Pakistan and the International Monetary Fund (IMF) have finally struck a staff-level agreement for the provision of $3 billion for nine months as a bailout package under a stand-by arrangement (SBA). The agreement replaced the Extended Fund Facility (EFF) which Pakistan entered in 2019 and which was to expire on June 30.
The SBA is a bail-out package for offering emergency relief to strengthen Pakistan’s foreign exchange reserves. The SBA is a temporary measure to see how Pakistan treads on the path determined by the IMF. The SBA also means that IMF is still suspicious of Pakistan and that the IMF would closely watch Pakistan’s macroeconomic handling.
The SBA is far stricter than the EFF. Any slip or discrepancy would enable the IMF to withdraw the agreement at anytime. The SBA embodies the IMF’s reservations harboured under the EFF. Though the EFF ended, the IMF refused to forget the lessons learnt: Pakistan secures funds but abstains from complying with the agreed conditions. This is how the SBA is an expression of differences marring Pak-IMF relations. This time, third-party guarantees, besides entreaties by Pakistan’s Prime Minister, made the SBA possible. The IMF board will meet in mid-July to approve the staff-level agreement.
The SBA is simply asking for introducing more reforms. To keep the SBA maintainable, as a pre-condition to Pakistan’s qualifying for any next EFF, the IMF imposed certain stringent conditions.
The SBA is available to Pakistan just to avoid otherwise imminent default and to allow Pakistan some time to be prepared for the next IMF agreement.
First, Pakistan has to revise its annual budget for the fiscal year of 2023-2034 and refrain from doing two things: making unbudgeted spending or permitting unapproved tax exemptions. Pakistan has to show that it is steadfast in policy implementations and capable of imposing fiscal discipline upon itself. This point alone throws Pakistan into a quandary, as a chunk of the country’s non-developmental expenditures falls under the rubric of unbudgeted spending. Further, Pakistanis are unaccustomed to following any fiscal discipline. Pakistanis are customary of double salary rise and post-retirement generous perks and privileges.
Second, Pakistan has to rebase tariffs in the power sector to ensure the recovery of costs. That is, instead of subsidizing the power sector, Pakistan has to make it self-reliant. The sector should at least recover the spending cost. The meaning of this reform simply means a high rate of electricity. The IMF does not know that almost all government sectors and most private sectors of Pakistan have been transformed into working in a cool-breeze-releasing environment.
Third, the State Bank of Pakistan has to withdraw import restrictions. This is a tricky area because Pakistan is left with around $3.5 billion in foreign exchange reserves enough for a month’s import and these can deplete quickly given the people’s inclination to do external payments by consuming or using imported high-quality goods. This condition of the IMF is to facilitate Pakistan to become a consumer economy.
Fourth, Pakistan has to follow a market-determined exchange rate by removing controls and eliminating multiple exchange rate practices in different markets to let Pakistan’s rupee float freely – even at the cost of the depreciation of the rupee.
Fifth, Pakistan’s State Bank has to take active measures in reducing inflation, especially by increasing the interest rate which stands currently at 22%. Through this step, inflation (which is in double digits) might be controlled or reduced, but this step would impede economic growth.
Sixth, Pakistan has to govern the state-owned enterprises strongly, as these are a major source of expenditures. Another option offered is to privatize them. Pakistan has to re-initiate the stalled privatization process. This is a tricky area because Pakistan is traditionally run by the government machinery, and has not yet learnt to promote private ownership. Under IMF pressure, Pakistan may think of privatizing certain facilities such as airports or shipyards in the name of inviting foreign investment.
Generally speaking, the SBA is available to Pakistan just to avoid otherwise imminent default and to allow Pakistan some time to be prepared for the next IMF agreement. The SBA is a favour the IMF has granted to Pakistan to let it reform its economy in this interim nine-month period to come comfortably for the next agreement, another EFF.
One area of disagreement with the IMF remained Pakistan’s insistence to offer a Tax Amnesty Scheme, but it was opposed by the IMF. Pakistan wanted to offer the scheme to draw an adequate amount from the black market (or black economy) which has a palpable presence in Pakistan. The repudiation would inflict an additional squeeze on the salaried class, registered taxpayers, and utility bill customers, as they would be taxed more.
Third-party guarantees of Pakistan’s economic viability were provided by Saudi Arabia and the United Arab Emirates, which pledged together $3 billion. Further, Pakistan’s largest bilateral creditor China rolled over debt amounting to $2 billion. Despite this support, Pakistan failed to secure another EFF because Pakistan was short of $2 billion to make it a total of $7 billion. Pakistan is now banking on these three countries for investment, but the question is what kind of investment?
To these three friendly countries, Pakistan is planning to lease out or sell its assets such as lands and islands – to begin with. Pakistan thinks that the speculated foreign income, in the name of investment, would be sufficient to stimulate its economy.
Pakistan, however, is forgetting one thing. That is, other than the immediate challenges imposed by the SBA, the bigger challenge before Pakistan is that, in the current fiscal year 2023-2024, Pakistan needs $22 billion to fund its external payment obligations, including international debt servicing. It simply means that Pakistan has to service around $2 billion of debt a month in the current fiscal year. The question is, where Pakistan can earn so much money to pay this huge debt, failing which would further enhance the repayment burden in the next fiscal year?
The SBA is available for nine months only. To complete it successfully, Pakistan will have to ask the IMF for the EFF. At that time, in March 2024, only three months will have been left before ending the current fiscal year on June 30, 2024. By that time, will Pakistan be able to service $22 billion as its external payment obligations? The answer is known to none.
By the way, does anyone find a correlation between this narration and the violent reaction of people against the symbols of power on May 9 or between this description and the youth attempting to cross the Mediterranean Sea on a boat to reach Europe illegally even at the cost of getting drowned?
The writer can be reached at qaisarrashid @yahoo.com.