Pakistan Reader# 618, 1 July 2023
Ankit Singh
On 29 June, in its press release, the IMF announced a new USD three billion Stand-By Agreement (SBA) with Pakistan. The staff-level agreement would be subject to management approval by IMF's executive board in mid-July. The Finance Minister of Pakistan claimed that the deal would ensure the USD one billion disbursement shortly after IMF board approval.
The SBA agreement came at the last hour of the expiration of the previous Extended Fund Facility (EFF) signed between Pakistan and IMF in May 2019. The talks on the ninth review talks under EFF had been in a stalemate over Pakistan-IMF differences. Under the last EFF, Pakistan was yet to receive approximately USD 2.5 billion. Hence, an additional USD 500 million would be a sweetener for the Pakistan government trying to contain a macroeconomic meltdown. The agreement will strengthen forex reserves and avert Pakistan from default.
The agreement over SBA needs to be looked at from three perspectives:
First, SBA is different from EFF (Extended Fund Facility). The EFF, as an instrument of the IMF, is usually employed when structural impediments subdue a country's growth sentiment and needs financing to deal with institutional weakness while maintaining macroeconomic stability. The EFF is a mid-term financing instrument, repayment of which is done between four to ten years, while for the SBA, the repayment period is three to five years. As an instrument, the SBA is used to support short-term financing needs.
Nathan Porter, under whom the IMF team discussed with Pakistan, also mentioned that external shocks had defeated efforts by Pakistan to remain aligned with benchmarks of previous EFF. He said: "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. Despite the authorities' efforts to reduce imports and the trade deficit, reserves have declined to very low levels. Liquidity conditions in the power sector also remain acute, with a further buildup of arrears (circular debt) and frequent loadshedding." This will be the 13th SBA agreement out of 23 loan programs which Pakistan has signed with IMF in its history.
Second, the agreement has come with a cost and a revised budget. The week leading to the announcement witnessed several important policy actions to convince the IMF of the new SBA. The most important was the State Bank of Pakistan's decision to withdraw all import restrictions and effectively leave the PKR to be determined at a market-based exchange rate. The SBA had also hiked the policy rate by 100 basis points to 22 per cent, the highest ever in the history of Pakistan. While on the ministry and legislative front, the finance ministry had to present a revised budget with additional taxes worth USD 731 million and reduce the expenditure by USD 289 million. However, the new taxes are limited to the salaried class and organised sector. The untaxed sectors like retail, agriculture and real estate have remained out of the new tax net.
Third, the IMF staff approved other loan instruments with several countries. In the same week, the IMF validated the external shocks as a disruptor in its engagement with Haiti, Vietnam, Denmark, Jordan, Lebanon, Ukraine, Croatia, the Democratic Republic of Congo, the U.A.E, Senegal, Fiji, Serbia, Indonesia, Portugal, Dominican Republic, Uganda, Albania, Honduras and Oman. This indicates that global macroeconomic sentiment is still subdued, and the IMF has intended to support countries in such critical times.
To conclude, Pakistan and IMF might go for another EFF after the current SBA expires in the next nine months. There is mistrust on both sides on the part of developing countries in the effectiveness of loan programs of IMF. The world is witnessing a phase of neo-populism, and the IMF policies and benchmarks have not adjusted to such changing reality. The multilateral institutions based on the Bretton Woods consensus may as well run out of steam. At the same time, regional and developing countries cement their financial collaboration and agree on decoupled macro-derivatives with advanced economies.
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