Pakistan aims for an interim agreement with the IMF
Stand-by arrangement may net the government $2.6 billion.
ISLAMABAD:
The current bailout package is set to expire on Friday without being fully distributed, but talks have begun between Pakistan and the International Monetary Fund on a new short-term programme to receive the remaining $2.6 billion.
The $6.5 billion Extended Fund Facility (EFF) is set to expire in only three days, and only $2.6 billion has been disbursed thus far. Despite high optimism in official circles, the IMF did not announce a staff level agreement in a new statement released on Tuesday.
After the introduction of new criteria, the 9th review worth $1.2 billion is due, but we want to obtain the whole $2.6 billion that has yet to be distributed, which is only conceivable under a new programme, sources informed The Express Tribune on Tuesday.
IMF Managing Director Kristalina Georgieva and Prime Minister Shehbaz Sharif reportedly discussed the possibility of Sharif signing a new $2.6 billion Stand-by Arrangement (SBA) programme for a short-term duration of six months.
Pakistan will need to make a major choice about whether or not to apply for a new IMF programme within the next 24 hours.
On Tuesday, the head of the International Monetary Fund’s mission in Pakistan, Nathan Porter, said that the IMF team was continuing conversations with the Pakistani authorities in the hopes of fast reaching an agreement on financial support from the IMF.
The staff level agreement, which the Pakistani authorities were hoping to accomplish at the beginning of this week, was not announced in Porter’s announcement. Despite this, the IMF recognised Pakistan’s attempts to negotiate an agreement.
The Pakistani government “has taken decisive measures to bring policies more in line with the economic reform programme supported by the IMF over the past few days,” said Porter.
According to Porter, these measures include improving the functioning of the foreign exchange market and tightening monetary policy to reduce inflationary and balance of payment pressures that particularly affect the most vulnerable. This will allow for higher spending on social and development programmes.
If the IMF is in talks with Pakistan on a new, short-term programme, the head of the mission did not give any indication of that.
The new initiative is projected to be the same size as the current EFF, which means it will cost $2.6 billion. According to the sources, IMF officials disagreed with Finance Minister Ishaq Dar’s request that the size of the new SBA be at least $3.5 billion.
According to the Ministry of Energy, the annual base tariff will need to be raised by 33%, or Rs8.25 per unit, before the new SBA arrangement can be implemented.
A possible hike in the base tariff from the present average of Rs24.82 per unit to Rs33 per unit was also mentioned by the sources. According to the sources, the new base pricing of Rs33 will be announced sometime around the middle of July following clearance by the National Electric Power Regulatory Authority (NEPRA).
The 33% price hike in the next fiscal year 2023-24, beginning July 1, will cost electricity users an additional Rs710 billion.
The impact on different types of consumers will be substantially greater than the average rise in the basic price of Rs8.25 per unit.
The Ministry of Energy estimates that after the base rate rise, the average per-unit price for residential consumers will be Rs34.50, up from Rs24.87. The new rate for commercial users is Rs55.66/unit, an increase from the previous rate of Rs44.2/unit.
Similar increases of up to Rs45 per unit are possible for industrial consumers, up from Rs34.64, and up to Rs30.65, up from Rs21, for the agriculture tariff.
The rates are calculated using a base exchange rate of Rs308 per dollar, the Karachi Interbank Offered rate of 22%, and the London Interbank Offered rate of 5.32%. In addition, we presume that electricity distribution firms will enforce a 90% bill recovery rate and a 16% loss ceiling. The estimated price of power is highly sensitive to the accuracy of the underlying assumptions.
Senior Energy Ministry officials stated that consumers wouldn’t feel much of an impact because they were already paying roughly Rs34 per unit due to quarterly rate increases. They further stated that in the next financial year, the net per unit price impact could be roughly Rs4.
The government raised average electricity costs by Rs7.91 per unit at the beginning of the current fiscal year, but this could not prevent the circular debt crisis from reaching Rs2.631 trillion by April of this year.
Pakistan, according to the sources, has been negotiating with Saudi Arabia and the United Arab Emirates to speed up the disbursement of the $3 billion loans. The UAE may release $1 billion this week, and Saudi Arabia may release $2 billion in the first week of July, according to the sources.
There was reportedly not enough time for a board level meeting, so Pakistan instead focused on getting staff-level approval for the new project. The fresh $1.2 billion tranche might be disbursed as early as this week if the IMF board approves the new SBA programme in the first half of July, as was discussed.
Since it will provide economic direction until a new government takes office and negotiates a long-term programme, the SBA’s short term will be ideal for the country. The coalition government’s constitutional term ends on August 12, and the caretaker arrangement will remain in place until perhaps the middle of October. The lack of ambiguity will be eliminated, and the banned foreign funding will be unblocked thanks to the short-term programme.
The prime minister spoke with IMF managing director Kristalina Georgieva by phone and voiced his expectation that the lender will make a decision about the transfer of the rescue funds within the next few of days.
According to a statement released by the PM’s Office after the call, “PM Shehbaz expressed hope that coordination on the points of the IMF programme would lead to a decision from the global lender in a day or two.”
According to the PM’s Office, the IMF managing director praised the finance minister and his colleagues for their work in bringing the plan to a successful conclusion.
In addition, “the prime minister also reiterated his determination to achieve the goals of improving the economic situation through joint efforts,” the document stated.
It also cited Georgieva, who was quoted as stating the IMF shared the premier’s desire to see Pakistan’s economy flourish.
Several actions have been taken in recent days by the government in an effort to repair strained relations with the IMF. It raised taxes by Rs215 billion, raised lending rates by 1 percentage point, and reduced spending by Rs85 billion.
To further win over the IMF’s confidence, the government also announced a new quarterly rate adjustment of Rs1.25 per unit. A government amnesty programme offering $100,000 was also cancelled.
It also gave the government the authority to raise the petroleum charge from Rs50 to Rs60 per litre, end import restrictions, and increase Benazir Income Support Programme funds by Rs16 billion.
The reports claim that beginning on July 1st, the gasoline levy will be Rs55 per litre. The IMF has agreed that the average petroleum levy rate for the entire fiscal year 2023-24 shall not be less than Rs55 per litre.
