In a major blow to a cash-strapped Pakistan, the talks for a much-needed bailout package between International Monetary Fund (IMF) and Pakistan have failed, posing a serious question on the country’s ability to repay international loans. Pakistan is talking with IMF on a $1.1 billion funding round, which is part of a $6.5 billion bailout package signed in 2019. While an IMF team was in Pakistan to discuss the deal, the talks collapsed as they failed to reach a staff-level agreement within the stipulated time.
The development comes as talks between the IMF and Pakistan, which took place from January 31 to February 9 in Islamabad, came to an end. The IMF delegation had arrived in Islamabad to meet with the Pakistani authorities. However, despite not reaching an agreement, the two parties have decided to continue the talks on the bailout deal via video calls.
IMF Pakistan Mission Chief Nathan Porter stated in a statement that “Key priorities include strengthening the fiscal position with permanent revenue measures and reduction in untargeted subsidies, while scaling up social protection to help the most vulnerable and those affected by the floods; allowing the exchange rate to be market determined to gradually eliminate the foreign exchange shortage; and enhancing energy provision by preventing further accumulation of circular debt and ensuring the viability of the energy sector. Virtual discussions will continue in the coming days” and added that significant progress had been made.”
Ishaq Dar, the finance minister of Pakistan, was scheduled to hold a press conference to announce the program’s resumption, which was not held.
Despite the inconclusive meeting in Islamabad, Pakistan is convinced that the deal will go through and IMF will sanction the funding after resolving the issues. Finance minister Ishaq Dar told reporters that Pakistan has agreed with the IMF on the conditions to release the funds. He said that talks with the IMF would resume virtually on Monday, and the delay in reaching an agreement was due to “routine procedures.” Dar further said they will implement whatever has been agreed upon between their teams.
Hamed Sheikh, Pakistan’s secretary of finance, stated in a statement on Thursday that “Actions and prior actions have been agreed but the staff level agreement will be announced subsequently.” He further said, “The discussions with the IMF are now over. The MEFP (Memorandum of Economic and Financial Policies) paper has been given to Pakistan by the IMF,”
Credibility crisis
The IMF was unwilling to completely trust Pakistan this time due to a credibility crisis and has established certain prerequisites. The Pakistani govt failed to provide adequate and convincing assurances to the IMF mission, which resulted in the failure of the staff-level talks.
IMF has set several conditions to release funds under the bailout package, and while Pakistan has implemented some of them, IMF is still not convinced. Some of the conditions include a return to a market-based exchange rate and higher fuel prices, which were implemented recently, causing massive inflation and a surge in fuel prices. Pakistan has also agreed with the IMF to introduce fiscal measures, including new taxes.
The IMF raised its concerns at the policy-level discussions about the projections presented by Pakistan’s Ministry of Finance regarding the inflows of external financing from multilateral, and bilateral creditors, and commercial loans.
Shehbaz Sharif, the prime minister of Pakistan, and Nathan Porter, the head of the IMF mission, had a virtual meeting in order to resolve the impasse.
Reportedly, the IMF has sought assurances from China, Saudi Arabia, and the United Arab Emirates about the fulfilment of the loans they had committed to providing to Pakistan.
Since its foreign exchange reserves have dropped to just $2.9 billion, the lowest level since February 2014, Pakistan urgently needs the staff-level agreement and subsequent board approval for the ninth review to release $1.1 billion. The country needs at least $7 billion to pay off its external debt, but the reserves are not sufficient to finance imports even for two weeks.
The State Bank of Pakistan (SBP) said in a recent weekly statement that the week ending February 3, 2023’s external debt repayments caused the country’s foreign exchange reserves to drop by $170 million to $2,916.7 million (or $2.92 billion).
The risk of failing to repay foreign debt has increased due to the concerning levels of Foreign exchange reserves. Pakistan’s finance minister despite the declining forex reserves was hopeful that the country will be able to conclude the IMF bailout programme however, things did not go as he thought.
The staff level agreement is the first but most crucial step in asking the IMF board for permission to finish the 9th assessment.
As per Pakistani media reports, a cash-strapped Pakistan government removed the dollar cap to the conditions laid down by the International Monetary Fund. It resulted in the historic fall of Pakistani currency in the interbank market. Currently, it is trading at 277.81 Pakistani rupees per US Dollar. Removing the dollar cap was one of the conditions to resume the bailout. Other conditions included easing fuel subsidies and more. The letters of credit (LCs) were also restricted by the government amidst the falling foreign exchange reserves.
Economic crisis in Pakistan
Pakistan is experiencing its worst economic crisis in years as the country is dealing with a shortage of food, a shortage of power, sky-high inflation, and a collapsing currency. The economy of Pakistan has been spiraling out of control due to the vicious cycle of debt and partial payments.
In addition to running out of money, Pakistan has also run out of flour to feed its population, and the country is facing massive power cuts as well.
As the government of Pakistan failed to end the economic crisis in Pakistan, over 7 million workers in its textile industry have been laid off. The country’s textile associations have blamed the mass layoffs on the Shehbaz Sharif government’s incompetence and shrinking exports.
Even in the midst of the severe economic crisis, it was reported that the Pakistani government was importing expensive luxury BMW cars for its cabinet ministers instead of focusing on measures to increase exports.
With expanding debt, rising energy import costs, depleted foreign reserves, political instability, a protracted decline in GDP growth millions losing jobs, the country desperately needs a bailout.
The situation in several cities of Pakistan is so grave that flour is being rationed and guarded by armed guards. Prices of flour and wheat have witnessed a dramatic surge.
