Islamabad is confused because the IMF keeps changing the goalposts.
Pakistan reaches out to the United States in an effort to secure an urgently required deal.
ISLAMABAD: Pakistan requested assistance from the US on Tuesday in order to finalise an agreement with the International Monetary Fund that is urgently needed (IMF).
It is “unusual” that the coalition government has to cope with a circumstance where the major lender keeps moving the goalposts while making difficult decisions with significant political cost.
Ishaq Dar, the finance minister, reportedly requested assistance from the US in a virtual meeting with Wally Adeyemo, the deputy secretary of the US Treasury.
According to the reports, the US made contact with the official to discuss a different problem; nonetheless, Dar brought up the issue of the IMF’s policy towards Pakistan.
The staff level agreement with the IMF, according to sources in the finance ministry, is not likely to be reached this week because the two parties continue to disagree on critical issues like the exchange rate, interest rate, external financing gap, and the Rs3.82 per unit debt servicing surcharge on electricity. Despite everything, they still want to resolve the problems and finalise an agreement the next week.
The government encountered this odd position for the first time in the previous 25 years when the IMF had presented a different demand at nearly every interaction, they continued.
The delivery of the $1.1 billion tranche under the 9th review negotiations started a month ago, and the country is suffering greatly as a result of the delay, with the latest blow coming from Moody’s, which further reduced the credit rating to CCC. The position is made more difficult by the fact that most of the regional nations, with the exception of China, are supporting the IMF.
According to the sources, the IMF has estimated a $7 billion external financing need as opposed to the $5 billion estimated by the Ministry of Finance. The Pakistani authorities have asked the IMF to reduce the projected deficit by $1 billion in order to resolve the disagreement.
The sources claimed that by lowering the restrictions for accumulating foreign exchange reserves, another $1 billion might be saved.
Despite having only $3.7 billion throughout the first seven months of the current fiscal year, the IMF anticipated a $8.2 billion annual current account deficit, according to the sources. “That can cut the projection by $1 billion to remedy the issue,” they noted.
If the IMF were to adjust its stance, the administration believed it could still secure $7 billion by June. The government officials negotiating with the IMF stated, “We are hopeful of increase in the gross official foreign exchange reserves to above $10 billion by June.”
The IMF, however, has not yet agreed with Pakistan’s position regarding the lack of external financing. Notwithstanding this, it is still hoped that Pakistan would be able to obtain $2 billion in further loans from Saudi Arabia and $1 billion in loans from the United Arab Emirates to close the gap. In addition, even though the Gulf countries haven’t been fully cooperating, it hopes to make $2 billion from the sale of assets to these countries.
The Chinese assistance, which has already distributed $700 million, was gratefully received by the Pakistani authorities. According to the sources, a further $1.3 billion Chinese loan will be made available in three installments, acting as a safety net at a time when the IMF’s demands were “unreasonable.”
According to the sources, the government had left the exchange rate up to market forces, which caused a huge fluctuation in the rupee-dollar value compared to the level of Rs230 to a dollar last month.
The IMF, however, continued to express concerns that the government was manipulating the price. The sources claimed that it was untrue that “the IMF regards the exchange rate as being close to the grey market rate.”
The sources claimed, “We have expressed our viewpoint, but the IMF somehow does not get it.
Both sides hold various opinions regarding the benchmark used to compute the real interest rate, which is the difference between inflation and the interest rate set by the central bank.
The government’s position of measuring the real positive interest rate against core inflation, which is computed after subtracting energy and food inflation, was rejected by the IMF. It requested that Pakistan compare the real positive interest rate to the overall inflation rate. In order to ensure a significant interest rate increase before the staff level agreement, the IMF has already advanced the date of the next meeting of the monetary policy committee by two weeks.
According to the finance ministry’s monthly economic outlook report, “due to the currency depreciation, recent rise in the energy costs, and increase in the administered prices, inflation will continue around 28% to 30% in the coming months.”
The real interest rate will be 13% lower at this headline inflation rate. After the impending increase, the real interest rate will be marginally positive at the core inflation rate, which is now at 19%.
The sources claimed that pressuring Pakistan into altering interest rates to reflect headline inflation would be equivalent to making us pay for global inflation as well.
According to ministry sources, the IMF has an inappropriate attitude towards Pakistan and is pressuring the government to take all actions prior to the staff level agreement, although in reality they are normally taken after the staff level agreement but before the board meeting.
Pakistan has raised the issue with the US once more. The US is the largest stakeholder and frequently exerts pressure on the global lender to soften or stiffen its stance.
According to a statement released by the finance ministry after the meeting, “the finance minister informed him (the US deputy secretary) of the talks held with IMF mission on the 9th review and shared that he had successfully completed the IMF programme in the past as minister and that the government is committed to completing the present programme.”
The US envoy was also informed by the finance minister of the government’s economic aims for turning the economy around while upholding its international duties.
Wally Adeyemo stated his belief in the government’s plans and programmes for ensuring economic and financial stability. He went on to express his continued collaboration and support for Pakistan’s sustained economic growth.
The sources claimed that it was impossible to support the IMF’s demand to “permanently” impose a surcharge for debt servicing for the upcoming fiscal year.
The IMF plan will finish in June, therefore it is unclear why the IMF was pressuring Pakistan to take action during a time when it will no longer be covered by the fund programme, according to the sources.
They said that the administration had already enacted the $170 billion mini-budget and approved an increase in the cost of gas and electricity. But, they continued, the IMF was taking longer than normal to finalise the staff level agreement.
