Pakistan moves closer to IMF deal

LAHORE: The successful conclusion of talks between IMF staff and Pakistan indicates a favourable outcome. Once the IMF staff reach an agreement on a package, the executive board typically approves it, provided no new concerns arise.

Pakistan has been implementing some of the IMF-mandated structural reforms and meeting conditions from previous agreements.

However, concerns about the country’s political stability and debt sustainability persist.

Pakistan holds strategic importance and has traditionally received support from countries like the US, China and Gulf states, which can influence IMF decisions in its favour.

While there is always a possibility of a refusal, the likelihood of approval appears higher due to the progress in negotiations, previous assistance packages, and Pakistan’s ongoing efforts to meet IMF criteria.

Nevertheless, uncertainties related to Pakistan’s political and economic situation could impact the final decision.

There have been instances where the IMF Executive Board has refused a loan request even after successful negotiations with IMF staff.

The central bank of Pakistan has managed monetary policy prudently. Despite a sharp decline in inflation, it has kept policy rates nearly twice as high as the current inflation rate.

The monetary policy board

has attempted to balance

relief for businesses, the vulnerability of the rupee, and low foreign exchange reserves while reducing the policy rate by 2.0 per cent.

The Pakistani government has faced criticism from both ordinary people and opposition over power, energy, and electricity rates in its efforts to comply with IMF directives.

Relief provided to some electricity consumers was sourced from the development fund, which, while not technically breaching the IMF agreement, was not well-received by the IMF. The financial body is likely to attempt to prevent similar subsidies in the future.

The government has also struggled to generate the required tax revenue from traders. Unlike in previous cases, however, the government has not reneged on its commitment to tax traders as agreed with the IMF. It has imposed taxes on processed dairy products and bakeries and included exporters under the normal income tax regime. The salaried class has faced higher taxes.

Despite these measures, revenues fell short of the IMF target in the first two months of this fiscal year, though the shortfall is not severe.

Pakistani planners argue that the unexpected sharp decline in inflation has also impacted revenues.

Concerns about debt sustainability have been partially addressed after Pakistan rescheduled some short-term debts from friendly countries. The IMF may have taken into account potential problems arising from political instability.

Major shareholders such as the US and the EU might influence decisions based on geopolitical interests or concerns about fund utilization transparency. However, the fact that Pakistan’s case is on the IMF board meeting agenda for September 25 suggests that key stakeholders are supportive of this.