IMF deal: A ray of hope after a year of economic chaos

The country wasted a good nine months under finance minister Dar’s obstinacy, only to eventually land up back where it was when he first came into power.
Published June 30, 2023

After a harrowing year of skirting the edges of a catastrophic default, some good news has finally arrived as the International Monetary Fund (IMF) announced it has reached an agreement with the Pakistani authorities on a nine month stand-by arrangement of $3 billion.

Not only that, the announcement also gives a date by when the IMF’s executive board approval is expected — early July. With this development, fears of a default can now start to recede, especially if the deal is successful in unlocking associated inflows from the World Bank and Asian Development Bank, as well as from bilateral partners like Saudi Arabia, the UAE and China.

What is particularly good about this announcement is that it clears up the uncertainty that has been looming over the past months, when Pakistan had to contend with a change of government amid plummeting foreign exchange reserves. With elections approaching, and an interim government set to take power, the absence of a strong decision-making centre in the country was a real concern over how the precarious reserves position will be managed. That concern has now been addressed.

“Now, the caretaker government will have a road map on what to do for economic stabilisation,” said Mohammad Sohail of Topline Securities in an alert sent out hours after the announcement.

One source who was part of the government team that clinched the deal said it was made possible by the channel of communication opened up by Prime Minister Shehbaz Sharif with the managing director of the IMF, Kristalina Georgieva. Three phone calls and three personal meetings between the managing director and the PM are where the key breakthroughs were achieved.

Now we wait for board approval, followed by release of the staff report to see what targets Pakistan will have to meet to keep the deal alive.

The agreement provides the country with the breathing room it desperately needs to make it through those months of the year in which an interim government will be in place and the country will be consumed by the elections. The next incoming government will have some time in which to negotiate a fresh programme, spanning a longer time horizon, with the possibility of framing some key structural reforms to put the balance of payments (BoP) on a more sustainable footing.

The agreement opens up some space, but it does not resolve the fundamental underlying weaknesses in the economy that repeatedly keep bringing Pakistan back to the precipice of a BoP crisis. For that, the next government will be responsible, but at least it will have some time in which to get its programme in place.

It will be worth asking how much Pakistan gained from Finance Minister Ishaq Dar’s insistence that the programme agreed to by his predecessor needed to be renegotiated.

Read: ‘Won’t take IMF’s dictation’

The country wasted a good nine months under Dar’s obstinacy, only to eventually land up back where it was when he first came into power, promising he will rework the agreement to lighten the burden of the adjustment. With the new stand-by arrangement today, the country has been handed those nine months back and given a second chance to complete the job that was supposed to have been done by now. This is welcome respite, but it is worth bearing in mind that violating commitments made to the IMF has yielded no benefit for the country.

Pakistani bonds rallied on the news. The price of the April 2024 paper leapt to 71 cents on the dollar after hitting depths of 36 cents in months past, which was default-level pricing. As of writing, it was continuing to rally with traders saying fears of possible default on this issue are now receding rapidly.

The government’s job is now clear: get the board approval required to activate this agreement, then unlock the associated inflows from bilateral and multilateral partners, rebuild the foreign exchange reserves in the closing weeks of its tenure, and leave behind a tenable BoP position to see the country through the transition of power looming before it. If it succeeds in getting past these milestones, it will have redeemed its year of troubled indecision on the economic front.

Header image: Shutterstock