IMF programme delay adding to uncertainty

There is growing unease due to delays in the IMF board approval. The Staff-Level Agreement (SLA) was reached in mid-July, with earlier expectations for board approval in mid-September. While the SLA process was smooth and the Fund team agreed to drop a few taxation measures without altering the total revenue target, the journey to board approval has been somewhat bumpy.

The delay is primarily due to difficulties in arranging the external gross financing gap, a challenge that has recently affected many countries.

For instance, in 2022 and 2023, countries such as Zambia and Sri Lanka experienced significant delays—over six months—between the SLA and board approval, reportedly due to disagreements between Western nations and China on debt relief measures.

It is highly unlikely that Pakistan will face such extensive delays today, as global financial conditions have shifted. However, tactical errors on our part, stemming from confusion over geopolitical positioning and ongoing domestic political disputes, are causing unnecessary delays.

The gross financing requirement for Pakistan is $5 billion in additional loans over the 37-month IMF programme. Of this, $2 billion is needed as a firm commitment for FY25, and $3 billion is required as a soft commitment for the remainder of the period.

On a positive note, $1.2 billion is being sought from Saudi Arabia through a deferred oil facility. Efforts are also under way to secure commercial loans from GCC-based financial institutions, while the IMF, along with local authorities, is seeking $3 billion from friendly countries.

The controversy surrounding the Independent Power Producers (IPPs) seems to have strained Pakistan-China bilateral relations, with powerful business figures and smaller political parties criticizing China’s role. Some experts suggest that this criticism was fueled by state actors to appease Washington by creating a narrative of debt restructuring for Chinese loans to IPPs.

Regardless of the underlying reasons, the IMF showed leniency in the SLA by forgoing taxes on fertilizer, real estate, retailers, and agriculture without substituting other revenue measures while maintaining the total revenue target. This compromise is difficult to achieve, yet the Fund overlooked it.

In the process, China, the largest bilateral lender and primary sponsor of IPPs installed over the last decade, has faced negative publicity in local media. This situation has worsened our efforts to secure the necessary financing. “It’s a tactical blunder, angering the Chinese,” remarked someone close to the government.

Currently, the noise surrounding the IPPs issue has diminished. The government appointed a new caretaker energy minister, who was central to the 2019 IPPs negotiations, as Special Assistant to the Prime Minister. Despite this, the new appointee remains relatively invisible. The energy minister from PML-N has avoided discussing the poor planning of the 2015 IPPs to avoid criticizing his own party, leading to the hiring of an ‘independent’ figure.

This ongoing confusion is counter-productive. The focus must be on securing the IMF deal, with assistance from China and other bilateral sources.

The finance minister’s honeymoon period is over, and his success in managing international relations is now under scrutiny. He has struggled to achieve rollover of bilateral loans and deposits for a tenor of four years and is now facing criticism for harsh budgetary measures impacting the urban middle class and formal businesses.

Adding to the complexity, the Punjab government has recently embarked on a generous spending spree. It announced a subsidy of around Rs 50 billion as a relief measure for power consumers (200-500 units) for two months.

The federal government had already provided similar subsidies for consumers below 200 units nationwide. Additionally, Punjab is promoting a housing scheme (approximately Rs 20 billion) and has also announced plans for subsidy on installation of solar panels by households.

These measures may need to be reviewed by the IMF staff before board approval, potentially causing further delays. If other provinces follow Punjab’s lead, it could further complicate the approval process. The federal government has also been tight-lipped over Punjab’s spending spree.

Typically, in Pakistan, political terms focus on reforms in the first half, with populist measures reserved for the latter part, close to elections. However, Punjab is implementing such measures in its first year, coinciding with the awaited IMF board approval.

This situation presents poor optics and suggests that the government may not have much time left. Rumors of a potential caretaker setup are circulating in the capital, influencing Punjab’s decision-making.

The lack of coherence and the government’s precarious position due to election-related slippages are contributing to a situation where short-term experiments could be detrimental that could potentially throw a spanner in securing timely approval from the Fund’s board.

Copyright Business Recorder, 2024