Context:
Recently, the staff-level talks between Pakistan and the International Monetary Fund (IMF) concluded for the seventh and eighth review under Extended Fund Facility (EFF).
Relevance:
GS III- Indian Economy
Dimensions of the Article:
- About International Monetary Fund (IMF)
- What was the Extended Fund Facility (EFF)?
- How important is the IMF support to Pakistan?
- Why have the Pakistan-IMF relations remained complicated?
- What lies ahead for Pakistan and the IMF?
About International Monetary Fund (IMF)
- The International Monetary Fund (IMF) is an international organization headquartered in Washington, D.C.
- It consists of 189 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.
- It periodically depends on the World Bank for its resources.
- Through the fund and other activities such as the gathering of statistics and analysis, surveillance of its members’ economies, and the demand for particular policies, the IMF works to improve the economies of its member countries.
Functions of the IMF
- To provide financial assistance to member countries with balance of payments problems, the IMF lends money to replenish international reserves, stabilize currencies and strengthen conditions for economic growth. Countries must embark on structural adjustment policies monitored by the IMF.
- It oversees the international monetary system and monitors the economic and financial policies of its 189 member countries. As part of this process, which takes place both at the global level and in individual countries, the IMF highlights possible risks to stability and advises on needed policy adjustments.
- It provides technical assistance and training to central banks, finance ministries, tax authorities, and other economic institutions. This helps countries raise public revenues, modernize banking systems, develop strong legal frameworks, improve governance, and enhance the reporting of macroeconomic and financial data. It also helps countries to make progress towards the Sustainable Development Goals (SDGs).
What was the Extended Fund Facility (EFF)?
- The 39-month EFF between the two was signed in July 2019 to provide funds amounting to Self-Drawing Rights (SDR) — $4,268 million.
- The EFF was signed by Pakistan to address the medium-term balance of payment problem, and work on structural impediments and increase per capita income.
- The IMF placed demands including fiscal consolidation to reduce debt and build resilience, the market-determined exchange rate to restore competitiveness, eliminate ‘quasi-fiscal’ losses in the energy sector and strengthened institutions with transparency.
- The decision to freeze the fuel prices by the then Pakistani President Imran Khan in February 2022 was considered a major deviation under the EFF benchmarks.
- Mr. Khan’s government, that gave tax amnesties to the industrial sector, impacted the tax regime and a structural benchmark for fiscal consolidation.
- Loans under Kamyab Pakistan Program were another point of contention. The IMF insisted on its demands before approving any release of the tranche.
How important is the IMF support to Pakistan?
- Pakistan’s economic situation is dire. According to the Economic Survey of Pakistan 2022, the fiscal deficit in FY 22 was $18.6 billion, and the net public debt at $252 billion, which is 66.3% of the GDP.
- The power sector’s circular debt is $14 billion.
- According to the State Bank of Pakistan’s latest report, the current account deficit has peaked to $48.3 billion.
- The budgeted expenditure outlay for FY 23 states that 41% ($19 billion) of total expenditure will be used in debt servicing.
- The IMF’s support in addressing the above numbers is crucial. According to the latest quarterly report of the Economic Affairs Division, during the financial year 2021-22, the IMF’s contribution to the total external debt (of $9.4 billion), is only $834 million.
- However, the IMF’s support is not limited to fixing the balance sheet, but validates and provides economic confidence to other multilateral institutions.
Why have the Pakistan-IMF relations remained complicated?
- Structural reforms require long-term commitment, which have been sacrificed due to Pakistan’s short-sighted political goals; hence the urge to go to the IMF for fiscal stability has been repeated over time.
- Pakistan has signed various lending instruments with the IMF, and sought support from IMF around 22 times. However, only once has a programme been completed.
- Since the 1990s, the IMF has placed specific demands but were addressed by Pakistan in bits and pieces.
- For example, during the Pakistan People’s Party (PPP) rule in 2008, Pakistan was to implement economic reforms, including improvements in tax administration, removal of tax exemptions as well structural reforms. However, successive governments kept domestic political calculations a priority, than the economic reforms.
- The latest EFF was on the verge of collapse, but the ruling coalition government continued its efforts to revive the discussions.
- To address the structural benchmarks of the IMF, the authorities have worked on specific legislations, for example, the State Bank of Pakistan (SBP) amendment act, and the Finance Bill 2022.
What lies ahead for Pakistan and the IMF?
- Despite the latest agreement, the road ahead for the IMF and Pakistan is not an easy one.
- Political calculations and the elections ahead will play a role in Pakistan’s economic decision-making.
- In 2019, the Director-General Debt Office of the Ministry of Finance revealed that Pakistan has to pay $31 billion by 2026. Total public debt as a percentage of gross domestic product is expected to increase further.
- There is also a narrative that Pakistan has the fifth largest population with nuclear weapons that cannot be allowed to fail.
- A section within Pakistan also places the geo-strategic location of the country would provide an edge for cooperation, rather than coercion. Hence, this section believes, the IMF would continue to support.
- Given the IMF’s increased assertion, Pakistan’s political calculations and the elections ahead, the relationship between the two is likely to remain complicated.
-Source: The Hindu
