The International Monetary Fund (IMF) announced on Thursday that it would dispatch a staff mission to Pakistan on January 31 for discussions regarding the 9th quarterly review of a funding program that had been delayed for nearly four months due to Pakistan’s removal of the exchange rate cap, which caused the rupee to depreciate by over 9%.
According to Esther Perez Ruiz, the Fund’s resident representative in Islamabad, “At the request of the (Pakistani) authorities, an in-person Fund mission is scheduled to visit Islamabad from January 31 through February 9 to continue the discussions under the ninth Extended Fund Facility (EFF) review.
On January 19, Pakistan formally informed the IMF of its readiness to accept all four key conditions and asked for the mission to travel to Islamabad to finalize the long-awaited agreement on the revival of the final $3 billion portion of the program, which is necessary to prevent a sovereign default and restore normalcy to the markets.
The Fund, however, held firm for over a week without allowing Pakistan to fully restore the market-based currency rate that had been arbitrarily set at about Rs225 per dollar.
In a single day, the inter-bank rate went beyond Rs255, and the open market rate towards Rs275. Through virtual contacts, the Fund had made it very clear while exchanging relevant data that it would consider a visit only after the administrative controls were lifted and interest rates enhanced.
The Fund made it very clear when it announced that it would be traveling to Islamabad the following week (Jan. 31) that its mission would be to “focus on policies to restore domestic and external sustainability, including to strengthen the fiscal position with durable and high-quality measures while supporting the vulnerable and those affected by the floods; restore the viability of the power sector and reverse the continued accumulation of circular debt; and reestablish the proper functioning of the government.”
With an average tariff increase of about Rs7.50 per unit, an increase in the petroleum levy on all petroleum products to Rs50 from the existing Rs35 on high-speed diesel and Rs6-9 on other smaller products like light diesel and kerosene, and new additional revenue measures in the range of Rs500-700bn through a mini-budget, the two sides would have to figure out a way to finance the over Rs803bn gap in the power sector.
The IMF’s earlier benchmarks did not include the increase in gas prices, but the sector’s over Rs. 1.6 trillion circular debt poses a risk to the gas businesses and would eventually add to the government’s already unmanageable budget deficit.
IMF’s statement that “stronger policy efforts and reforms are critical to reduce the current elevated uncertainty that weighs on the outlook, strengthen Pakistan’s resilience, and obtain financing support from official partners and the markets that are vital for Pakistan’s sustainable development” has served to underline this point.
With only $3.3 billion in official foreign exchange reserves, friendly nations had been delaying the delivery of additional assistance they had promised, including $2 billion from Saudi Arabia, $1 billion from the UAE, and $2 billion from China, on top of recent rollovers. This was primarily due to a stalemate between the Ministry of Finance and the IMF.
According to sources, the government has reneged on its August 2022 obligations, which called for increasing electricity revenues by 3 percentage points to 93 percentage points, lowering line losses by 1 percentage point, and withdrawing subsidies for the dominant industrial sector. Instead, sales decreased to 83 percent due to flooding and price increases before marginally increasing to roughly 87 percent.
Additionally, a hole of around Rs70 billion was created by the tariff cap, and a second hole of roughly Rs120 billion was created by the set export tariff that was announced the day Ishaq Dar took over as finance minister. This imbalance currently exceeds Rs 800 billion and calls for an average increase of around Rs 7.5 per unit.
The authorities have now conveyed to the Fund about introducing all measures to be agreed upon during the Jan 31 to Feb 9 talks through a mini-budget, tariff notifications, and independent adjustment of the exchange rate. The serious challenges, however, are still to come as more than 9000 import cargoes are held up at ports for want of foreign exchange, which if cleared could at once wipe out all the reserves in the system.