As per the Pakistan-IMF accord, Pakistan will receive US$6 billion over three years and it will also receive US$2-3bn, each year, from World Bank and ADB. Dr Abdul Hafeez Shaikh has hinted at raising prices in some areas “to recover costs” as foreign loans have now exceeded US$90bn and exports have registered a negative growth over the past five years. Meanwhile, the opposition parties have rejected the notion that IMF lifeline would ease the economic crisis. In the article, experts’ views on conditions attached to the IMF bailout package also gives an inside to economic development.
The wait is finally over as Pakistan and the International Monetary Fund (IMF) have struck a deal on a bailout package for about US$6 billion over the next three years to meet foreign debt obligations. The IMF and Pakistan reached a staff-level agreement on economic policies for a three-year Extended Fund Facility (EFF) on May 12.
The agreement, which still needs approval from the IMF’s management, comes after months of negotiations arising out of the economic crisis with short supplies of foreign currency reserves and stagnating growth.
In brief, as per the Pakistan-IMF accord, Pakistan will receive $6 billion over three years and Pakistan will also receive US$2-3bn from World Bank and the Asian Development Bank (ADB). Adviser to Prime Minister on Finance, Revenue and Economic Affairs Dr Abdul Hafeez Shaikh has hinted at raising prices in some areas “to recover costs”. Shaikh said that foreign loans have now exceeded $90bn and exports have registered a negative growth over the past five years.
IMF says Decisive Reforms Necessary
As per the press release on the IMF website, the EFF arrangement aims to support the authorities’ strategy for stronger and more inclusive growth by reducing domestic and external imbalances, removing impediments to growth, increasing transparency, and strengthening social spending.
IMF has said that decisive policies and reforms are necessary for growth. IMF also said that ‘market-determined exchange rate’ will help the financial sector.
It states that an ambitious structural reform agenda will supplement economic policies to rekindle economic growth and improve living standards, adding that financing support from Pakistan’s international partners will be critical to support the authorities’ adjustment efforts and ensure that the medium-term program objectives can be achieved.
In response to a request by the Pakistani authorities, an IMF mission led by Ernesto Ramirez Rigo visited Islamabad from April 29 to May 11 to discuss IMF support for the authorities’ economic reform program.
The 39-month EFF for about $6 billion agreement, the press note said, is subject to the timely implementation of prior actions and confirmation of international partners’ financial commitments.
Opposition Parties Reject IMF Deal
Meanwhile, the opposition parties have rejected the IMF bailout package saying the package has been provided under strict conditions and people would now face unbearable inflation.
Pakistan Muslim League-Nawaz Spokesperson Marriyum Aurangzeb said: “The deal of IMF with the IMF has been successful and now an inflation bomb will be dropped on the people of Pakistan. Imran Khan, you handed over the country to the IMF for just $6 billion.”
Pakistan Peoples’ Party (PPP) senior leader Khursheed Shah said that unbearable inflation will be seen in the country following the deal with the IMF. While hoping that the ‘tsunami’ will not make the people slaves of the IMF, PPP’s Sherry Rehman said: “It seems that a tsunami of inflation will emerge out of the IMF bailout package.”
Also, Jamaat-e-Islami Ameer Senator Sirajul Haq said that “the government has bowed down to the IMF’s condition of imposing more taxes. The people of Pakistan will become the IMF’s slaves after the agreement while it will also increase the gas, electricity and oil prices.”
Meanwhile, the vice president of Pakistan Muslim League–Nawaz (PML-N) Maryam Nawaz has criticized the agreement between the government and IMF.
“IMF or no IMF – the incompetent rulers were not sure. Finally when it does come, it’s a complete sell out of our sovereignty and rightly REJECTED by stock market. After just 9 months, country is on the brink of economic disaster,” Maryam tweeted on Monday.
Within 9 months,the incompetent government has brought the country to a complete economic collapse. The masses are suffering while rulers enjoy perks & privileges. All sectors of the economy stand at the verge of disaster. The experiment has miserably failed. #SayNoToIncompetence https://t.co/vQvRhSM6Nk
— Maryam Nawaz Sharif (@MaryamNSharif) May 13, 2019
Within nine months the incompetent government had brought the country to a complete economic collapse, she said. “The masses are suffering while rulers enjoy perks & privileges. All sectors of the economy stand at the verge of disaster. The experiment has miserably failed.”
Has IMF Blamed PMLN for Mismanagement?
While PMLN leaders have pounced upon the IMF deal as a historic failure of PTI government, there were many in the government and policy circles in Islamabad and in banks and markets in Karachi that noticed the unusually harsh language IMF press release used to describe the actions of previous governments which can mean both PPP and PMLN but under the circumstances it looks like directed more towards the last incumbents in power ie PMLN.
IMF press release stated:“Pakistan is facing a challenging economic environment, with lackluster growth, elevated inflation, high indebtedness, and a weak external position” but it does not stop on describing this scenario, it offers its causes when it goes not to say: ” This reflects the legacy of uneven and pro-cyclical economic policies in recent years aiming to boost growth, but at the expense of rising vulnerabilities and lingering structural and institutional weaknesses”. And then IMF changes tone when it describes the actions of current PTI government. It says:” The authorities recognize the need to address these challenges, as well as to tackle the large informality in the economy, the low spending in human capital, and poverty..”
WhatsApp and Facebook were alive from early morning in Pakistan discussing these lines from IMF. One senior banker, familiar with workings of international organizations and who wants not to be quoted in name, found these lines overtly political in describing the economic policies and failures of PMLN. Another Karachi stock broker thought that IMF has made it clear what it finally thinks of the financial wizardry of Ishaq Dar. While others are concerned that why IMF remained silent when Dar and his mentor Nawaz Sharif were in power and calling shots.
Experts’ View on the Package
Naveed Vakil, the Chief Operating Officer at AKD Securities, said that the Pakistan Stock Exchange pared early gains to close at 33,900 points down 816 points or 2.4 percent despite Pakistan entering into a staff-level agreement with the IMF.
He said that interbank USD rate remained stable whereas in the open market the USD availability was limited and buy-side transactions were reported to take place at 143-144, signaling upside pressure.
Syed Hussain Haider, the head of JS Global Research, was of the view that IMF package emphasizes on revenue collection as well as cutting unnecessary expenditures and development expenditure. However, he said, “there is nothing new for Pakistan as most of the previous IMF programs with Pakistan (this being the 22nd instance) have been mostly under either an EFF framework or a Standby Arrangement (SBA).”
Haider said that initial effects of the loan would be difficult and inflation would rise as the loan will only be sufficient to meet foreign debt obligations. “The amount of money would only be sufficient to pay the debt meaning that we are standing where we were before,” he said.
Answering the inevitable question on whether this would be the last IMF program for Pakistan, he said, Pakistan has potential and, although, “history is repeating itself, let’s leave it on time.” With proper reforms, especially by appointing the right person for the right job, “we can make things better,” he said.
Timely Implementation of Prior Actions?
Other experts – that made comments to GVS strictly on the basis of confidentiality – wondered why Pakistani government, that fought so hard for 8 months for better conditions has in the end accepted an unusually stringent condition like “timely implementation of prior actions and confirmation of international partners’ financial commitments..” which puts it in a straight jacket. No such condition was attached to IMF package in 2013. Also some experts point that to strong rumors in Islamabad that Pakistan’s Finance Secretary, Younas Agha, was not made part of the final round of negotiations.
Insiders of stock market think that market crashed today because these words in IMF press release, “timely implementation of prior commitments and confirmation of international partners commitments” has made investors worried and jittery. Most still don’t understand the full range of commitments agreed by the Pakistani government and are not sure what “prior actions” will mean in this case and if Govt. of Pakistan will be able to meet IMF’s expectations on these “prior commitments”
IMF Reaches Staff-Level Agreement on Economic Policies with Pakistan for a Three-Year Extended Fund Facility
May 12, 2019
- The Extended Fund Facility arrangement aims to support the authorities’ strategy for stronger and more inclusive growth by reducing domestic and external imbalances, removing impediments to growth, increasing transparency, and strengthening social spending.
- An ambitious structural reform agenda will supplement economic policies to rekindle economic growth and improve living standards.
- Financing support from Pakistan’s international partners will be critical to support the authorities’ adjustment efforts and ensure that the medium-term program objectives can be achieved.
In response to a request by the Pakistani authorities, an International Monetary Fund (IMF) mission led by Mr. Ernesto Ramirez Rigo visited Islamabad, Pakistan from April 29 to May 11 to discuss IMF support for the authorities’ economic reform program. At the end of the visit, Mr. Ramirez Rigo made the following statement:
“The Pakistani authorities and the IMF team have reached a staff level agreement on economic policies that could be supported by a 39-month Extended Fund Arrangement (EFF) for about US$6 billion. This agreement is subject to IMF management approval and to approval by the Executive Board, subject to the timely implementation of prior actions and confirmation of international partners’ financial commitments. The program aims to support the authorities’ strategy for stronger and more balanced growth by reducing domestic and external imbalances, improving the business environment, strengthening institutions, increasing transparency, and protecting social spending.
“Pakistan is facing a challenging economic environment, with lackluster growth, elevated inflation, high indebtedness, and a weak external position. This reflects the legacy of uneven and procyclical economic policies in recent years aiming to boost growth but at the expense of rising vulnerabilities and lingering structural and institutional weaknesses. The authorities recognize the need to address these challenges, as well as to tackle the large informality in the economy, the low spending in human capital, and poverty. In this regard, the government has already initiated a difficult, but necessary, adjustment to stabilize the economy, including thorough support from the State Bank of Pakistan. These efforts need to be strengthened. Decisive policies and reforms, together with significant external financing are necessary to reduce vulnerabilities faster, increase confidence, and put the economy back on a sustainable growth path, with stronger private sector activity and job creation.
“The EFF aims to support the authorities’ ambitious macroeconomic and structural reform agenda during the next three years. This includes improving public finances and reducing public debt through tax policy and administrative reforms to strengthen revenue mobilization and ensure a more equal and transparent distribution of the tax burden. At the same time, a comprehensive plan for cost-recovery in the energy sectors and state-owned enterprises will help eliminate or reduce the quasi-fiscal deficit that drains scarce government resources. These efforts will create fiscal space for a substantial increase in social spending to strengthen social protection as well as in infrastructure and human capital development. The modernization of the public finance management framework will increase transparency and spending efficiency. Provinces are committed to contribute to these efforts by better aligning their fiscal objectives with those of the federal government.
“The forthcoming budget for FY2019/20 is a first critical step in the authorities’ fiscal strategy. The budget will aim for a primary deficit of 0.6 percent of GDP supported by tax policy revenue mobilization measures to eliminate exemptions, curtail special treatments, and improve tax administration. This will be accompanied by prudent spending growth aimed at preserving essential development spending, scaling up the Benazir Income Support Program and improve targeted subsidies, with the goal of protecting the most vulnerable segments of society.
“The State Bank of Pakistan will focus on reducing inflation, which disproportionately affects the poor, and safeguarding financial stability. A market-determined exchange rate will help the functioning of the financial sector and contribute to a better resource allocation in the economy. The authorities are committed to strengthening the State Bank of Pakistan’s operational independence and mandate.
“An ambitious structural reform agenda will supplement economic policies to rekindle economic growth and improve living standards. Priority areas include improving the management of public enterprises, strengthening institutions and governance, continuing anti-money laundering and combating the financing of terrorism efforts, creating a more favorable business environment, and facilitating trade. To improve fiscal management the authorities will engage provincial governments on exploring options to rebalance current arrangements in the context of the forthcoming National Financial Commission.
“The IMF team is grateful to the Pakistani authorities for open and constructive discussions and their hospitality.”