Securing the IMF deal

The silver moment has arrived:between Pakistan and the rest of the IMF-EFF programme loan now stands only an ‘entente cordiale’ on the economic and fiscal targets handed by the multilateral lender in the wee hours of Tuesday. Finance Minister Miftah Ismail used Twitter to tell the nation that the government finally has an MEFP (Memorandum of Economic and Finance Policy) from the IMF for the combined 7th and 8th reviews. The clubbing of the two reviews means that Islamabad will be able to draw approximately $1.9 billion tranches after approval by the Fund’s Executive Board. A handshake on the targets means a staff-level agreement to be followed by IMF board review which, if approved, would lead to the State Bank of Pakistan’s (SBP) foreign exchange reserves becoming $1.9 billion stronger probably by end July. That would be the golden moment.Pakistan has also called on the IMF for extending the size of the programme from $6 billion to $8 billion and the timeframe from September 2022 to June 2023.

Now with the possibility of a revival of the IMF programme stronger than ever, Pakistani authorities are confident that multilateral and bilateral creditors would bridge the financing gap for providing billions of dollars to Pakistan’s struggling economy. The exact IMF assessment on the financing gap on the external account is unknown, but an educated guess could be $40 billion. External debt servicing of $22 billion is due in the next fiscal year 2022-23. The current account deficit is around $10 billion to $11 billion. This the government will have to draw through inflows worth $7 billion to $8 billion, which takes the total requirement to $40 billion. This massive financing gap on the external front cannot be bridged without full backing by the IMF. That is why the government was so desperate for the revival of this programme. The IMF will also seek confirmation from all multilateral and bilateral creditors before incorporating figures of dollar inflows as part of its projections on the gross financing requirement of the external front of FY2022-23. We will continue to consult in advance with the Fund staff on adoptions of measures or revisions of the policies contained in the MEFP and in this letter, in accordance with the Fund’s policies on such consultations. We will provide the Fund with the information it requests for monitoring programme implementation. However, a relentless enforcement of MEFP before the IMF board pores over Pakistan’s case is simply decisive.If the government is able to deliver the goods by taking more tough measures to ensure these goals, the programme will continue. Otherwise, sooner than we might think, another ‘new government’ would be running from one financial pillar to another donation post looking for dollars and this hide-and-seek with a ‘default’ would continue for maybe an eternity. We may never default, but we may also not be able to stabilize our economy – ever remaining trapped in the classic boom-and-bust cycle. There’s a reason we are called a one or two-tranche nation. The billion-dollar-question now is: what would be the cost of sitting pretty far away from default? For instance, more monetary tightening to control inflation, likely to be demanded by the IMF, is going to put the brakes on the economic activities of the major sectors of the economy, which will not be able to live up to the government’s revenue expectations. A rift will be the result. Capital will fly, which means even slower growth. The next-to-impossible revenue target of Rs7.4 trillion cannot be achieved by just juicing the industries, businesses, and trade. As long as agriculture and other un- or undertaxed sectors enjoy immunity and the tax apparatus remains corrupt and others bask in incentives, zero-rating, tax refunds etc, without giving anything in return, we are fated to stagger back and forth between boom and bust.