial managers who downplay this aspect and mention that this scheme for the industrial sector did not require waiver from the IMF because it was not part of performance criteria and it was part of missed structural benchmarks which are assessed in the context of overall programme performance. The official side emphasised that the major challenge for striking consensus on Memorandum of Financial and Economic Policies (MEFP) was evolving consensus on external front projections in the wake of increasing current account deficit because the IMF’s projections proved wrong. The IMF had projected that the current account deficit would be standing at $12.9 billion for the current fiscal year but it had already touched $11.6bn in the first seven months of the current financial year.
The impending difficulty in this respect could be that if current account deficit target was revised upward in the range of $18 to $20 billion for the whole fiscal year 2021-22 then the question would certainly arise that from where external financing of $5 to $7 billion would be bridged to avoid depletion of foreign currency reserves. This is a tricky situation and there is no easy solution to this riddle. The rising POL and commodities prices in the international market multiplied the woes of the economic managers but keeping in view increased vulnerabilities on economic and political fronts they did not have much space to manoeuvre through policy prescriptions. This again is a knotty issue and may take considerable efforts to come to grips with.
It is reported that for the sake of arriving at a consensual decision on MEFP, the IMF has asked Islamabad to increase discount rate, allow free movement of the exchange rate, slash down Kamyab Pakistan Program (KPP) and reverse relief package measures to align it with prudent financial management. Acting in complete contradiction of the laid-down conditionalities there emerged new realities on the macroeconomic front as despite IMF opposing the PM’s Relief Package announced reduction of petrol and diesel prices by Rs.10 per liter and electricity prices by Rs.5 per unit from March to June 2022. This most damaging aspect of this measure was that it froze the price hikes of these services for a period of months thereby going against the long-time practice of letting the prices fluctuate according to market flows.
Moreover, the government has envisaged disbursing loans of Rs.407 billion under much hyped KPP but the IMF is asking to slash down this amount for two years period till June 2023. The obvious fall-out is that the review talks were scheduled for two weeks and were expected to conclude shortly but the recent measures have put a damper on the parleys. It is quite obvious that Pakistan and the IMF team have so far failed to strike a consensus on the MEFP as the proposed IMF’s prescriptions clearly illustrate tightening of fiscal and monetary policies as well as exchange rate adjustments in the range of Rs.185-190 against the US dollar. IMF is also coming up with a prescription of tough prior actions in the shape of rising twin deficits including the budget deficit and the current account deficit. The indicative target for Net International Reserves might be another thorny issue between the two sides.
The IMF is also suggesting hiking discount rates and abolishing tax exemptions for individual taxpayers under Personal Income Tax and also reducing a number of income tax slabs. There are other cogent reasons hindering solution of the current review as it is also reported that the energy sector’s circular debt was also above the threshold agreed with the IMF and the tax refund arrears were also higher than the limit set by the global lender. The government had agreed with the IMF to implement a prudent macroeconomic framework in January this year in return for the revival of the stalled loan programme.
The government and the central bank have implemented most of the IMF conditions concerning monetary and fiscal targets agreed for end-December 2021. It is well-understood that subject to timely conclusion of the talks, the IMF board may take up Pakistan’s request for approval of over $960 million in loan tranche before the end of next month. Approved in July 2019, the IMF has so far disbursed $3 billion out of the $6 billion package, as the programme has remained derailed for almost half of the period. This is certainly a major cause of worry from the economic angle and may prove harmful for the country. TW

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Asrar Raouf is a former civil servant


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