New funds

Published February 27, 2024

PAKISTAN plans to seek a new loan of $6bn from the IMF under its Extended Fund Facility for a period of three years, Bloomberg reported last week, citing unnamed officials. Discussions with the lender on the new facility are expected to begin in March or April, following the completion of the last review of the ongoing nine-month $3bn Stand-by Arrangement. The latter arrangement with the IMF, which is due to end soon, had helped the country avert default last summer. However, Pakistan’s other creditors — multilateral, bilateral, and commercial included — have thus far been reluctant to help the nation shore up its shrinking foreign exchange reserves and improve its external sector outlook, in spite of the present IMF programme. Their reluctance is evident from the fact that only $6.3bn in foreign loans, or 35.75pc of the annual budgeted target of $17.6bn, in the first seven months of the present fiscal year to January, has materialised. But it was not unexpected as foreign creditors are waiting for a larger and longer arrangement between Islamabad and the Fund for medium- to long-term reform policy clarity under the elected government. Two of the three top global rating agencies, Moody’s and Fitch, recently cautioned that a larger IMF package is crucial to Pakistan’s longer-term economic stability and to unlock other foreign inflows to cover the country’s annual financing gap of $22-25bn for some years.

An IMF spokesperson recently said the Fund was ready, if requested, to support the post-election government through a new arrangement to address Pakistan’s financing challenges. It, nevertheless, remains unclear if the authorities have started doing their homework towards a quicker conclusion of the deal — billed as being tougher than the current one — with the global lender. The government was compelled to agree to a slew of measures to cut public expenditure, impose additional taxes on corporates and salaried individuals, hike borrowing costs, increase energy rates, etc, to meet IMF goals under the ongoing loan. Coupled with the unannounced import control to curb the dollar outflow, these measures have caused the economy to contract and kept price inflation up, making matters even more difficult for struggling low-middle-income households.

It is also not apparent how far the incoming minority set-up will be ready to go to secure the IMF funds. But it is as clear as day that it would not have much room to manoeuvre while dealing with the lender of last resort, given the nation’s vulnerable external position and its need for securing financing from its multilateral and bilateral partners to stabilise and grow the economy and avoid defaulting on its mounting debt. It is also clear that the new government will have no choice but to make difficult and unpopular decisions, no matter what the political costs.

Published in Dawn, February 27th, 2024

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