The IMF mission left Pakistan on a neutral note. The negotiations were not conclusive, but they did not fail either. There is nothing from the IMF mission's press release to infer a stalemate. Rather the talks were said to be productive and more rounds of discussions are required before reaching an agreement.
This is not unusual looking both from Pakistan's own perspective and by seeing IMF's recent dealings with other member countries. The IMF took a long time in negotiations with Greece and it has suspended a funding programme with Sri Lanka.
In case of Pakistan, the mission comprised of a new team with no or little experience in dealing with the country. Similarly, ministry of finance and SBP team is relatively inexperienced in handling the Fund. It makes sense for both parties to learn from each other and negotiate more on the reforms and financial assistance package.
The government is using a systematic approach to exhaust all external financing options, including the IMF. The first point of discussion should be on the funding requirement and how much is Pakistan getting from other sources to extract the net requirement to be sought from the IMF. The Pakistan side either does not have the information or is not allowed to disclose commitments from friendly countries, especially China.
There is a deadlock on negotiations which is being told either directly by finance minister or indirectly through government sources to journalists. But there could be unrevealed facts on what the Fund is asking and how much of that government is willing to share. The IMF would like to know the details of CPEC and other debt (including upcoming possible bailout) from China; but knowing the sensitivity of Chinese, Pakistan authorities might be reluctant to share.
The IMF wants Pakistan to curtail its fiscal and current account deficits, and all the terms of loan would revolve around the subject. The good news is that the efforts to curb twin deficits started back in December 2017, the measures translate into numbers with a lag of 6-18 months.
The currency adjustment of 27 percent along with 275 bps interest rates hike has already started reflecting in current account deficit, whereas significant cut in development expenditure (both by federal and provincial governments), and upward revision in energy prices will be visible on fiscal side in the quarters to come.
But the Fund usually seeks immediate results and will probably ask for more adjustments. The buzz is that the IMF is asking for free float exchange; but the MoF, SBP and EAC members are unanimous on having a managed float in a thinly traded market which otherwise can easily be manipulated.
There is consensus that the currency depreciation is enough and any further adjustment could be counterproductive. Similarly, there is not much room in monetary adjustment. The economic slowdown is already visible from various leading indicators including petroleum, automobiles and cement sales.
A significant cut in development expenditure will further hurt the growth momentum. It is time to sit tight and wait for impact of adjustments to fully translate into numbers. Now with talks halted for a few weeks (around two months, accordingly to government officials), in the next round of negotiations, some of the impact of measures already taken may start appearing on twin deficits, to help soften the terms.
Secondly, the rift is apparently on the revision of energy prices. The government has increased half of what NEPRA recommended on electricity tariffs, while the Fund is probably asking for full adjustment. Without plugging the holes of circular debt, no price hike is enough to end subsidies. The government has now bought sometime to initiate reforms; however, its focus is yet not on energy which is the biggest runtime drain both on fiscal and current accounts.
The other element is taxation targets. The IMF is not convinced on the supplementary budget offered by Asad - the Fund is asking for fresh and tangible taxation measures while the ministry is relying on technological measures and crackdown on tax evaders. Again, the government has time to demonstrate progress
On the face of it, seeing the current government performance, not much can be yielded by cutting energy subsidies and collecting taxes in the next two months. The critical outcome could come from the JCC meeting with Chinese in December and the package to be offered by UAE.
Things will be clearer by the dawn of next calendar year and will determine how immediate and important an IMF programme would be for Pakistan. The conditions may soften a bit, but it would still be a tough programme. Once Pakistan gets into the IMF programme, the Fund can offer waivers over the course of programme - it had 16 waivers in the last programme and some may be offered this time too, subject to Pakistan’s relationship with the US.
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