Many things happened last Friday.

Pakistan began talks with the International Monetary Fund (IMF) for the next $960 million tranche at a time when the government is faced with critical political, economic and foreign policy challenges in the middle of its fourth year in power.

The threat from the opposition political parties of a vote of no confidence against the prime minister has compelled the ruling PTI to announce a Rs237 billion energy price relief package and a new tax amnesty for the wealthy in breach of a deal closed with the IMF early last month for the resumption of the Fund’s suspended programme to ease the jittery markets.

That Imran Khan is meeting and visiting his allies — PML-Q and MQM Pakistan — at their homes with a commitment of greater share in power for them and his government’s decision to partially close the Parliament House for renovation (renovated last time in 1994) shows how unsettling the combined opposition’s plans are for the ruling PTI.

At stake is approval and release of the next tranche of $960m in April and another two tranches of over $2bn before the end of the current programme in September

Political difficulties of the Imran Khan government aside, the economy is once again facing the growing threat of terrorism. The suicide attack on a Shia mosque in Peshawar that killed 57 and injured about 194 is a rude reminder of how flawed Pakistan’s policy of appeasing the terrorists is. The militant attacks on the country’s soil are on the increase ever since the Afghan Taliban took control of Afghanistan after the US pulled out its troops from there last summer.

On the diplomatic front, the challenges appear tougher. The US has warned Islamabad that the war in Ukraine could have both ‘regional and global consequences’ (for the country) as Pakistan decided early last week to abstain from voting on a United Nations General Assembly (UNGA) resolution, demanding the immediate withdrawal of all Russian troops from Ukraine to maintain its ‘neutrality’ in the conflict.

The warning came on the day the talks with the IMF had begun. Prior to that, some 22 envoys from the western countries, many from the European Union, in a joint statement circulated through social media had exhorted Islamabad to ‘take a clear stance against Russia’ — the country Imran Khan chose to visit on the day the Kremlin sent its troops into Ukraine. The US had also supported their joint statement.

In the meanwhile, the Financial Action Task Force (FATF) decided to retain Pakistan on its so-called terrorism financing ‘grey list’ in spite of meeting 32 targets out of 34 action points. The global money laundering and terrorist financing watchdog also told the country to address the ‘remaining deficiencies in its financial system’ as soon as possible.

The seventh review of the IMF funding programme is taking place amid concerns that the Washington-based lender of last resort may not take kindly to the government’s populist deviations from “sound economic policies” it had agreed to only recently to get its dollars to prop up its balance of payments position and secure loans from the other multilateral, bilateral, and commercial sources.

At stake is the approval and release of the next tranche of $960m in April and another two tranches of over $2bn before the end of the current programme in September. Esther Perez Ruiz, IMF Resident Representative, was quoted in a report to have stated that “the (Pakistan) authorities and the IMF will discuss recent developments, the merits of the recently adopted relief and industrial promotion package and other measures to promote macroeconomic stability during the upcoming mission”.

The statement is not much encouraging amid claims by finance minister Shaukat Tarin and other government officials that ‘the Fund is on board’.

A Reuter report quoted a finance ministry spokesman as saying Pakistan is confident that it will be able to defend the fuel and electricity subsidy packages during the IMF programme review. “We have that fiscal space to fund this money,” Muzzammil Aslam was quoted as saying. “We are already Rs285bn above our tax collection target,” he added.

There still is a big question mark over the government’s ability to convince the Fund, especially when it will not have the backing of the US and other western nations. When Shaukat Tarin had assumed the charge of the finance ministry and ditched the IMF programme to pursue growth before the budget last year, he too was full of confidence in converting the lender onto his side after a few months.

However, when he approached the Fund in October for the resumption of the funding to ease the balance of payments pressures, he was forced to sign even a tougher programme that included prior actions like grant of absolute autonomy to the central bank, withdrawal of tax exemptions and increases in the electricity prices.

The programme conditions still require the government to implement more tax measures, including an increase in the personal income tax rates in the budget for the next year and raising the power tariffs. Given the history, the chances are that Mr Tarin will find it hard to convince the lender on the cap placed on the electricity and petrol prices for four months and the grant of a third generous tax amnesty for the wealthy and powerful by the PTI government.

Published in Dawn, The Business and Finance Weekly, March 7th, 2022