The refrain from the Prime Minister’s office prior to 23 June 2023 that all International Monetary Fund (IMF) conditions pertaining to the stalled ninth Extended Fund Facility (EFF) review have been met was based on misinformation at best or deliberate misleading at worst.
On 20 June 2023, a grand Economic Revival Plan was announced envisaging a potential 112 billion-dollar foreign direct investment subsequent to the highest level meeting of civilian (federal and provincial) and military representatives. The Plan was subsequently touted by the Minister for Petroleum Musaddaq Malik on the electronic media as Plan B if not Plan A which can now be delegated to what it always realistically was: a grand vision that many previous administrations harped upon but which remain unfulfilled to this day.
It was not till three days later, on 23 June, that the State Bank of Pakistan (SBP) issued a directive withdrawing previous instructions to commercial banks to reopen all imports with immediate effect, a directive that necessitates decontrol of the rupee-dollar parity. The following day amendments to the 9 June budget were tabled in parliament, approved on 25 June, envisaging 215 billion rupee additional taxes and 85 billion-rupee reduction in expenditure. On 26 June the Monetary Policy Committee raised the discount rate from 21 to 22 percent. And reports from the Finance Ministry indicate that the 6 billion-dollar external financing (roll-overs as well as new lending) from the three friendly countries was secured by June end.
This led the Fund to issue a press release on 29 June stating that the EFF “expires end June” and announced a staff level agreement on 3 billion dollar Stand-By Arrangement (SBA).
The ninth review was never Plan A – so claim a handful of Finance Minister Ishaq Dar’s supporters in the Ministry of Finance, those he selected and installed in key positions. This claim belies a statement by Dar on 27 June 2023 to a local broadcaster that he was confident that the ninth review would be done, unlocking 1.1 billion dollars.
SBA was always Plan A, the dwindling number of Dar acolytes further contend, as it provides Pakistan with greater flexibility both in terms of an additional 0.4 billion dollars than the amount remaining under the EFF and allows for possible (though perhaps not probable) relaxation of harsh upfront conditions in future negotiations with the IMF as there is a widespread consensus (domestically and internationally) that Pakistan would have to seek another programme to meet its large external financing needs estimated at over 24 to 25 billion dollars annually for the next few years.
The question however is why was the ninth review of the EFF abandoned in favour of the SBA? First off the Fund website notes that SBA is a high access precautionary arrangement for countries facing very large potential financing needs that do not intend to draw on approved amounts (perhaps the suspended EFF), but retain the option to do so if they need it. EFFs, on the other hand, are generally not formulated on a precautionary basis in anticipation of a future balance of payments problem. This distinction between the two products goes a long way in explaining why the IMF and the government agreed on suspension of the EFF in favour of the SBA: as a precaution to avert the looming possibility of default by Pakistan and perhaps an unfair comment is in order to allow the incumbent coalition government a politically safe exit next month as and when its constitutional tenure expires; while enabling the IMF to remain engaged with Pakistan on an ever more rigid upfront reform agenda.
Second, SBA provides immediate/short-term assistance (nine months in Pakistan’s case) to countries facing balance of payment problems and provides a framework for financing from multilateral and bilateral partners. EFF provides medium-term (3 to 4 years) assistance to correct structural imbalances that may require prior assurance from these partners (a persistent impediment to the now abandoned ninth review EFF negotiations). This does not mean that the Fund will not monitor the policy framework during the SBA, with reports indicating that there may be two to three reviews under the SBA prior to the decision to disburse a tranche; but it may imply that the chicken and egg analogy will no longer apply – whether external committed support must pre-date a staff level agreement and not, as was the usual practice in the past, a staff level agreement would automatically unlock external support.
In other words, the deadlock in the ninth review over which comes first, partners support or staff level agreement on a pending review, may not apply to SBA though the IMF does note in its press release that “continued efforts to mobilise financial support from multilateral institutions and bilateral partners…will support near term policy efforts to replenish gross reserves, with the aim of bringing them to more comfortable levels.”
Third, while disbursement under both products is conditional on observance of quantitative performance criteria yet repayment under SBA is within three and a quarter year’s to 5 years in 8 equal quarterly installments beginning three and a quarter year’s after the date of disbursement while EFF requires repayment within 4½ to 10 years in 12 equal semiannual installments. Assuming elections take place latest by November this year the next government will face a flurry of repayments to the IMF (SBA and the suspended EFF) as 2028 elections near. But no coalition partner seems to be looking that far ahead.
One relaxation that would have gratified the Ishaq Dar-led economic team but which was not provided in the IMF press release pertained to the staff’s assessment of the efficacy of the policies implemented post-September 2022 (after the disbursement of the last tranche under the lapsed EFF). While acknowledging that external shocks including the Russia-Ukraine war, and the floods impacted on macroeconomic fundamentals the Fund declared “some missteps – including shortages from constraints on the functioning of the foreign exchange market.” That these missteps had devastating outcomes on economic fundamentals were in all likelihood referred to in the subsequent three sentences – stalled economic growth, inflation including for essential items is very high, reserves declining to very low levels with acute liquidity conditions in the power sector with further buildup in arrears and frequent load shedding. So much for Ishaq Dar putting the economy back on track as he repeatedly claims.
The writing on the wall is that irrespective of the outcome of the elections Ishaq Dar is unlikely to retain his portfolio as the finance minister – an assessment based on his appalling handling of the economy that is now patently evident to all stakeholders. Dar’s continued constant regurgitation of 2017 macroeconomic data compared to today as proof of his competence is easily challenged as his flawed policies at the time accounted for the largest ever current account deficit of 20 billion dollars in 2017-18.
To conclude, one would sincerely hope that the next administration (the caretakers and an elected government) resists the temptation to appoint any of the previous finance ministers who passed the buck onto the hapless consumers in terms of higher indirect taxes and utility rates and not by implementing structural reforms; or seek a retired or incumbent staff member of a multilateral agency as previous such appointments indicate a mind-set fully supportive of flawed polices divorced from the general public welfare. Instead a different pool of economists must be considered, perhaps those in academics who are undertaking independent research in well-known international universities.Anjum Ibrahim, "Call a spade a spade," Business recorder. 2023-07-11.
Keywords: Economics , Economic challenges , Foreign exchange , Monetary fund , Structural reforms , Foreign investment , External support , Direct investment , SBA