Will IMF Re-sign Loan with Pakistan?

When a country borrows from the IMF, the government agrees to adjust its economic policies to overcome the problems that led it to seek financial assistance. These policy adjustments are conditions for IMF loans and help to ensure that the country adopts strong and effective policies. Conditionality helps countries solve balance of payments problems without resorting to measures that harm national or international prosperity. In addition, the measures aim to safeguard IMF resources by ensuring that the country’s finances will be strong enough to repay the loan, allowing other countries to use the resources if needed in the future. Conditionality is included in financing and non-financing IMF programs with the aim to progress towards the agreed policy goals. Finance Minister Ishaq Dar said on Thursday that Pakistan’s agreement with the International Monetary Fund (IMF) is being delayed as the global lender wants “friendly countries” to complete and materialize some of their commitments to the South Asian country. Pakistan has been struggling to revive a stalled loan program with the IMF which would unlock a tranche of $1.1 billion, crucial for the country to stave off a balance of payment crisis. Pakistan’s reserves have dipped to historic lows over the past couple of months, as it desperately seeks external financing to honor its global debts and sustain its economy. Though the finance minister refrained from naming the friendly countries he spoke about, it is largely understood that he meant Saudi Arabia, United Arab Emirates, and China, all close allies of Pakistan.

An IMF mission visited Pakistan last month but after extensive talks with the government, left without signing a staff-level agreement. In a bid to fast-track the signing of the deal, the government agreed to fulfill more “prior actions” including the collection of additional revenues to revive the deal, and has been assuring the nation that the agreement would be signed “soon”.  “At the time of previous reviews, certain friendly countries made commitments to bilaterally support Pakistan, “Dar said during a session of the Senate. What IMF is now asking is that they should actually complete and materialize that commitment, that’s the only [reason for] delay”. “So, the delay is not on the part of the Government of Pakistan. It has been an extensive engagement: unusual, too lengthy, too long, too demanding, but we have completed everything. Presented before Parliament on Wednesday evening by Finance Minister Ishaq Dar, the measures include raising the general sales tax by a percentage point to 18% and follow hikes in the price of fuel and gas earlier this week as part of efforts to meet the global lender’s conditions for the release of a $1.1 billion loan tranche, originally due in November 2022. It comes after an IMF delegation visited Pakistan late last month to discuss the ninth review of a $6.5 billion bailout programme that Pakistan entered in 2019. While the government failed to sign a staff-level agreement with the IMF team after 10 days of negotiations, it is expected that the bill’s approval will result in the IMF unlocking the $1.1 billion installment, as well as Pakistan’s allies providing it with much-needed external financing. The delay in completing the ninth review, however, has sent the country’s economy spiraling down further foreign reserves have dwindled to $2.9 billion, covering less than just three weeks of imports. Pakistan is currently facing severe economic challenges as inflation is on higher side, reserves are depleting and currency is massively depreciating amid foreign inflows had dried.

Long-time ally China is the only country that has announced refinancing of a $2 billion loan, and Pakistan’s central bank has already received $1.2 billion of that amount. Pakistan had to complete a series of prior actions demanded by the IMF, which included reversing subsidies in the power, export and farming sectors, a hike in energy and fuel prices, a permanent power surcharge, jacking up the key policy rate, a market-based exchange rate, and raising over 170 billion rupee ($613.17 million) in new taxation through a supplementary budget. A long-awaited loan agreement between Pakistan and the International Monetary Fund (IMF) will be signed once a few remaining points, including a proposed fuel pricing scheme, are settled, an IMF official said. Devastating floods last year that caused damage worth more than $30 billion and that forced millions from their homes and destroyed infrastructure and crops have only compounded hardship in a country mired in financial and political crises. With inflation at 27.5%, the country’s highest in nearly 50 years, experts see difficult days ahead for Pakistan’s population following the imposition of new taxes and austerity measures. “We still have alternative options, but we need to expedite and put our house in order. Bilateral trade partners have all pledged financial assistance, but they would like to see how quickly Pakistan finalizes its transactional structures.

“Similarly, almost $10 billion in program financing is pending from multilateral banks like ADB and AIIB just because the project proposal has to go to the provinces. So, the provinces must quickly fulfil the prior condition for the project to kick start and package the transaction,” Ahmed continued. “The only realistic alternative is debt restructuring. This means admitting to all the bilateral lenders that the borrower cannot repay the debt. It calls for either re-profiling the debt (delaying the maturity period), reducing the rate of interest, or reducing the overall principal amount for the bilateral creditors. All the countries will receive equal treatment, no matter how much loan they have given. The IMF makes the debt sustainability analysis and states the terms of debt restructuring. In return, the creditors ask for a guarantee of following the sustainability plan in the form of reducing subsidies and inefficiencies to see that the borrower country will stand at a point where it can promise to be in a set number of years. If Pakistan declares default, the IMF will be able to provide guarantee support and settle on an agreement with the creditors. “The most important thing is to get the IMF deal done. Once that comes through, support from bilateral countries will also start flowing in. Right now, it’s important that Pakistan makes a smart plan for the next two to three years focuses on exports so that it can generate foreign exchange to service its external debt. Most immediately, these exports should be those that are not heavily dependent on imports, such as IT and agricultural items. This will help to attract investment from bilateral partners as well as convince creditors to offer some temporary debt relief, which is much needed.