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Pakistan goes to IMF for loan against its poll promise

March 25, 2019
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Pakistan goes to IMF for loan against its poll promise

Islamabad: The Pakistan Tehrik-e-Insaf (PTI) government took charge in the month of August last year after triumph in the July elections. Its pre-election narrative and manifesto underlined that it would never go to the International Monetary Fund (IMF) for funds. But, Pakistan is all set to enter an IMF programme despite trying its best to fulfil its monetary shortcomings from other sources. Islamabad welcomed the IMF mission chief Ernesto Ramirez Rigo on March 26, and is set to finalise terms for its 13th bailout package, government officials confirm.

A $2.1 billion loan from China preceded Rigo’s arrival in Islamabad, pushing the country’s foreign exchange reserves to $17.8bn – a 12-month high. Pakistan’s reserves have also been bolstered by financial support from the UAE and Saudi Arabia, with both the countries giving Islamabad a combined $12.2 billion between November and January.

Going to IMF only recourse as help from allies not enough: Finance Ministry

Finance Ministry officials confirm that the prospect of getting financial support from allies resulted in the delay in getting the bailout package from the IMF. “We were hoping that we would get enough funds to avoid going to the IMF. And even though we are still going for the IMF programme as a last resort, with the funds that we have received from Saudi Arabia, UAE and China, we are in a better position to reach an agreement on our terms,” a Finance Ministry official said.

While talking to the media on March 25, Finance Minister Asad Umar said that Pakistan hasn’t moved from its stance throughout the negotiations, maintaining that the agreement is almost closed because the IMF has revised its position.

As recent as January, Pakistan was still looking to avoid going to the IMF as the National Assembly passed the Finance Supplementary (Second Amendment) Bill 2019. After presenting it in the National Assembly Asad Umar had said that the reforms in the finance bill are designed to ensure that ‘it would never have to go to the IMF again’.

In November, Asad Umar had pointed out that Pakistan’s financing gap was $12 billion. Following financial packages from Saudi Arabia and the UAE, the current account deficit dropped to $8.424 billion in January. There was further boost in the month of February, as the current account deficit saw a 72% decrease as compared to the same month last year. China has given another $2.1 billion worth loan to Pakistan as well.

However, Finance Ministry officials confirm that the current foreign exchange reserves, hovering around $8 billion prior to the Chinese loan, aren’t sufficient for two months’ worth of imports. Officials further confirm that where the IMF has asked Pakistan to deregulate its currency, the bailout programme is also asking for tax reforms.

IMF’s preconditions cause the Pakistani rupee to fall to an all-time low

According to reports, the State Bank of Pakistan has said that the country’s external debt in the third quarter of FY 2018-2019 has risen to $96.7 billion. Economists have asked the government for structural reforms to improve the condition.

In the lead up to the visit of the IMF mission chief, the Pakistani rupee fell to an all-time low of 140.24 against the US dollar. The Pakistani currency has depreciated over 30% since December 2017, with the government officials confirming that rupee deregulation was one of the IMF preconditions for the bailout package. Other conditions include privatisation of state-owned enterprises as the Government has to keep bailing them out as they incur huge losses.

“The IMF has asked Pakistan to let the currency value be determined by market forces. The IMF mission has discussed structural reforms to ensure that the rupee isn’t artificially bolstered,” says former Government Spokesperson on Economy and Energy Farrukh Saleem, referring to former Finance Minister Ishaq Dar’s policy of keeping the rupee’s value afloat by using the foreign exchange reserves from the State Bank of Pakistan.

Saleem also adds that despite the government claiming otherwise, going to the IMF was ‘inevitable’. “Unlike the Islamic Development Bank, Asian Development Bank, or countries like China and Saudi, it’s the IMF that is the only institution that gives you a proper monetary programme,” he said.

“Yes, the IMF programme requires an increase in general sales and value-added taxes in order to generate more revenue to finance the repayments,” says an official from the Finance Ministry when asked about the terms of the IMF bailout. Over 6 percent hike in petroleum prices is a part of the government’s strategy to increase revenue.

Officials further confirm that the IMF programme requires privatisation of loss-making public enterprises. The most notable among these is Pakistan International Airlines. The PIA currently has a deficit of around PKR 800 billion, half of which is the cumulative losses and the other half in liabilities. PIA’s operational losses are over PKR 2 billion per month.

Former Finance Minister Rana Afzal Khan confirms that his Pakistan Muslim League-Nawaz (PML-N) government was ready to privatise the PIA, but faced political resistance. “The PIA issue is more political than financial. We were ready to privatise it but the opposition parties used protests as political tools against us, which meant that we had to back out,” he said.

Steps by the government not enough to address issues: Ex-Finance Minister

Rana Afzal Khan, who was the Finance Minister in the Pakistan Muslim League-Nawaz (PML-N) government is critical of the time taken by the current government to go to the IMF. He also believes that January’s Finance Supplementary Bill, known popularly as ‘mini-budget’ did little to address Pakistan’s actual economic needs. “The taxes were insufficiently enhanced. The finance bill will only result in inflation, in addition to the impact on fuel, gas and utilities that the IMF programme is going to have,” he said.

Rana Afzal Khan further adds that the continued fall in the rupee’s value is indicative of the masses’ rejecting the PTI government’s policies. “The fall in the value of the rupee is reflective of the public sentiment, which is clearly negative. This is because the new government hasn’t done anything to address the economic challenges in the short or long term. There is no clearly defined roadmap for the economy, which is because the government itself has no idea what it is doing,” he said.

Former Caretaker Finance Minister Salman Shah maintains that Pakistan has had to go to the IMF for a bailout package owing to its pending loan payments. “The current account deficit is still around $18 billion (despite the funds from Saudi Arabia, China and UAE). Therefore Pakistan had to go to the IMF – especially given that loans worth $10 billion are still to be paid,” he said.

Shah, however, adds that the IMF programme would have long term benefits for Pakistan. “Once Pakistan accepts the IMF terms and the programme is agreed it would help the country generate investment interest and trust from around the globe,” he said. “And with the IMF bailout bolstering the reserves, the government would have the space to implement the much-needed reforms, especially on taxation and in the power sector.”