SBP has increased the policy rate by 1 percent to 22 percent in an emergency monetary policy committee meeting. But it was not a big surprise move as this was one of the conditions of the IMF. The government is desperate to complete this programme (or at least 9th review) before it ends on 30th June and will do everything it can. Already, alterations have been made to the budget. Together with the policy rate hike, the government will do away with import restrictions to ensure proper functioning of the forex market.

The question is whether the programme is to conclude successfully or some other arrangement with the IMF will take place, as time runs out.

Thegovernment’srelationship with the IMF looks complicated. The government wants this programme to be finished successfully and get the remaining tranche(s). That will open inflows from other multilaterals, and gross financing commitments from bilateral and others. This is to buy some time for the state to complete the electoral process in the next six months (or so). When the new government comes, it will negotiate the next programme, without the need of external debt restructuring (in case of running down of forex reserves) in the transition.

One version is that, after the PM’s meeting with the IMF’s MD, the Fund has let go of the $6 billion gross financing requirements and agreed to the confirmation the government has. However, the Fund insisted on removing the import restrictions and currency market to function properly by not controlling either the supply or demand of dollars. The supply (pumping the dollar in the market) is not happening, as SBP doesn’t have any to spend. Control is in demand by allowing selective imports to take place. IMF wants this to normalize. The government has agreed on it.

Once the imports open, the currency would come underpressure, and this would have inflationary consequences. Then the additional tax measures (including rising PL) have direct and indirect inflationary impacts. And to counter that, the interest rates must be increased. SBP did this yesterday.

Now the government is waiting for the Staff level Agreement (SLA) to take place before 30th.

The other version is that given the mistrust between the authorities and the IMF, the latter might like to see implementation of lifting import restrictions and proper functioning of the forex market. Then there could be a possibility of any supplementary budgetary measures, after the IMF programme is successfully implemented and before the next government requests for a new programme.

These two steps warrant some monitoring mechanism. And for that the country must remain in the IMF facility. Thus, the possibility of this programme ending without successful review and having a standby facility, till the time the new government comes and settles, cannot be ruled out. In this case, there could be reviews and conditions, and releases, according to the agreement.

The government desires the completion of this programme now. The negotiations are going on. Things will get clear this week.