Pakistan, IMF again fail to reach staff level agreement

Pakistan and the International Monetary Fund have failed to reach a staff level agreement for revival of the $6 billion programme amid huge gaps between their assessments of the economy and the required measures that are immediately needed to stop economic meltdown.

In a handout, the IMF on Wednesday emphasised upon “urgency of concrete policy actions, including removing fuel and energy subsidies”.

The talks held in Doha, Qatar, from May 18th to 25th but ended on a note of “disappointment”, a senior official revealed on Wednesday. Finance Minister Miftah Ismail and IMF’s Mission Chief to Pakistan, Nathan Porter, led their respective delegations.

The Pakistani negotiating team’s hands were tied from Islamabad and London, which was also felt by the IMF team.

Read more: Fate of IMF talks hinges on PM’s ‘big nod’

It was the second time that Pakistan and the IMF tried to reach a staff level agreement on the 7th review of the $6 billion Extended Fund Facility but failed. The disagreement may give a serious jolt to the markets. Earlier, the last PTI government too had failed to convince the IMF to complete the seventh review and release nearly $1 billion loan tranche.

One senior member of Pakistani delegation insisted that the removal of the fuel subsidies was the only hurdle in the way of announcement of the staff level agreement. But he admitted that there were some policy gaps.

The main hurdle was the lack of authority of the Pakistani delegation to take decisions, said a person familiar with the discussions. The government did not want to make any major move during this fiscal year while the IMF wanted immediate actions, said the sources.

The failure to have an agreement with the IMF could prove costly for both the government and the markets. The rupee on Wednesday closed at nearly Rs202 to a dollar in the interbank, as the government of Pakistan Muslim League Nawaz has too failed to stem the currency devaluation due to a delay in taking timely decisions and the thin foreign exchange reserves. The rupee has lost its value by Rs19 to a dollar since the PML-N came into power.

While announcing the conclusion of the talks through a press statement, the IMF said talks were held both in-person and virtually “on policies to secure macroeconomic stability and support sustainable growth in Pakistan”.

Also read: Govt agrees to implement IMF demands

The IMF said that its staff level team “looks forward to continuing its dialogue and close engagement with Pakistan’s government on policies to ensure macroeconomic stability for the benefit all of Pakistan’s citizens.”

A day before conclusion of the talks, former Finance Minister Ishaq Dar had said at Neo TV that the IMF would not disburse the loan tranche before July and increasing the fuel prices at this stage would not be helpful.

Another source having direct knowledge of the conversations said that the IMF was not looking the fuel subsidies in isolation rather it would be a package deal involving decisions on two key issues, first the withdrawal of fuel subsidies and then agreement on the next year’s budget.

The impression that the IMF got from discussions with the Pakistani delegation was that the government wanted immediate disbursement of the loan but was not ready to do anything meaningful, said the sources.

The delay in release of the IMF tranche has also held back the World Bank, the Asian Development Bank and other bilateral creditors from committing new loans to Pakistan.

Both the sides could not bridge gaps on the issues of primary budget balance, revenue target, power subsidies’ withdrawal plan, the extent of provincial cash surpluses, the need for any fiscal adjusters and the external financing requirements.

The sources said that there was a disagreement on the primary budget balance target for the next fiscal year 2022-23 and the gap was in the range of 1.2% of the Gross Domestic Product or around Rs800 billion.

“On the fiscal side, there have been deviations from the policies agreed in the last review, partly reflecting the fuel and power subsidies announced by the authorities in February”, said the IMF. The team emphasized the urgency of concrete policy actions, including in the context of removing fuel and energy subsidies and the FY2023 budget, to achieve program objectives”, stated the Fund.

The IMF also demanded firm commitments from the four provincial governments about the cash surpluses that they can generate to achieve primary balance, said the sources. The deep political divisions in Pakistan was also a hurdle in achieving a consensus on the provincial cash surpluses.

The government sought certain fiscal adjusters from the IMF against the primary budget deficit target, which the Fund did not agree to.

There was also disagreement on the issue of the amount of fuel and electricity subsidies during the remainder period of this fiscal year and in the next fiscal year. The IMF was asking for upfront increase in prices of electricity and petroleum products, which the government did not agree to.

Last month, the finance minister had made a promise with the IMF top management that he would start withdrawing fuel subsidies from May 1. But like his predecessors -- former finance ministers Dr Hafeez Sheikh and Shaukat Tarin -- Ismail, too, remained unable to fulfil his promise, further widening the trust deficit gap with the fund.

The sources said that new IMF Mission Chief had also to face questions from the headquarter for giving a positive statement at the end of Miftah Ismail visit to Washington. This time, the body language of the IMF team was aggressive, said the sources.

There was also disagreement on the gross external financing needs for the next fiscal year, as the IMF was looking for steeper adjustments to contain the current account deficit.

“Considerable progress was made during the mission, including on the need to continue to address high inflation and the elevated fiscal and current account deficits, while ensuring adequate protection for the most vulnerable”, stated the IMF. In this regard, the further increase in policy rates implemented on May 23 was a welcome step, according to the IMF

The mission called the talks “highly constructive discussions” aimed at reaching an agreement on policies and reforms that would lead to the conclusion of the pending seventh review of the authorities’ reform programme.

The IMF also opposed the government’s move to ban the import of about 41 goods to curb the import bill, according to the sources.

For many, the ban was not sufficient to cut the bill, which is now estimated to remain at $46 billion to $47 billion in this fiscal year while the per month impact of the import ban was hardly $300 million.

Former prime minister Imran Khan had capped the fuel prices at February 15 level for a period of four months, which now has tied the hands of the new government. Shehbaz Sharif is facing a choice to increase prices and face people’s wrath or keep giving subsidies and risk the country’s solvency.

There was disagreement on the next year’s revenue collection target, as the IMF demanded to fix it at Rs7.25 trillion while the FBR showed different scenarios ranging from Rs6.8 trillion to Rs7 trillion.