ISLAMABAD: A day after Pakistan removed the exchange rate cap giving way to over nine per cent depreciation of the rupee, the International Monetary Fund (IMF) on Thursday announced fielding its staff mission to Pakistan on Jan 31 for talks on the 9th quarterly review of a funding programme pending for almost four months.

“At the request of the (Pakistan) authorities, an in-person Fund mission is scheduled to visit Islamabad January 31st-February 9th to continue the discussions under the ninth Extended Fund Facility (EFF) review,” said the Fund’s resident representative in Islamabad, Esther Perez Ruiz.

Pakistan formally conveyed to the IMF its willingness on Jan 19 to accept all four major conditions and requested for the mission to visit Islamabad to conclude a long-awaited agreement on the revival of the remaining $3 billion part of the programme needed to avert a sovereign default and bring markets back to normal.

The Fund, however, did not yield an inch for almost a week unless Pakistan allowed a complete return to the market-based exchange rate that had been capped artificially at around Rs225 per dollar.

In a single day, the inter-bank rate went beyond Rs255 and open market rate towards Rs275. Through virtual contacts, the Fund had made it very clear while exchanging relevant data that it would consider a visit only after the administrative controls were lifted and interest rates enhanced.

While announcing the visit to Islamabad next week (Jan 31), the Fund emphatically made it clear that its mission “will focus on policies to restore domestic and external sustainability, including to strengthen the fiscal position with durable and high quality measures while supporting the vulnerable and those affected by the floods; restore the viability of the power sector and reverse the continued accumulation of circular debt; and reestablish the proper functioning of the FX market, allowing the exchange rate to clear the FX shortage”.

That means the two sides would try to find a way to finance over Rs803bn worth of gap in the power sector with an average tariff increase of about Rs7.50 per unit, increase in petroleum levy on all petroleum products to Rs50 from the existing Rs35 on high-speed diesel and Rs6-9 on other smaller products like light diesel and kerosene, fresh additional revenue measures in the range of Rs500-700bn through a mini budget.

The increase in gas prices is not part of the IMF’s previous benchmarks, but over Rs1.6 trillion circular debt in the sector risks the gas companies and a looming burden to the already runaway fiscal deficit.

This has been reinforced by the IMF, which made it clear that “stronger policy efforts and reforms are critical to reduce the current elevated uncertainty that weighs on the outlook, strengthen Pakistan’s resilience, and obtain financing support from official partners and the markets that is vital for Pakistan’s sustainable development”.

With just $3.3bn in official foreign exchange reserves, friendly countries had been holding back their promised additional support – about $2bn by Saudi Arabia, $1bn the UAE and about $2bn China – on top of recent rollovers mainly because of an impasse between the Ministry of Finance and the IMF.

Sources said the government had backtracked from its August 2022 commitments that required passing on fuel cost adjustments to consumers in the winter, increasing electricity collections by 3pc to 93pc and reducing line losses by 1pc on top of withdrawal of subsidies on the powerful industrial sector. Instead, collections dropped to 83pc amid floods and price hike before slightly recovering to about 87pc.

On top of this, about Rs70bn worth of additional hole emerged due to tariff cap and another Rs120bn because of a fixed tariff for the export sector announced a day after Ishaq Dar took over as the finance minister. This gap has now grown beyond Rs800bn and required about Rs7.5 per unit average increase.

The authorities have now conveyed to the Fund about introducing all measures to be agreed during the Jan 31 to Feb 9 talks through a mini budget, tariff notifications and independent adjustment of exchange rate. The serious challenges, however, are still to come as more than 9000 import cargoes are held up at ports for want of foreign exchange, which if cleared could at once wipe out all the reserves in the system.

Published in Dawn, January 27th, 2023