After a year of wait, anticipation and prior actions, the Executive Board of the International Monetary Fund (IMF) approved the new $3-billion Stand-By Arrangement (SBA) for Pakistan, which allows Pakistan to get hold of about $1.2 billion. The fund had already announced the SBA on the 30th of June, when Pakistani authorities and the IMF reached a Staff Level Agreement on the newest bailout, however the approval of the IMF board was pending on the said deal.
“Today, the Executive Board of the IMF approved a 9-month SBA for Pakistan for an amount of SDR 2,250 million (about $3 billion, or 111 percent of quota) to support the authorities’ economic stabilisation program,”read the statement issued by the fund.
“The Executive Board’s approval allows for an immediate disbursement of SDR894 million (or about US$1.2 billion). The remaining amount will be phased over the programme’s duration, subject to two quarterly reviews,” the IMF added in its statement.
While the statement comes amongst high anticipation and confidence, let’s look back on how the IMF came around.
Background:
To understand the context we need to know that the IMF, a lender of last resort, offers various programs. Amongst these programs are the EFF and the SBA. EFF is for a longer duration loan facility compared to the Stand-By Arrangement (SBA).
A fully disbursed program indicates that the country has carried out financial reforms and performed well on the economic front. SDR stands for “Special drawing rights”.
SDRs are units of account for the IMF and not a currency per se, but the IMF sets their unit value regularly to facilitate an estimate of the loan amount in five big currencies.
In July 2019, the PTI led government won approval for an SDR4.268 billion (again around $6 billion) IMF EFF loan.
Ever since the PMLN came in power, the government laid groundwork to resume the IMF program which had been suspended after the PTI government went back on one of its prior actions. After long and hard negotiations and even stricter prior actions, Pakistan was able to obtain the 5th tranche after the completion of the 7th and 8th review of the EFF.
Come the 9th review, the veteran accountant and senior party leader Ishaq Dar was appointed the finance minister of Pakistan. Ishaq Dar, who was an open critic of his predecessor’s negotiations with the IMF made the nation believe that Pakistan could get a better deal of prior actions approved by the fund before the next tranche is released.
A negotiation episode:
From here on forth, the negotiations started. The 9th review that was supposed to happen by December 2022, got delayed. In February 2023, the IMF mission visited Pakistan to form an assessment of the situation but left without signing the Staff Level Agreement (SLA).
The mission’s deliberations with the Finance ministry, from then onwards, was supposed to happen online. As the danger of default started appearing on the horizon, Pakistanis started to get worried about the delays in the Staff Level Agreement.
The Finance Ministry did its best to calm people down but no words could have filled the void that was created by the absence of the SLA. With each coming day the nation started to fear the inevitable.
Meanwhile, the finance ministry was being made to jump through hoops of prior actions by the IMF. They were asked to get prior assurances from their bilateral creditors, set dollar rate to market rate, raise policy rates, tariffs and taxes.
It came to the point where the fund expressed its wish to review the country’s budget. Even after the budget was presented, the fund did not seem impressed. A statement made by the fund’s representative, Ester Perez Ruiz, came down hard on the budget.
It came to a point where the finance minister, on the 16th of June was found accusing the fund of being cognizant of greater geo-politics against Pakistan.
Behind the Scenes:
While the finance minister was up and running with his fiery claims of making it without the IMF program. The Prime Minister took it upon himself to make all the efforts to restore the program. PM Shehbaz Sharif was reported to hold telephonic conversations with the IMF mission chief Nathan Porter on multiple occasions over the last two months.
Amidst the chaos, the PM also met with the head of the International Monetary Fund on the sidelines of a global financing meeting in Paris.
Lo and behold, within one week, a new budget was tabled, presented and approved. The policy rate was hiked and the country was able to announce a new standby arrangement right at the expiry of the previous EFF, which did not bear fruit.
What Next?
After the board approval came on Wednesday, talking to Profit, the CEO of topline securities, Muhammad Sohail said that, “This loan will provide much needed stability to Pakistan at a time when Pakistan will see transfer of power from one government to caretakers and then to New government. Besides this this will further help in getting bi lateral and multilateral loans thereby supporting the falling FX reserves, and inflationary pressures.”
While talking to a ceremony regarding Pakistan Education Endowment Fund in Islamabad, the PM Shehbaz Sharif confirmed his willingness to hold an election. He said that his government will leave office by the 14th of August, making way for the new interim setup.
However, on the subject of IMF Sharif said that the IMF programme is not something to be proud of but is a time of “self retrospection”.
Meanwhile, the IMF statement after Wednesday’s board meeting said the SBA would focus on: various aspects like
- Implementation of the FY24 budget to facilitate Pakistan’s needed fiscal adjustment and ensure debt sustainability, while protecting critical social spending.
- A return to a market-determined exchange rate and proper FX market functioning to absorb external shocks and eliminate FX shortages;
- An appropriately tight monetary policy aimed at disinflation; and
- Further progress on structural reforms, particularly with regard to energy sector viability, SOE governance, and climate resilience.
With the dangers of default momentarily averted, all eyes are set on the upcoming elections, for it will be the future government that would be able to give the country a new economic direction. Something that even the IMF is aware of.
