Any negative observations on the direction of the Pakistan economy made by the International Monetary Fund (IMF) after the last tranche under the $6.64 billion Extended Fund Facility (EFF) is released, scheduled for end September 2016, would negatively impact on the country's access to programme (budgetary) support from other multilateral and bilateral sources.
This was stated by an official of the Finance Ministry who confirmed that Finance Minister Ishaq Dar flew for Dubai on Tuesday to join the Pakistani team and head the policy level discussions with the IMF staff mission led by Harald Finger.
Sources in Finance Ministry on condition of strict anonymity said the IMF would have no leverage in policy matters after completion of the last review and the Fund would be focusing on conditions prior to the release of the final tranche; and Pakistan's credit worthiness would be negatively impacted if the Fund makes any negative observations during Post-Porgramme Monitoring (PPM).
Sources further revealed that Pakistan would seek a waiver from the IMF on fiscal deficit target, energy sector reforms, slow progress on privatization of distribution and generation companies, during the ongoing last (twelfth) review.
There is great concern in the Ministry of Finance that in the event of an increase in the international oil prices the fiscal space that the economic managers enjoyed for the past couple of years would evaporate leading to increased pressure on the government to raise taxes and/or slash development expenditure.
Former Finance Minister Dr Salman Shah told Business Recorder that IMF would not be in a position to dictate policy matters after the completion of the ongoing programme, however, it would continue to have a say through other means. The Fund undertakes a review of every member country and any negative observation by the Fund would jeopardise access to external financing, he said, adding that Pakistan's dependence on external financing is likely to increase significantly in the coming years due to expensive energy projects.
Shah added that planned energy projects are very expensive and envisage a per unit generation cost of 10 cents as opposed to 3 to 4 cents in the UAE and China. Additionally, he said, these projects are backed by sovereign guarantees, which implies that the government has taken financing liability of these projects. The government would be responsible for payment when these projects are completed whether it takes electricity from these projects or not, he added.
He emphasised that as a result of these costly power agreements, Pakistan's reliance on external financing would increase and the country is likely to seek another IMF programme in the next two years to meet its financing obligations.
Dr Shah said that power sector would be a real challenge in the coming years as corruption, incompetence, and balance of payment position have merged in one sector. On the one hand, he said either the circular debt or quantum of subsides would increase due to expensive power while on the other hand payments to the power producers in foreign exchange would impact the balance of payment position.