Incredibly uncredible

The government has finally relented on its hard bargain with the IMF, throwing in the towel at the last moment: The budget has been fixed to meet all the Fund’s demands to secure an executive board nod on the ninth review of the multibillion-dollar Extended Fund Facility (EFF). If it does materialize, the said nod should authorize disbursement of a $1.2 billion tranche of IMF funding, helping the finance ministry bridge the last remaining external financing gap that could not be closed by other means.

Clearly, Prime Minister Shehbaz Sharif, who had three meetings with the IMF Managing Director Kristalina Georgieva in Paris on the sidelines of the Summit for a New Global Financing Pact, had no case for a waiver of the Fund’s conditionalities. In particular, he must have found Pakistan’s failure indefensible to post the 0.5 per cent primary surplus his economy czar Ishaq Dar repeatedly promised. What’s more, Dar could neither keep the current account deficit within the agreed threshold despite all his efforts, nor deliver on his promised help from friendly countries to help meet the external financing gap. Not only did these lapses and shortcomings leave Pakistan afoul of its promises with the Fund, they also left the country on the hook for IMF help to meet its external financing needs in the final weeks of FY23.

This begs the question: what was the government looking to achieve by all this foot-dragging in the final stretch viz drawing up the budget for the new fiscal? All it needed to meet the Fund’s parameters was a little belt-tightening here and there accompanied by additional revenue measures to the tune of Rs300bn. Why could the needful not be delivered the first time, saving the nation and the markets the last couple of weeks of harrowing suspense? Also, now that the State Bank of Pakistan (SBP) has agreed to lift the curbs on dollar for imports at a time when the ports are chock full with containers of imported goods and importers are prepared to acquire dollars at any price, what does the finance minister envisage to do about a breakneck erosion of the rupee’s value? Pushing through the same measures earlier in an orderly manner could have saved us that eventuality, but for some odd reason, our finance ministry wouldn’t have it that way.

Now, there remains no doubt that Pakistan is doing it under the gun from the IMF because the managers of the nation’s economy have run out of options to keep going without the Fund’s help. The country has yet to fork out around $3bn in external debt repayments before it can round out the current fiscal with the foreign exchange reserves standing at a precarious $3.5bn. So Pakistan eats humble pie and is forced to swallow all the IMF conditionalities it formerly found unpalatable – a mere week before the EFF package is set to expire. The way we are closing the current fiscal leaves little doubt as to how we will fare over the next fiscal. Nor does the budget for FY24 provide any reasons for hope. We have to spend around $24bn on external debt service over the 12-month period from July 2023 to June 2024 , and we have no hard currency inflows to match those outflows – meaning we must seek more debt to service our existing debt. Clearly, we need a new IMF programme to pull off that feat – and there is no telling how harsh the Fund’s conditionalities for that programme would be. Viewed from this perspective, the pointless haggling the country’s finance authorities indulged in will hurt rather than help Pakistan’s cause when the time comes to negotiate a new programme. Nor have we seen PM Sharif’s coalition government reap any political benefits from this policy of needless fighting for every inch only to concede everything in the end.

The only thing this policy has achieved, if an achievement it may indeed be called, is that the markets have lost any residual faith in the prognostications and assertions of the government. In the world of finance, not only do markets hang on every word of key government leaders, they take their cue from their every wink and nod. Pakistan has been left in an unenviable position where markets have no reason to trust the authorities any more. Now, even if the final tranche of the EFF does flow in as expected, Pakistan will have to work hard to bridge that credibility gap.