IMF prior actions likened to terms imposed in 1998

ISLAMABAD: The International Monetary Fund (IMF) has asked Pakistan to implement four prior actions, including the imposition of a permanent surcharge of Rs3.82 per unit on electricity. Pakistani officials called the new demands ‘deliberate efforts’ to put pressure on Pakistan’s falling economy on the pattern of 1998 when the country had conducted nuclear tests.

The implementation of all four prior actions only can pave the way for striking a staff-level agreement between Pakistan and the IMF and the release of a $1 billion tranche under the $6.5 billion Extended Fund Facility (EFF).

Policymakers negotiating on behalf of Pakistan have called these prior actions unjustified.

Making a comparison of the prior actions with the 1998 conditions, a top official recalled that there were 24 prior actions for the revival of the IMF programme when Pakistan faced a financing gap of approximately $400 million in 1998. When all the 24 prior actions were fulfilled, then petty issues came to the surface but the Pakistani side managed to resolve all for paving the way for reviving the IMF programme in January 1999, he added.

Now the frequent changes in the goalposts being done by the IMF have made it really hard for the Pakistani side to strike a staff-level agreement at the moment.

The official said that the IMF mission that recently visited Pakistan had made a commitment for issuing a positive press release on the conclusion of review talks on February 9, 2023, but the draft sent to Washington, DC, for clearance was massively changed. The words such as “comprehensive talks” and “positive outcomes” were deleted from the text of the press release by the Fund’s headquarters, he added.

The draft of the Memorandum of Financial and Economic Policies (MEFP) was not shared at the end of the parleys, rather it was dispatched on the morning of February 10 when the IMF mission had left Islamabad.

However, another top official of the Finance Division was still hopeful that the staff-level agreement might be struck next week provided the IMF refrains from coming up with any new demands.

The IMF has placed four prior actions i.e. imposition of permanent power surcharge of Rs3.39 per unit plus 0.43 paisa (total Rs3.82 per unit), market-based exchange rate, hiking discount rate by 150 to 250 basis points and securing confirmation from bilateral partners to meet external financing gap of $7 billion. On the power surcharge, the Pakistani side argued that the EFF programme was going to expire in June 2023, so how the IMF could demand slapping a permanent surcharge of Rs3.82 per unit.

On the issue of securing confirmation of external financing, the official said that the IMF was pitching the current account deficit on the higher side i.e. they projected the gap at $7 billion against an official projection of $5 billion. The official said that Pakistan paid back $5 billion in commercial loans out of which $700 million from China had already been re-financed, while the remaining $1.3 billion would be re-financed in two instalments soon. The official said that Saudi Arabia and the UAE would provide additional deposits of $2 billion and $1 billion respectively.

“The State Bank of Pakistan’s foreign exchange reserves will cross $10 billion by June end,” he claimed and added that they had made arrangements to meet the desired figure on dollar inflows within the stipulated time frame.

The new prescription suggested by the IMF on the exchange rate has triggered a debate between the Washington-based lender and Pakistan’s economic team. The Pakistani side argued that if the SBP had not intervened to buy dollars, the rupee might have further strengthened in the last couple of weeks. However, the IMF is consistently persisting altogether a different prescription for allowing further depreciation of rupee against dollar.

The incidents where the Afghan businessmen bought dollars from Peshawar by paying Rs20 extra against the prevalent rate of inter-bank market cannot be replicated for whole of Pakistan, said the official.

Some official estimates prepared by law enforcing agencies suggest that there was shifting of $2 billion from Karachi to Peshawar per annum and major chunk of dollars were being smuggled out of the country.

Out of the remaining outstanding issues that created difficulties for the staff level agreement included the demand of IMF for placement of market-based exchange rate equivalent to the level of higher side prevalent in the bordering areas adjacent to Afghanistan. The IMF has shown its uneasiness over the different rates in inter-bank market and dollar rate offered at Peshawar market as traditionally there was an incentive of Rs20 against US dollar.