On Friday, Pakistan finally received what many commentators hailed as a ‘breathing space for its embattled economy’ after months of uncertainty when the International Monetary Fund (IMF) announced that its staff had signed off on a short-term $3 billion loan structured over a period of nine months.

That the IMF preferred to give Pakistan, teetering on the brink, a new deal under the IMF’s Stand-by arrangement (SBA) instead of completing the ninth review of its Extended Fund Facility (EFF) facility to release the $1.2bn tranche stuck for the last eight months as requested by the government shows the trust gap still persists.

The EFF expired on June 30, adding to the long list of IMF programmes that could not be completed. As mentioned in the final mission statement, the lender blames “some policy missteps, including shortage from constraints on the functioning of the foreign exchange market, along with internal and external shocks — Ukraine war, devastating floods last year, and international commodity super cycle — for stalling economic growth”.

Therefore, the IMF does not want to lose the leverage its bailout programmes allow it over how a country like Pakistan manages its finances and executes the policies agreed with the Fund. The SBA will enable the lender to closely watch over the present government and the caretaker setup, which will replace it in August to hold the election in the country, and monitor how they execute the 2024 budget and reforms agreed with the Fund.

Interest rates are likely to remain high, the rupee may depreciate as import curbs are lifted and electricity is set to become more expensive

The IMF mission statement clearly underscores that “steadfast policy implementation is (the) key” for Pakistan to overcome its current challenges, including through greater fiscal discipline, market-determined exchange rate, progress on reforms — particularly in the energy sector — to promote climate resilience, and improvements in the business climate.

Analysts like Topline Securities CEO Mohammad Sohail have hailed the new IMF facility as a better deal because it ends the uncertainty around what would happen in the lead to, and in the immediate aftermath of, the elections. “In fact, there will be some discipline until December, which couldn’t be there due to the upcoming elections — when the government takes popular decisions — if Pakistan had successfully or unsuccessfully completed the EFF. It is a blessing in disguise,” he argued in a note on the SBA agreement.

The deal announcement has already ‘revved up’ investor confidence, with fear of an immediate default subsiding fast, as is evident from the rally of the country’s short-duration debt following the IMF statement. The price of Eurobonds due in April has surged to nearly 71 US cents from a low of 38 cents, while the one due in 2025 has risen to 55 cents. The bond prices are up by 70-80 per cent from October, says a Topline Securities note. The Pakistan bonds were up by more than 10pc in the UK’s over-the-counter market on Friday, the note added.

Going forward, the new loan, once approved by the IMF executive board, is expected to unlock an unspecified amount of blocked financing from both multilateral and bilateral lenders and make it easier for Islamabad to secure rollovers due this fiscal year.

This will help the State Bank shore up its dwindling foreign exchange reserves, which have dropped by 60pc to $3.5bn in the last year, as well as make debt payments coming due over the next several months. Most importantly, it’s expected to ensure the much-needed fiscal discipline until a new government comes into power due to continuous oversight and monitoring of the budget by the IMF.

The IMF announcement has already indicated this, as is evident from its statement that “… it will be important that the budget is executed as planned, and the authorities resist (the) pressures for unbudgeted spending or tax exemptions in the period ahead.”

While the deal delivers much-needed breathing space to the economy, it doesn’t come without a few conditions injurious to both the businesses and common people.

If it comes at all, the healing of the economy gripped by a severe crisis for the last year will not come without painful consequences for the inflation-stricken businesses and people.

The interest rates will likely remain high as the IMF requires the State Bank to remain proactive in line with inflationary pressure. The bank had hiked the rates in an emergency meeting by 100bps to 22pc to ensure the finalisation of the SBA package.

The rupee is likely to bounce back in the immediate term but is predicted by analysts to depreciate going forward as curbs on imports and foreign exchange markets are lifted as announced by the government.

Last but not least, electricity will become a lot more expensive than it is right now as the base tariff is all set to increase by around Rs8.25 per unit to more than Rs33 from existing over Rs24 for all consumers — domestic, industrial and commercial.

What Next?

Still, analysts describe Pakistan as luckier than Sri Lanka, which defaulted on its loans last year, that had to contend with widespread public unrest and struggle hard to get what the IMF has ominously dubbed as “the last chance” for the island nation.

No wonder the IMF deal, after a year of political and economic chaos and anxiety, has brought smiles to many faces. But as economic analysts and commentators have warned, Pakistan still faces a tough road ahead.

Analysts argue that if the new deal is implemented fully and honestly, it will help the incoming government to negotiate a better, long-term programme after the elections, which is crucial for Pakistan for raising funds for its debt repayments and rollovers of close to $77bn for the next three years as well as ensure the balance of payments stability.

The newly elected government will have some time to evaluate the economic situation and decide on the way forward with a bigger IMF loan, says a finance ministry official. It will also provide the policymakers with enough space and liquidity to seek debt relief from bilateral lenders through debt reprofiling.

“This is crucial for long-term debt sustainability, considering the huge repayments that we have to make each year for the next several years. Debt restructuring will also help slash the burden of repayments on the external account, achieve long-term debt sustainability, and allow the authorities to undertake tax, spending, governance, export and other reforms to fix the economy and rid us of the boom-bust cycles every few years,” he argued.

Like Sri Lanka, this could be the last chance for Pakistan as well.

Published in Dawn, The Business and Finance Weekly, July 3rd, 2023

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