Assessment by Fitch Solutions

Fitch Solutions in its most recent report titled "Pakistan: what to expect in the next International Monetary Fund (IMF) bailout package" argued that an agreement on the bailout package will be reached soon and that Pakistan has requested 12 billion dollars. The report further maintains that the package conditions would be "roughly in line with the consolidation programme implemented in 2013 that set out expectations for a reduction in the fiscal deficit by an annualized one percent for three years," and that "there is likely to be a focus on reducing transfers to provinces so as to better align federal and provincial responsibilities in expenditures as pointed out by the IMF in its Article IV document."
These elements of the Fitch Solutions report are unlikely to find a responsive chord in either the Cabinet or government circles or indeed amongst independent economists as well as the media. While there were positive statements following the meeting between Prime Minister Imran Khan and Managing Director IMF Christine Lagarde, as noted by Fitch Solutions, yet it is well known in government circles as well as the local media that it was the Prime Minister who opposed the package conditions proposed by the IMF mission in November 2018, which were similar to the 2013 Extended Fund Facility (EFF) package conditions, thereby stalling negotiations on the package. Reports also indicate that the Prime Minister has not changed his mind on what his administration will accept as IMF conditions.
In marked contrast to the country's financing needs in November 2018, the Khan-led administration has been successful in generating 11.3 billion dollar loans from friendly countries - with three billion dollars from Saudi Arabia and the United Arab Emirates each and 2.5 billion dollars projected from China, and around 6 billion dollars worth of oil imports in one year on deferred payment from Saudi Arabia and the UAE - which has significantly reduced the country's requirement for the bailout package. True, Pakistan's reserves are appallingly low, less than 3 months of imports, yet the government anticipates that its recent measures, including the export promotion package, a major component of the second Finance Amendment Bill 2019 currently being debated in the National Assembly, would fuel exports down the line thereby strengthening reserves. The amount therefore that the government is likely to request as a bailout package would likely be around 7 to 8 billion dollars that would provide enough reserves for Pakistan to be comfortable till the end of the calendar year.
The IMF will insist on a lower budget deficit, and may give time bound targets, as stated by Fitch Solutions, and may insist on reducing expenditure (lower subsidies, privatisation to reduce the annual package of 1.3 trillion rupees to poorly performing state-owned entities) and higher revenue generation as has been the case in all IMF packages that Pakistan has received to date. Refusal to reduce subsidies and/or social sector programmes as expected must be accompanied by the government's counter proposal to reduce current expenditure (particularly the two highest allocated sectors, notably the running of civil administration and defence) rather than non-development expenditure as was the norm in the past programmes which had negative implications on growth.
The Khan administration must hasten the process of developing and beginning implementation on structural reforms in the tax structure with the objective of making it fair, equitable and non-anomalous rather than simply focusing on revenue generation (as was the case in the EFF). The previous package unfortunately focused on raising indirect taxes, through heavy reliance on withholding taxes in the sales tax mode, and one would hope that the present government revisits this.
Reports indicate that during November negotiations, Pakistan declined IMF's proposal to implement a free float regime and one would agree with Fitch Solutions that agreement may be reached on a wider management float policy band to increase flexibility and reduce the need for policy intervention; however exactly how wide the band will be agreed upon will be heavily negotiated by the two.
The report also states that IMF would focus on reducing transfers to provinces to better align responsibilities - a view that fails to take account of Pakistan's constitution that does not allow for a reduction in the provincial share from the divisible pool. However, the 18th Amendment devolved several social sector subjects including health and education, to provinces which have yet to develop capacity. One would hope that the government proactively proceeds to shift responsibilities away from the federal government thereby reducing its own contribution to these sectors and obviating its need to appoint federal agriculture, education or health ministers or maintain staff in their ministries.
Finally, the Fitch Solutions does mention standard normal IMF conditions that would be negotiated, including setting a target for debt-to-GDP ratio, but is silent on another sore point between the two: the exact terms of loans incurred from friendly countries all of whom historically do not make their terms public, including under China Pakistan Economic Corridor.