The State Bank of Pakistan has finally received proceeds of $1.16 billion (the equivalent of SDR 894 million) after the International Monetary Fund (IMF) Executive Board completed the combined 7th and 8th review under the Extended Fund Facility (EFF) for Pakistan.
While this tranche was much awaited ever since the Shehbaz Sharif government took power through a controversial in-house change on April 10, the results of this release so far are not clear. Since immediately after the IMF release, the Pakistani Rupee, which had earlier started to stabilize against the US $, has suddenly shown a downward trend – indicating perhaps that even the IMF tranche has not met market needs or other parallel developments are increasing pressures upon the country’s troubled economy.
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There is a longstanding background to current challenges. High international prices and delayed policy action worsened Pakistan’s fiscal and external positions in FY-22, leading to significant exchange rate depreciation and eroding foreign reserves. The loan approval comes as Pakistan’s foreign exchange reserves (including those held by private commercial banks) stand at a mere $13.5 billion, as of August 19, according to the central bank. Weekly inflation touched 45 percent in August, according to the Pakistan Bureau of Statistics, with food and fuel prices skyrocketing. In addition, Pakistan is confronting massive devastation caused by monsoon flooding that has left over 33 million people in desperation and taken the lives of over 1,300 people.
Politics around IMF
Pakistan has been in the IMF program since June 2019; it was never really suspended despite political debates on tv that create that misperception. It kept stalling because IMF would like to see the completion of commitments before the release of the new cache. Imran Khan’s government, before its removal, was confident that the next cache would have released around April. However, politics around IMF has continuously affected Pakistan’s relations with the monetary body. Public opinion has been shaped to see IMF as a threat to Pakistan or a conspiracy.
Shehbaz Sharif’s government, after much bickering and infighting, on July 13, 2022, finally reached a staff-level agreement on policies to complete the combined 7th and 8th reviews of Pakistan’s EFF. The agreement was subject to approval by the IMF’s Executive Board. However, despite a principled agreement, the situation kept dragging – and politics continued as usual.
Alhamdolillah the IMF Board has approved the revival of our EFF program. We should now be getting the 7th & 8th tranche of $1.17 billion. I want to thank the Prime Minister @CMShehbaz for taking so many tough decisions and saving Pakistan from default. I congratulate the nation.
— Miftah Ismail (@MiftahIsmail) August 29, 2022
The public has been unhappy because of strict decisions regarding fuel, power and commodity prices undertaken by the Shehbaz government to meet IMF conditions. The coalition partners have responded by accusing Imran Khan’s government of signing the agreement with the IMF on tough conditions and leaving the economy on the “verge of default.”
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The finance minister believes that the IMF agreement would help unleash $3.5 billion in further loans from Asian Development Bank, $2.5 billion in World Bank loans, and $500 million in Asian Infrastructure Investment Bank loans (AIIB). Moreover, the government is expecting to unlock further foreign economic assistance from various international creditors, in addition to flood relief aid from friendly countries and other financial institutions. However, given the country’s current overall socioeconomic situation, investors will remain cautious.
On the other hand, aftershocks of the revival of the IMF loan program are still to be surfaced. These are evident from the country report released by the Fund, including the Memorandum for Economic and Financial Policies—a document that is full of assurances given by Miftah Ismail on behalf of the government of Pakistan. The document was required to revive the program and extend it until June 2023 in order to get a total $3.5 billion loan from the IMF from August 2022 to June 2023. According to the report, Pakistan has assured the IMF that if revenue collection slows or current expenditures begin to exceed targets, the government will implement a contingency plan that involves both the imposition of new taxes and the reduction of federal and provincial development expenditures of Rs. 534 billion.
Note: A slightly different version of this article appears in the 2022 September Magazine.