ISLAMABAD: The International Monetary Fund (IMF) has asked Pakistan to eliminate the dual exchange rate system and presented a revised budgetary framework for the current fiscal year and the upcoming budget (2023-24) to reach a staff-level agreement.
Due to low revenues and unchecked expenditures, the IMF fears that the budget deficit could rise to an unprecedented level of 8-9 percent of GDP if the status quo is maintained. Therefore, the government needs to share a revised budgetary framework for the current and next financial years.
The finance ministry has been assigned to revise and align the macroeconomic and fiscal framework for the next budget (2023-24) to satisfy the IMF. These revised figures may be shared on Tuesday night or, at the latest, on Wednesday (today).
Last week, Prime Minister Shehbaz Sharif phoned the IMF’s managing director in the presence of Minister of State for Finance Aisha Ghaus Pasha and Special Assistant to the PM on Finance Tariq Bajwa at the PM House. This call, which lasted nearly an hour, had helped break the communication deadlock between the two sides.
Following this, the finance ministry was tasked with sharing the budgetary framework with the IMF by aligning it with its demands. The IMF’s managing director had specifically highlighted the issue of the dual exchange rate as the gap between the inter-bank and free markets widened in recent days. According to the IMF programme, a dual exchange rate system is not permissible.
There might be objections from the IMF to the allocation of subsidies and grants amounting to Rs 1.7 to Rs 1.8 trillion in the upcoming budget. For power subsidies alone, the finance ministry has proposed an allocation of Rs 970 billion for the power sector in the next budget. Considering the low tax revenues and inflexible expenditures, the government has started discussing the primary deficit, which will either be kept low or efforts will be made to convert it into a surplus.
Sources say external financing remains a major obstacle to reaching a staff-level agreement (SLA). The pending ninth review under the $6.5 billion Extended Fund Facility (EFF) has been unresolved since November 3, 2022, and a consensus has not been reached in the last seven months. Initially, the external financing gap was estimated at $8 billion until the end of June, following discussions held from January 31 to February 9, 2023, in Islamabad. However, Islamabad insisted that the current account deficit would be much lower, opposing the IMF’s suggestion to reduce the CAD through import compression. Nevertheless, the government managed to transform the CAD from a deficit into a surplus, mainly by compressing the import bill. Unfortunately, this import compression policy led to a decline in GDP growth, which fell to 0.29 percent in the outgoing fiscal year 2022-23, according to provisional figures, compared to the revised figure of 6.1 percent of GDP for the previous financial year 2021-22.
IMF Mission Chief Nathan Porter cited three major prerequisites for the revival of the stalled IMF programme, the restoration of proper foreign exchange market functioning, the passage of an FY24 budget aligned with programme goals, and adequate financing. He said that sustaining strong policies and obtaining sufficient financing from partners is crucial for Pakistan to maintain macroeconomic stability. The IMF staff continues to engage with Pakistani authorities to facilitate a board meeting before the current programme expires at the end of June. IMF Mission Chief told The News on Tuesday that “they acknowledge recent political developments and hope that a peaceful way forward is found in accordance with the Constitution and the rule of law.”
Meanwhile, Finance Minister Ishaq Dar has said that the government has met all prior conditions of the IMF except for external financing requirements. He spoke to delegations from Lahore and Faisalabad chambers of commerce on budget 2023-24 proposals, emphasising the hard choices between compressing imports or facing depletion of foreign exchange reserves. Pakistan did not default on its obligations, contrary to predictions made by various sources. He expressed his belief that Pakistan will be safeguarded by God and said the onus on all to perform to the best of their abilities.
The minister reflected on past instances when the IMF programme was suspended but later revived, such as after Pakistan’s nuclear test in 1998. He acknowledged the challenges faced by the economy and assured the business community of the government’s support and cooperation to enhance economic and business activities in Pakistan. Dar appreciated the budget suggestions from the delegations and reaffirmed the government’s commitment to overcoming challenges in the commerce sector and ensuring economic growth. He assured the business leaders that a business- and people-friendly budget for fiscal year 2023–24 would be presented, with the government providing assistance for economic stability and growth. He recognised the importance of the business community and praised their contributions to Pakistan’s economy.