To many it sounds like PDM wants to have its cake and eat it

The plot thickens. With SBP’s (State Bank of Pakistan’s) forex reserves expected to fall below $5 billion in a couple of weeks, the time to negotiate with the IMF (International Monetary Fund) is ending. Hard decisions must be made. Either finance minister Ishaq Dar (and PML-N (Pakistan Muslim League-Nawaz) leadership in London) must willingly take actions to get the IMF review done, or they would be dragged to do so.

Otherwise, the PDM (Pakistan Democratic Movement) government might be forced out and be replaced by technocrats (perhaps for 3-6 months). If none of these scenarios materialises, the country will move towards a very painful economic default.

Time is running short. There is risk of non-linear events taking place. SBP has around $5 billion deposits from the Kingdom Saudi Arabia (KSA) and China where there are specific conditions of use. KSA can recall its deposits on a week’s notice. If that happens, things could go south in no time. Then, if the IMF review keeps on delaying there is a risk that Fund might end the programme and will suggest Pakistan to get into a new one. In between the IMF programmes, SBP reserves could deplete to a level where imports of essentials could become a major concern.

There are too many variables. And there are too many risks too. The government wants to get the IMF review done. At the same time, it is reluctant to meet the IMF conditions. It has increased the refinance rates for exporters, which has been done to appease the IMF. But Dar is not ready to leave the exchange rate market based, and running parallel exchange rate markets is the biggest impediment to the resumption of the programme.

The government demanded the US intervene, as well. However, the reply is to do what the IMF has asked for. The government is trying to get KSA and other friends to provide additional financing. However, they are pushing the government to first get back to the IMF route. No one is willing to extend support without having the nod from the IMF. The financing gap is only growing.

Seeing the reluctance to implement the IMF conditions, the business community and establishment toed the idea of extended technocrat setup to replace the incumbent PDM government. On the other hand, PML-N leadership is perhaps demanding a ‘guarantee’ of one-year extension in the tenure before taking tough economic decisions. But there are no guarantees in these games. Now there are two options for PML-N.

One is to swallow the IMF’s bitter pill and pick up the extension fight later. The other is to not dispense any further political capital and let the establishment intervene and take the caretaker route. The hope is to regain some lost political capital in this fight which is wishful thinking.

Whatever the way the axe falls, the status quo may break in 2-3 weeks. That is because the IMF cannot be taken for granted. At some point, the IMF may rescind the programme even if the authorities become ready to swallow the bitter pill. In such case, Pakistan could default and get back to the IMF programme at a later stage for debt restructuring. That is the way it happened in Sri Lanka.

The question is what the conditions of the IMF are and why the Fund is not flexible. Well, that stiffness is due to growing mistrust between the authorities and the IMF. This all started with Shaukat Tarin assuming the finance ministry in 2021. First, the sixth review was delayed. Then, the events related to VON-C (vote of no-confidence) delayed the seventh review, and eventually it was clubbed with the eight. Now the ninth review has been delayed for about 2.5 months.

There are four pressing issues with the IMF on the ninth review. The most critical is running parallel currency markets with a growing gap between interbank and open market rates. The finance ministry is responding that the SBP is not intervening by injecting dollars into the interbank market. However, SBP is controlling the rate by becoming the effective broker between banks in dollar trade at the prevailing rate. When the finance minister is quizzed on such practices, he becomes agitated and defensive.

The next issue is the revenue shortfall. FBR is short of its target by Rs220 billion in the first half and the second is looking bleaker due to further imports and economic compression. Non-tax revenues are shying from budgeted number too. This must be bridged by a combination of imposition of new taxes and curtailment of expenditures.

Third is to fill in the gap of power circular debt from what was earlier agreed. The only options the ministry of energy is presenting is a tariff hike. There is nothing to improve governance in the transmission and distribution as lately AT&C losses are growing. Then, no efforts are being made to end the cross and unfunded subsidies.

And the fourth is about the specifics on the commitment of financing from friendly countries which were made by the authorities in the last review. This includes fresh financing and rollover of some commercial debt which has lately been offered at 10 percent, but the ministry declined to accept the loan due to unfavourable pricing. One may wonder what alternate options the government has.

The lower the SBP reserves, the higher and harder would be the cost of financing. The government may have to sell its assets (airports and other infrastructure) cheaply to fill in both fiscal and external gaps.

Anyhow, all these conditions must be met in the next few weeks. The more time authorities take to implement the required steps, the higher the chances of the IMF review not taking place. There is little room for clubbing 9th review with 10th review. Dar and PDM cannot escape from this without paying an even higher political cost that would unfold if they decide to fly solo - without the IMF – for even a month longer.

Thus, the PML-N is short of choices. It is boxed in; and the box is getting tighter with every passing month. The party cannot have its cake and eat it too. They have freed themselves of the criminal charges and have secured their hands on power. They are doing everything under the sun to damage IK’s reputation. However, at the same time, they cannot attain the political capital which the party used to enjoy in the last decade.

Copyright Business Recorder, 2023