Talks with IMF face obstacles, as adjustments sought deemed “too steep”

The forthcoming IMF programme envisages an adjustment between Rs1,600 to Rs2,000 billion over a three to four years duration

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ISLAMABAD: As Pakistan procured a lifeline of $3 billion from the United Arab Emirates on Friday, the talks with the International Monetary Fund (IMF) aren’t going well, according to a senior official privy of the developments.

According to a report in Dawn, the depth of the adjustment being sought by the IMF is way too extensive and accession to the programme is likely to be delayed.

The state of the talks with the IMF according to senior officials of the finance ministry are bleak at the present juncture.

One of the officials said there was no chance that the adjustments recommended by the IMF can be made and the demands in their present form are too sheer to be executed.

Consequently, this has put the government in a catch-22 situation, since securing an IMF bailout is critical to unlocking access to resources from multilateral lenders like the Asian Development Bank (ADB), World Bank and the international financial markets.

Meanwhile, the authorities have received a lifeline in the form of bilateral support from Saudi Arabia and a commitment from UAE of another $3 billion deposit to be parked in the central bank “in the coming days.”

Additionally, the same sources shared the talk with China are nearing finalization on another $2.2 billion deposit with the central bank.

The last meeting was held on 20th December and this funding will come with strings attached.

And officials at the finance ministry believe these bilateral inflows can provide cover for one year at the very least.

Ultimately, an IMF bailout would be required irrespective of the situation and the government wants that something can be done in the interceding period for bringing about some change in the Funds’ stance.

One of the sources said, “It is possible that the IMF may come around, considering our position and will not let us collapse. After some tough talk, I think they may come to a point to sign a basic agreement.”

There are major points of contention between the IMF and Islamabad, one of them is the size of the adjustments between revenues and expenditures being sought by the Fund to be executed by the government.

The other problem is the continuing rise in interest rates, which would hike the borrowing cost for government and businesses.

Since January, the central bank has raised interest rate by 425 basis points to 10% by end of November.

Also, the IMF has demanded a free float exchange rate regime to be implemented, which will allow market forces to totally ascertain the value of the rupee.

However, the government officials are of the view that the country’s forex exchange market is too thinly traded to be left to the whims of the market and are persisting to retain some control which allows them to intervene, only if to rein sharp swings stimulated by speculative activity.

The IMF says that previously such unrestricted power has been utilized to intercede in the market and manage the rate.

A senior official stated the country’s market was very small since it witnessed trading of $200 to $300 million on a daily basis.

The official added accepting the IMF demand would permit few players to exploit the small market with ease and was economically and politically unfeasible for Pakistan to accept it.

One of the officials rebuffed media reports about Pakistan’s acceptance to further devaluing the rupee to Rs150 against the greenback by June 2019.

The official said nothing like this had been committed and highlighted that negotiations are on the framework for ascertaining the exchange rate and not its real value.

The forthcoming IMF programme envisages an adjustment between Rs1,600 to Rs2,000 billion over a three to four years duration.

Interestingly, the Fund wants the weight of any slash in expenditure cuts to fall on current expenditures, which include defence and subsidies, debt service, as per a senior official who has been part of the discussions.

And previous administrations had slashed development expenditures when executing IMF-led adjustment and current expenditures were left untouched (other than subsidies).

A major slash in current expenditures being sought by the IMF could create problems for the government and compel it to get a partial reversal of the provincial transfers under the 9th NFC award.

According to officials, such steep cuts to current expenditures being demanded by the IMF were impossible to meet.

Moreover, one of them stated it would be difficult for the country to accept it and highlighted there is certain non-development spending which cannot be decreased or terminated.

Further IMF demands include a hike in gas and power tariffs and a major rise in revenue collection of the Federal Board of Revenue (FBR) in the current financial year 2018-19.

A senior official stated it didn’t have much space to increase revenue in the next six months being demanded by the Fund.

Considering the demands, it seems improbable to secure an IMF bailout. However, officials are hopeful of some flexibility in the demands over the next few months.

The source stated that plan regarding the measures implementable has been shared with the IMF and are in touch with them via video conferencing.