International Finance

IMF engages with new Pakistan government for economic stability

Pakistan averted default in 2023 as the IMF provided a last-minute bailout

The International Monetary Fund (IMF) has expressed its intention to engage with the new Pakistan government on policies to ensure “macroeconomic stability and prosperity for all of the country’s citizens”.

The development comes a day after PTI (Pakistan Tehreek-e-Insaaf) Senator Ali Zafar told reporters that a letter would be sent from the jailed party founder and former Prime Minister Imran Khan to the IMF, urging it to call for an independent audit of the February 8 general elections before it continues its engagement with Islamabad.

Zafar also pointed out the charter of the IMF, the European Union and other organisations, which stated that good governance was needed for working in the country or giving it a loan.

“If elections were not free and fair, any organisation would avoid giving a loan to such a country. Because that loan will further burden the people,” Zafar said, while talking about PTI demanding an audit of the election results and that condition being put in front of the IMF.

Pakistan averted default in 2023 as the IMF provided a last-minute bailout. The short-term programme is all set to expire in April 2024 and a new government will have to negotiate a long-term arrangement to keep the economy stable.

IMF’s Take On The Matter

Julie Kozack, the head of the Communications Department at the IMF, was recently asked about whether Pakistan was on track to secure the third tranche of the stand-by agreement reached in June 2023, along with the question enquiring whether the global monetary body would entertain any letter by Imran calling for investigations into election irregularities.

Kozack said, “On January 11, the IMF Executive Board approved the first review of the Stand-By Arrangement, with Pakistan that brought total disbursements under the Stand-By Arrangement to USD 1.9 billion. The Stand-By Arrangement is supporting the authority’s efforts to stabilise the economy and to, of course, with a strong focus on protecting the most vulnerable.”

She said that during the tenure of the interim government, the authorities had “maintained economic stability”.

“This has been done through strict adherence to fiscal targets while also protecting the social safety net. It has been done by maintaining a tight monetary policy stance to control inflation and to continue to build up foreign exchange reserves,” Kozack stated further, while adding, “We look forward to working with the new government on policies to ensure macroeconomic stability and prosperity for all of Pakistan’s citizens. And I am going to leave it at that.”

Commenting on Imran possibly writing a letter to the IMF, the official remarked, “I’m not going to comment on ongoing political developments. So, I don’t have anything else to add to what I just said.”

Pakistan secured a last-gasp USD 3 billion “Stand-by Arrangement” in 2023 June with an immediate disbursement of USD 1.2 billion to help the country’s economy stay afloat.

In January 2024, the IMF’s executive board completed its first review of the country’s economic reform programme, allowing for the release of USD 700 million. The move brought total fiscal disbursements under the programme to USD 1.9 billion.

For 2024, Pakistan plans to seek a new IMF loan of at least USD 6 billion, which will be used by the incoming government to repay billions in debt due this year. The country will seek to negotiate an “Extended Fund Facility” with the IMF, as the talks with the global lender were reportedly expected to start in March or April.

“The country’s vulnerable external position means that securing financing from multilateral and bilateral partners will be one of the most urgent issues facing the next government,” ratings agency Fitch said.

“A new deal is key to the country’s credit profile, and we assume one will be achieved within a few months, but an extended negotiation or failure to secure it would increase external liquidity stress and raise the probability of default,” it added further.

What’s Happening In Pakistan?

The latest general elections saw a split mandate with PTI-backed candidates winning 93 seats in the National Assembly while the party’s main rivals, the Pakistan Muslim League-Nawaz (PMLN) and Pakistan Peoples Party (PPP), secured 75 and 54 seats, respectively.

Despite not having the majority, PMLN, PPP and smaller allies have agreed to form a coalition government. The PTI was denied its electoral symbol, a cricket bat, weeks before the elections and was forced to field candidates as independents. The party also faced a nationwide crackdown that impeded its campaign but still won the highest number of seats. The boost for the party came after the removal of Imran Khan’s government in 2022 after a no-confidence motion.

The PTI has alleged widespread manipulation in the counting and results and has said it will continue both protests and legal cases to reclaim what it insists is “a stolen mandate”.

Why The Loan Is Necessary For The Nation?

The answer lies in the fact that a failure on the part of the new government to tackle Pakistan’s economic challenges may send the nation of 241 million people into default. Its foreign reserves, as of February 2024, stand at about USD 8 billion, which can somehow cover eight weeks of imports. The Pakistani rupee has lost more than 50% of its value against the US dollar.

Inflation, which hit a record high of almost 38% in 2023, is currently nearly 30%, and high energy tariffs, along with costlier essential commodities, are draining household incomes at a quick pace.

A recent report by Tabadlab, an Islamabad-based think tank, called Pakistan’s debt obligations “unsustainable”, saying that the total amount went up to USD 271 billion.

A 2023 United States Institute of Peace report stated that the Asian country needed to “repay USD 77.5 billion in external debt” by June 2026.

“For a USD 350 billion economy, this is a hefty burden,” it added further.

Pakistan’s central bank needs over USD 6 billion to service its debt obligations by June 30.

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