IMF programme has dead-ended?

The uncertainty surrounding the International Monetary Fund (IMF) programme is one single factor that has been haunting the country’s economy and fiscal sustainability for months. It has swung the market sentiment from one low to another; triggered the PKR slide, adversely impacted trading in commodities and stocks and caused economic drift.

The other factor impacting the market, though to a lesser degree, is the political uncertainty prevailing in the country over the last one year. The rupee parity against the dollar, over the year, has moved from Rs 180 to over Rs 285 in the interbank with a devastating effect on imports and debt repayments.

Finance Minister Ishaq Dar, while speaking to a delegation of Rawalpindi, Islamabad and Sarhad Chambers of Commerce and Industry, last Wednesday, hinted that the International Monetary Fund (IMF) programme may expire on June 30 without revival due to “restricted time” and apologised to businessmen for the hardships they have been facing because of an extremely challenging economic situation.

According to him, “our efforts are aimed at completing the second IMF programme in the country’s history, although time has been restricted and the programme is ending on June 30”. This statement enormously added to the depressed sentiment with rupee being traded in the range of Rs308 to Rs313 to a dollar in the open market.

The IMF’s demand that the planned budget for fiscal year 2023-24 must get its approval has not been met yet. The government’s failure in this regard has therefore caused a new setback to the prospects of an early completion of the pending 9th review of the Extended Fund Facility (EFF), according to government sources.

Dar’s assurance that the country was not on the verge of a financial crisis and “will absolutely not default” provided no comfort to the markets.

Pakistan had signed the current “The 36-month $6 billion Extended Fund Facility” in July 2019. The IMF, on a request of the then finance minister, Miftah Ismail, extended the programme by nine months to June 30, 2023 and also increased its size to $6.5 billion.

Over the past almost four years, the programme has been derailed at least four times. The governments of PTI (Pakistan Tehreek-e-Insaf) and PDM (Pakistan Democratic Movement) tried multiple times to renegotiate the programme but to no avail. On the contrary, the IMF kept on adding more conditions to the bailout. The programme, therefore, got delayed, adding to country’s fiscal woes.

It is learnt that the IMF has raised the fresh demand for additional financing from an earlier unmet condition of $6 billion to $8 billion aimed at ensuring debt repayments coming up for the May-December 2023 period. The lender has worked out the $8 billion needs by considering all projected inflows and outflows for this period.

Obtaining commitments of “significant additional financing” is essential before the IMF approves the release of pending bailout funds that are crucial for Pakistan to resolve an acute balance of payments crisis, according to the IMF spokeswoman.

Reportedly, Pakistan has not accepted the new additional financing demand on grounds that the Fund’s current programme will end in June 2023 and it should not put conditions beyond the programme period.

Trust deficit appears to be a major factor which could not bridge the gap between Pakistan’s limitations and IMF’s inflexibility and indifference. The IMF did not take into consideration the impact of floods for the very same reason. It increasingly appears that the IMF is not releasing the next tranche anytime soon.

So where does the country go from here? The government has not spelled out or unveiled any contingency plan. To comprehend what may turn out to be the likely scenario, we need to go back to any English-language dictionary to fully appreciate the import of ‘sovereign default’ phrase. ‘Sovereign default’ is the failure or refusal of the government of a sovereign state to pay back its debt in full when due. In other words, sovereign default occurs when a sovereign entity or state is unable to pay back the principal and interest owed to creditors.

It is, however, important to note that governments are typically hesitant to default, since doing so is likely to bar the country from accessing debt markets again for years, and make borrowing more expensive, at least for some time, when it once again becomes possible.

Lenders have a limited recourse in the event of a sovereign debt default because no international court can force a country to pay up, though they may pursue claims to seize a defaulted borrower’s assets located overseas.

Wars, revolutions, mismanagement, and political corruption are among the leading causes behind sovereign defaults. Distressed sovereign borrowers often seek to negotiate debt restructuring forcing their creditors to write-off part of the debt in exchange for reduced debt service payments.

The IMF, China, Saudi Arabia and the UAE are the key lenders whose stakes are significantly high. However, only China may step forward to keep Pakistan out of default as its interests are strategic, although it did not bail Sri Lanka out.

The reluctance of lenders stems from Pakistan’s non-ending political and economic crises. We must put our house in order without any further loss of time.

Copyright Business Recorder, 2023