The International Monetary Fund (IMF) has shown a low tolerance for Pakistan for deviations from its program targets regarding fiscal adjustments, foreign exchange policy, and energy sector reforms, says Barclays.
The credit research firm noted that at the same time, the lender has leaned on Pakistan’s bilateral creditors to boost available funding given the country’s need for large debt rollovers. Barclays expects further bilateral financing deals to be piecemeal and anchored by an IMF program.
On 9 February, the IMF concluded its visit to Pakistan and issued a press release1 stating that “virtual discussions will continue in coming days.” As a result, a staff-level agreement on the ninth review was not reached even after 10 days (31 Jan-9 Feb) of discussions with the Pakistani authorities.
According to Pakistan government officials, prior actions need to be implemented before the IMF Board will approve the disbursement of USD 1.1 billion in March. These prior agreed actions include an increase in electricity tariffs and gas rates, removing unbudgeted energy subsidies to industrial sectors, and other revenue-boosting tax measures.
Bilateral funding has not been forthcoming More interestingly, the IMF highlighted the need for assurances of bilateral financing commitments from Pakistan’s other creditors – notably, Saudi Arabia, the UAE, and China.
This requirement supports our concern that Pakistan’s external-debt viability relies heavily on its ability to secure large debt rollovers. For reference, in late September we estimated that roughly USD 17 billion of foreign-currency debt is due in FY23, but the funding gap is likely to be around USD 6 billion even if official creditors (non-IMF) rollover USD 9.5 billion that is due in the fiscal year.
It further believes that the lack of new bilateral financing agreements reflects Pakistan’s complex political environment and macroeconomic instability–high inflation, slow growth, and widening fiscal deficit. We do not expect this situation to change and believe new bilateral financing agreements will remain piecemeal, focus on investment returns/opportunities rather than strategic partnerships, and be anchored by an IMF program.
Recently, the central bank recently allowed the currency to adjust sharply, and Finance Minister Ishaq Dar highlighted4 that the government would launch Rs. 170 billion mini-budget to boost tax revenues (such as raising GST, sales, and excise taxes on certain products). In addition, the economic Coordination Committee (ECC) increased gas prices.
Petroleum prices have also been sharply raised and diesel will be raised in the coming weeks.
It is clear to us that to gain access to external financing, reviving the IMF program has become the number one priority of the government and the government appears willing to accommodate those demands, at least in the near term.
On 3 July 2019, the IMF approved a 39-month Extended Fund Facility (EFF) for Pakistan amounting to USD6bn.
The Board’s decision allowed the Pakistani authorities to make an immediate drawdown for USD1bn and unlock USD38bn from international partners over the program period.
Key elements of the program included:
The First review of the program was completed on schedule but following the Second review (3-13 February 2020) the IMF highlighted that reform efforts were disrupted due to the COVID-19
outbreak and deterioration in global economic conditions.
No funds were disbursed following the Second review but “policies and reforms” to approve disbursal were agreed upon. In April 2020, the IMF approved a USD 1.39 billion disbursement under the Rapid Financing Instrument (RFI) to meet the urgent balance of payment needs due to the disruption caused by the COVID-19 pandemic. Through most of 2020, the program was stalled because PM Khan was reluctant to introduce unpopular reforms to reduce the fiscal deficit.
The National Electric Power Regulatory Authority (NEPRA) bill and the State Bank of Pakistan (SBP) Act were highlighted as “prior actions” required to restore the program. Nearly a year later, in March 2021, the Board approved the Second, Third, Fourth, and Fifth reviews allowing for the immediate disbursal of USD500mn towards budget support.
In November 2021, the Sixth review was completed after the Central Bank Bill was approved by parliament, with USD1bn disbursed in February 2022. In order to support program implementation and meet the higher financing needs in FY 23, the IMF Board approved an extension of the eFF until end-June 2023 and augmented the program by USD1bn. In July 2022, the Seventh and eighth reviews were completed and USD1.1bn was disbursed after IMF Board approval in August 2022.