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May 11, 2019

$6.5 bn package: Pak-IMF talks remain inconclusive on last day

Top Story

May 11, 2019

ISLAMABAD: Pakistan and the IMF have failed to strike a staff level agreement on fresh bailout package of $6.5 billion in the wake of tough conditions of the Fund on account of taxation, upfront hike in discount rate and withdrawal of subsidies on power sector.

However, Ministry of Finance claimed in its brief statement on late Friday night, “Pakistan and the IMF made good progress in their discussion. Consultation will continue over weekend,” the Finance Ministry concluded in two sentence statement.

Pakistan and the IMF were scheduled to conclude parleys on fresh bailout package till May 10 but both sides after hectic consultation convinced the IMF for extending its stay for next two days for making more efforts for striking staff level agreement. If the Pakistan side remained unable to extend this stay, it would have serious consequences for the economy. So efforts are underway to strike consensus but the government has entered into difficult position in order to achieve such programme from IMF that can also be deliverable. Otherwise the country might again start knowing as one or two tranche country. Pakistan and the IMF team remained tight lipped as journalists continued to stay outside the Finance Ministry for hours while fasting but no one was ready to talk to the media on IMF parleys.

The major thorny lingering issues about fiscal efforts the IMF is asking for Islamabad to move ahead with additional tax measures of Rs700 to Rs730 billion in upcoming budget through combination of both withdrawal of different tax exemptions and raising tax rates.

The political government, which enjoys thin majority in Parliament, will have to face tough resistance within and outside Parliament to pass such harsh measures. The additional taxation to fetch of Rs700 billion will be hard task when the real GDP growth nosedived to 3.3 percent in outgoing fiscal, which is nine years low posing threat for rising poverty and unemployment.

The IMF is asking for hiking the discount rate by 100 to 200 basis points through upcoming monetary policy. The Net International Reserves (NIR) will be another important target for the government to achieve consensus between Pakistan and the IMF side.

For jacking up foreign currency reserves, the government will have to generate dollar inflows through issuance of Eurobonds, Sukuks and/or renewal of 4G licenses. The IMF asks for revenue increase by 1.7 percent of GDP, in the range of Rs690 to Rs730 billion tax through withdrawal of exemptions which would have an inflationary impact on the economy and will result in lower purchasing power of consumers as well as lower profitability for certain sectors.

Prices of administered utilities (electricity and gas) to go up for majority of the consumers. Reduction of losses from SOEs via privatisation will also be demanded by the IMF. Arif Habib Limited in its research stated that the SBP's forward short positions increased significantly from $2.5 billion in Oct-16 to $7.8 billion in March-19 as there was a shortage of foreign currency and the SBP increased its short position to meet commitments in the ready market. Reduction in the forward position would require unwinding of swaps and payments in the ready market, it added.

The government, the research report stated, has borrowed Rs 3.2trn from the SBP during Jul-Apr’19. IMF would like to introduce a ceiling on government's borrowing from the SBP, which would result in sale of T-bills and PIBs by the government in the market resulting in increase in yields on these instruments. Ceiling on gov’t borrowing may also have a deflationary impact on the economy

Prices of Electricity & Gas would increase. The government intends to protect the lifeline consumers and exporting industries. Meanwhile, remaining consumers will bear the brunt of full cost recovery, it added.

The cost of borrowing via Sukuk and Eurobonds is expected to reduce by 1-1.5 points if Pakistan enters into an IMF program, which will help Pakistan refinance its maturing debt. When contacted, a top official of Finance Division on late Friday night said that Pak and IMF would have to reconcile nine to ten tables having hundreds of numbers on it in order to strike agreement with the Fund staff. The efforts are still underway to evolve consensus in this regard.

Without mentioning name of former finance Minister Asad Umar, the official was of the view that the statement of deal done after return from Washington was premature because now the detailed workout was under way to achieve the desired results. We are hopeful for achieving consensus over this weekend, he concluded.