IMF, Pakistan fail to strike deal on bailout package

Cash-strapped Pakistan and the IMF have failed to reach a staff-level agreement on a much-needed USD 1.1 billion bailout package aimed at preventing the country from going bankrupt.

After 10 days of talks here, discussions between the two sides remained inclusive, with the Washington-based global lender saying that discussions will continue virtually in the coming days.

Pakistan, whose foreign exchange has dropped below USD 3 billion, is in desperate need of financial assistance and a bailout package from the International Monetary Fund in order to avoid an economic collapse.

The 9th review is currently pending and its successful completion will bring USD 1.1 billion in the form of the next tranche.

An IMF mission led by Nathan Porter visited Islamabad from January 31 to February 9 to hold discussions under the ninth review of the authorities’ programme supported by the IMF Extended Fund Facility (EFF) arrangement.

The Pakistan side was led by Finance Minister Ishaq Dar.

In a statement Porter said, the IMF team welcomes Pakistan Prime Minister Shehbaz Sharif's commitment to implementing policies needed to safeguard macroeconomic stability and thanks the authorities for the constructive discussions.

“Considerable progress was made during the mission on policy measures to address domestic and external imbalances,” he said.

“Virtual discussions will continue in the coming days to finalise the implementation details of these policies,” he added.

Key priorities include strengthening the fiscal position with permanent revenue measures and reduction in untargeted subsidies while scaling up social protection to help the most vulnerable and those affected by the floods, he said.

Among other priorities include allowing the exchange rate to be market determined to gradually eliminate the foreign exchange shortage; and enhancing energy provision by preventing further accumulation of circular debt and ensuring the viability of the energy sector.

“The timely and decisive implementation of these policies along with resolute financial support from official partners are critical for Pakistan to successfully regain macroeconomic stability and advance its sustainable development,” Porter said.

Pakistan Finance Minister Dar said in a press conference on Friday the government has received a memorandum on the terms and conditions from the IMF for the completion of a USD 7 billion loan programme, but acknowledged that both sides are yet to clinch a staff-level agreement.

“We insisted that they (the Fund delegation) give us the MEFP before leaving so we could look at it over the weekend,” he said, adding that the government and the IMF officials would hold a virtual meeting on it on Monday.

“I am confirming that the MEFP draft has been received by us at 9 am today (Friday). We will completely go through the [MEFP] over the weekend and will hold a virtual meeting with [Fund officials]. It will obviously take a few days,” he said.

The finance minister acknowledged that reforms in certain sectors required by the IMF were in Pakistan’s interest, criticising the previous Pakistan Tehreek-e-Insaf-led government for “economic destruction and misgovernance”.

“It is necessary to fix those things. These reforms are painful but necessary,” Dar added.

He made the statement after the IMF delegation left Pakistan on Thursday night after 10 days of talks with the government.

“It is a standard process which can neither be shortened and hopefully they won’t extend it unnecessarily,” Dar said. The finance minister shared that the country would receive a USD 1.2 billion disbursement in the form of Special Drawing Rights (SDR) after the review’s completion.

SDRs are international reserve assets created by the IMF in 1969 and are allocated to member states to supplement existing official reserves.

Outlining the policy measures agreed upon between the government and the IMF, Dar said taxes amounting to Rs 170 billion would be imposed.

He, however, added that the government would try to ensure that the taxes did not directly burden the common man.

To impose the taxes, the government would introduce a finance bill or ordinance, depending on the situation at the time, Dar said.

“Secondly, we will implement the agreed-upon energy reforms through the federal cabinet,” he said, adding that the primary focus would be on minimising untargeted subsidies and reducing the “flow” in the gas sector to zero so there was no addition to the circular debt.

The Pakistan government initially conveyed to the media at the conclusion of talks on Thursday evening that everything thing was settled and Dar would announce the details at a press conference.

But the conference was postponed and instead Finance Secretary Hamed Yaqoob Shaikh told the media that the two sides agreed on a set of prior actions but a staff-level agreement (SLA) on the Memorandum of Economic and Financial Policies (MEFP) was not signed yet.

“All issues have been settled and prior actions agreed upon,” said Shaikh, adding that the SLA would be finalised in the days to come.

The IMF mission is going to share the details of talks with the top IMF officials in Washington and then issue a statement.

The finance secretary rejected the impression that there was any disagreement by saying that “all things have been settled”.

He, however, refused to divulge the details of the prior actions. He said the finance minister would address a press conference after the fund had issued its statement.

The IMF mission came to Pakistan after Islamabad agreed to take tough decisions, including restoring the market-based exchange rate and increasing petroleum prices.

In the first phase, Pakistan’s technical discussion with the IMF went on till February 3. It was followed by the second phase of policy negotiations that concluded on February 9 to finalise a memorandum of economic and financial policies.

Pakistan inked a USD 6 billion IMF programme in 2019, which last year expanded to USD 7 billion.

Earlier, talks on the review were originally scheduled to be held in October but were delayed after Dar refused to implement some of the conditions of the fund after taking the finance ministry from Miftah Ismail.

Ismail has said Pakistan would have to enter another IMF programme after the current one ends in June due to declining foreign exchange reserves.

Pakistan’s reserves have fallen below USD 3 billion and the country is feared to default on its external liabilities unless the IMF unlocks its funds for it. The availability of IMF money will avoid the default but it is feared to bring a tsunami of price hikes.

“When this [programme] ends in June, we will probably not have much more than USD 10 billion in reserves, if that. That would be about a month and a half of import cover,” he was quoted as saying by Dawn News.

He said that as a consequence of low reserves, the country would have to approach the World Bank and the Asian Development Bank for loans, which would require it to enter another IMF programme.

“Because of the debt repayment we have to do now — about USD 20bn for the foreseeable future — I am pretty sure we will have to have back-to-back IMF programmes,” he said.

Terming the IMF a lender of last resort, Ismail said it was similar to being admitted to the intensive care unit (ICU).

“You want to avoid going to the ICU, you have to start living a healthy life. Once we start living within our means, once we start pursuing rational and intelligent economic policies, then we can avoid going to the IMF.

“But if we continue living as we are, going from one boom-bust cycle to another, the IMF is the lender of last resort and we have to keep going to it,” the former finance minister said.