Ninth review, nth controversy

Pakistan and the IMF have had a troubled relationship for some time – and it looks increasingly like both the partners are resigned to a break up but neither is willing to take the blame for pulling the plug. At issue is Budget 2023-24, in the context of the ninth review of the global lender’s multibillion-dollar Extended Fund Facility (EFF) programme. The review has been dragging on since November 2022, with some $2bn worth of funding stuck in the pipeline that Pakistan rightfully expects to have access to. The Fund fielded a hard-bargaining staff mission this February, which conducted threadbare review talks with the Pakistani authorities, but a staff-level agreement (SLA) has since remained elusive, with officials privately accusing the Fund of dilly-dallying in pursuit of some unspoken geopolitical agenda.

There have also been disagreements over projections of primary balance, current account deficit (CAD), and external financing needs. It became clear only over the last week or so that the Fund staff was eying the opportunity presented by Budget FY24 to secure guarantees of policy continuity into the new fiscal – beyond the sunset of the EFF programme. While this looks somewhat unusual, the revised data for the outgoing fiscal has borne out the IMF fears of slippage. Committed to returning a 0.5 per cent primary surplus, Pakistan has instead posted a 0.5 percent primary deficit, and external financing arrangements seem to lag behind the revised CAD number.

Against this backdrop, when the government announced its draft budget for the coming fiscal, business leaders could not believe it included no major new taxation measures. They have now been joined by the IMF and international rating agencies who are saying just that: the budget numbers are too good to be true. How the government means to make ends meet without either cutting spending or boosting revenue is beyond everybody’s comprehension. Of course, nobody is talking about the elephant in the room: with an eye to a general election due in October or November, finance minister Dar is likely leaving the painful measures to be instituted at a later time. There is simply no other way to support the level of spending the government is projecting for FY24, even though the funds earmarked for social safety and development are clearly inadequate and will have to be bolstered.

But the government cannot publicly own up to this strategy for obvious reasons. Instead, Dar has invoked Pakistan’s sovereign right to manage its affairs as it pleases, and accused the IMF of trying to push the country into default so Islamabad is forced to negotiate a new programme from a position of weakness. Dar’s open assertion of Pakistan being a victim of geopolitics would suggest that the kid gloves are coming off and the inevitable separation is devolving into a bare-knuckles fistfight that will leave both sides bruised. The Fund, on the other hand, clearly intends to keep Pakistan on the hook for the next tranche of the EFF, insisting it is prepared to help Pakistan fine tune the budget to bring it in line with agreed reform objectives.

Separately, Dar and his team have been working to de-dollarize the economy for some months now, as suggested by the recent resort to Chinese central bank currency swaps to pay for Russian oil. Other de-dollarization initiatives in the works include barter trade agreements with China and Iran in addition to Russia, and energy import deals with the Central Asian Republics. Seen in this context, the proposal to allow citizens to bring up to $100,000 from abroad without declaring their source of income may be seen as a further attempt to take the pressure off the country’s dollar reserves. But it is not at all clear if there are adequate safeguards against the scheme becoming a money-laundering enterprise. The IMF is obviously piqued over it, the SEC has chimed in, and the FATF is unlikely to take kindly to it. Dar has asserted Pakistan can go on with or without the IMF programme, but not much is known about his plan, if any, to weather the storm likely to break loose if and when the Fund decides to leave Pakistan high and dry. Considering that much of the $24bn Pakistan falling due in debt service over FY24 goes to official creditors may mean he is planning a rescheduling or moratorium on that component of the country’s public debt, which would not have a bearing on the country’s credit rating, but nothing can be said with certainty at this point. These, then, are the battle lines, with both sides looking determined to stick to their guns. Let us see who blinks first, and who eats humble pie in the end.