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November 21, 2018

Pakistan-IMF initial talks end in deadlock

Top Story

November 21, 2018

ISLAMABAD: Pakistan and the International Monetary Fund (IMF) have remained unable to strike a staff-level agreement owing to persistent differences over the pace of adjustments and conditionalities on the request of Islamabad for fresh bailout package, top officials confirmed to The News on Tuesday.

However, both the sides have agreed to continue parleys for evolving a consensus in the next few weeks, which will pave the way for presenting $6 billion bailout package before the IMF’s Executive Board around January 15 to 25, 2019.

“We have covered 80 percent spadework in our parleys held with the IMF mission from November 7 to 20 and work is underway on the remaining 20 percent on which a mechanism was agreed for holding more round of talks in the weeks ahead,” one top official of the Finance Division told a select group of reporters on the conclusion of two weeks with the IMF mission led by Harald Finger here at the Q Block in the Federal Secretariat on Tuesday evening.

Sources said that Pakistani side refused to concede certain demands on jacking up tax revenues, tightening of monetary and fiscal policies and sharing full details of the China Pakistan Economic Corridor (CPEC).

The IMF mission, in a statement issued on Tuesday, stated that discussions would continue in the coming week toward reaching the staff-level agreement. An IMF mission led by Harald Finger visited Islamabad from November 7-20, 2018 to initiate discussions on a financial arrangement with the IMF requested by the Pakistani authorities to support their economic reforms programme. At the end of the visit, Finger stated: “The IMF mission has been engaged in productive discussions with the Pakistani authorities on economic policies and reforms that could be supported by a financial arrangement with the IMF. In this context, there has been broad agreement on the need for a comprehensive agenda of reforms and policy actions aimed at reducing the fiscal and current account deficits, bolstering international reserves, strengthening social protection, enhancing governance and transparency, and laying the foundations for a sustainable job-creating growth path. Our dialogue with the Pakistani authorities will continue over the coming weeks."

The team is grateful to the authorities for open and constructive discussions, the IMF further said. However, without sharing specific details of persistent differences, Pakistani officials said that both sides possessed divergent views on pace of adjustments and exact conditionalities, so they decided to continue more rounds of talks for evolving staff-level agreement after which they signed Memorandum of Economic and Fiscal Policy Framework (MEFP) and Letter of Intent (MoI) would be tabled before the IMF’s Executive Board around January 15 to 25, 2019.

The major differences persisted on exact financing requirements, front loaded or back loaded programme, raising tax to GDP ratio by 0.5 percent by taking additional tax measures, hiking electricity rate by 20 percent, plugging leakages on power front so that no circular debt further piled up, erasing circular debt and putting sustainability of debt into risk zone.

Pakistan’s negotiating team took time knowingly that there would be Christmas holidays in Washington from December 15. They were making last ditch efforts to convince the IMF staff for providing a lenient view in case of Pakistan just on pattern of some other countries like Argentina where the IMF struck an agreement on $50 billion package on three year Standby Arrangement (SBA) in June this year.

The IMF has also demanded of sharing details of inflows and outflows under the CPEC and other accounts. The Pakistani side said that the repayment on account of the CPEC was not substantial issue as it would be started in coming years and would cross $3.2 billion mark from the fiscal year 2022. In case of ML-1 agreement then the repayment on all accounts might cross $4 billion mark on yearly basis.

The Pakistani side claimed that the raising of GST rate from 17 to 18 percent was not the demand of the IMF and sources said that basically this idea was floated by the FBR but the government rejected it, keeping in view its inflationary impact. The FBR has been assigned to come up with proposals for taking additional revenue measures of 0.5 percent of GDP with the aim to bring wealthy and influential segments into the tax net instead of burdening the poor through indirect taxation. They further claimed that the IMF did not ask for inclusion of FATF action plan as part of benchmark criteria but conceded that the Fund raised concerns over rampant incidents of money laundering occurring in the country.

The IMF has suggested the tightening of monetary and fiscal policies in order to stabilise the economy. However, Pakistani side took the stance that independent monetary policy committee was in place without having any representation of the Finance Ministry, so the monetary committee will decide the monetary policy keeping in view the economic fundamentals.

The Ministry of Finance in its statement stated that substantive progress has been made by the Government of Pakistan and the IMF Mission towards developing a common understanding on the policy and structural reforms framework for the prospective IMF programme, including fiscal and monetary measures, corrective interventions for balance of payments sustainability, pro-poor spending, governance and development of a business-friendly environment.

The positive engagement with the IMF will continue over the coming weeks to finalise the programme with the Fund.

The government acknowledges and appreciates the support that the Fund is providing in achieving the government’s broad-based development agenda aimed at enhancing the social and economic well-being of the people of Pakistan, the statement concluded.