IMF challenges

LAHORE: Providing relief to 40 percent of the population living below the poverty line and braving inflation of around 30 percent may be the desire of the elected government but not the priority given the state of the economy Pakistan is in.

The public generally is not expecting an immediate relief from whoever assumes power but they do hope that the further deterioration of the economy would stop. The best they hope for is that the inflation is tamed and prices of daily use items do not increase further.

Pakistan’s top priority would be to remain under the IMF umbrella. Currently, Pakistan is under a 9 month $3 billion IMF program that concludes on April 12. It has already received $1.9 billion from the Bretton Wood Institution and a $1.1 billion tranche is still pending. The money would be doled out after a successful review of the IMF staff about the steps that Pakistan had promised to take for the release of this final tranche.

The caretaker government was executing the program satisfactorily but was slow in implementing the IMF wishes on the privatization of state owned entities. In fact, its move to go ahead with privatization of PIA was stalled by a court through a stay order. No progress on the privatization front would be a stumbling block in the release of the final $1.1 billion tranche that Pakistan badly needs.

The new government that assumes power would have to satisfy the IMF on practical steps taken to get rid of loss-making public sector entities. Pakistan is in an economic crisis, with dwindling foreign currency reserves that will be further strained by a $1 billion bond payment due in two months, while it would have to secure a much bigger and long-term financing from the IMF after the current program expires soon after the assumption of office by the elected government.

Securing funding will be a top priority for the new government as the country has not yet fully covered its external financing requirements for 2024 and its near $100 billion external debt burden eats up most of the resources in debt servicing. Moreover, the current level of FX reserves at just over $8 billion is equivalent to just 1-1/2 months of import cover.

With these financial obligations, the political fragmentation is the last thing that Pakistan needs. There will be no recourse for the government to push through painful and unpopular but necessary measures including widening the tax base and further reducing subsidies and eliminating exemptions.

Pakistan's international bonds dropped as much as 5 cents in the dollar a day after elections before trimming some losses. Its sovereign dollar bond due on April 15 trades at 95 cents in the dollar, reflecting expectations that investors will get paid back, but maturities coming due in 2027 and beyond trade at or below the 70 cents in the dollar and will be a source of worry for the investors.

A new government is expected to quickly take the necessary steps, for example, on governance of state-owned enterprises, to complete the last remaining review of the current $3 billion IMF Standby Arrangement — a bridge loan that helped pull the country back from the brink of default.

Doing so would secure it a final $1.1 billion tranche before the current IMF program expires in mid-April — with the government then having to secure a follow-up program straightaway.