• Islamabad taking steps to ensure it doesn’t lose $1.4bn quota already approved by IMF board
• Short-term support discussed at staff-level; Fund official says happy with govt’s ‘decisive measures’

ISLAMABAD: With time running out, Pakistan and the International Monetary Fund (IMF) are discussing a new short-term — six to nine months — standby arrangement (SBA) worth about $2.5bn, the remaining part of the Extended Fund Facility (EFF) expiring on June 30, to get the country through the political transition to the newly-elected government in the second quarter of the current fiscal year.

This is one of the two options currently under discussion by the two sides after the government met all the conditions and prior actions of the ninth review, and also those relating to subsequent 10th and 11th tranches without disbursement of $2.5bn funds outstanding since October 2022.

The options have been discussed at the staff level and during recent back-to-back engagements between Prime Minister Shehbaz Sharif and managing director of the IMF, Kristalina Georgieva, including the one through telephone on Tuesday morning.

“In the strict sense, we have completed conditions of not only 9th but with the revised budget, the terms of 10th and 11th reviews had also been met and [Pakistan] deserves disbursement of entire outstanding approved quota,” said an official.

The two sides had exchanged a memorandum of economic and financial policies (MEFP) a few days ago for completion of the 9th review, the official added.

However, the Fund’s rules do not provide quick reviews, particularly when the programme’s one-year extension expires on June 30. This was explained by Ms Georgieva to PM Shehbaz in Paris.

The IMF has acknowledged Pakistani authorities’ swift completion of policy actions. The last policy decision that Pakistan reluctantly delivered was the sudden increase in the central bank’s policy rate to the highest-ever 22pc; although the fund staff wanted it to be 23pc.

Earlier, IMF staff had raised objections over the original budget presented on June 9 but has now confirmed that the revised budget, including additional taxes, expenditure cuts, an end to amnesty scheme for remittances etc, had met its programme requirements.

The two options include disbursement of $1.1bn under the 9th review. But once approved by the IMF executive board, this would mean the end of the programme, without the possibility of release of two subsequent tranches of $1.4bn.

This, however, is not a preferred option for the government because Pakistan would lose $1.4bn worth of quota approved by the IMF executive board.

Short-term arrangement

The other option under consideration is to enter into a new short-term arrangement with upfront disbursement equivalent to the 9th review ($1.1bn) within the next 15 days (latest by mid-July), followed by two-three more reviews for up to $500 million each.

This would send a message of stability to the markets as the current government completes its term in less than two months and is to be replaced by a caretaker setup until a new regime takes charge after elections.

For both options, the two sides have to announce a staff-level agreement by June 30 for confidence building. The executive board approval could follow over the next week or so.

“For us, the priority is to secure the entire amount of $2.5bn,” informed sources said, adding the authorities had pitched a higher amount for SBA but perhaps that was asking for too much.

But to achieve this, the government may have to increase the petroleum levy by up to Rs5 per litre in the coming pricing review to secure at least an average of Rs55 per litre petroleum levy for the year and commit to the expedited regulatory process for rebasing of electricity tariffs by Rs5-8 per unit with effect from July 1 even if its approval takes a couple of weeks.

Both EFF and SBA windows are similar in nature except that EFF has a longer (3-4 year) tenure to address the medium-term balance of payment challenges while SBA is generally short-term (9-24 months) with relatively flexible terms.

Meanwhile, Pakistan expected inflows from friendly Arab countries over the next couple of days to close the fiscal year with a higher foreign exchange reserve position.

IMF ‘happy’ with recent measures

In a related development, the IMF staff mission also acknowledged Pakistan’s hard work and quick policy actions. In a positive statement, the mission chief to Pakistan, Nathan Porter, said the fund team continued “discussions with Pakistani authorities with the aim of quickly reaching an agreement on financial support from the IMF”.

He said that over the past few days, the Pakistani authorities had taken “decisive measures to bring policies more in line with the economic reform programme supported by the IMF”, including the passage of the budget that broadens the tax base while opening up space for higher social and development spending, as well as steps towards improving the functioning of the foreign exchange market and tightening monetary policy to reduce inflationary and balance of payment pressures that particularly affect the more vulnerable.

Published in Dawn, June 28th, 2023

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