GP Short Notes # 706, 2 July 2023
On 29 June, the IMF, in its press release, announced a new USD 3 billion Stand-By Agreement (SBA) reached with Pakistan. The staff-level Agreement would be subject to management approval by IMF's executive board in mid-July. The Finance Minister of Pakistan claimed that the deal would make sure the disbursement of USD 1 billion shortly after IMF board approval.
What is the background?
First, a brief note on the Stand-By-Agreement (SBA). The SBA is different from the Extended Fund Facility(EFF). The EFF is an IMF instrument usually employed when structural impediments subdue a country's growth sentiment and needs financing to deal with institutional weakness while maintaining macroeconomic stability. While SBA as an instrument is used for supporting short-term financing needs. Nathan Porter, under whom the IMF team discussed with Pakistani authorities, also mentioned that external shocks had defeated efforts by Pakistani authorities to remain aligned with benchmarks of previous EFF.
Second, Pakistan's revised budget and related actions as a prelude to the IMF deal. The week leading to the announcement witnessed several important policy actions to convince the IMF of the new SBA. The most important was the State Bank of Pakistan's decision to withdraw all import restrictions and effectively leave the PKR to be determined at a market-based exchange rate. SBA had also hiked the policy rate by 100 basis points to 22 per cent, the highest ever in the history of Pakistan. While on the ministry and legislative front, the finance ministry had to present a revised budget with additional taxes worth USD 731 million and reduce the expenditure by USD 289 million. However, the new taxes are limited to the salaried class and organized sector. The untaxed sectors like retail, agriculture and real estate have remained primarily out of the new tax net.
What does it mean?
First, the immediate measure. Pakistan and IMF might go for another EFF after the current SBA expires in the next nine months. The IMF factor in Pakistan's attractiveness is likely to fade over the medium term as Pakistan weighs in on China as an alternative guarantor of the financial viability of Pakistan.
However, there remains a mistrust not just on the IMF side for Pakistan but on the part of developing countries in the effectiveness of loan programs of IMF. The world is witnessing a phase of neo-populism, and IMF policies and benchmarks have not adjusted to such changing reality. The multilateral institutions based on the Bretton Woods consensus may as well run out of steam. At the same time, regional and developing countries cement their financial collaboration and agree on decoupled macro-derivatives with advanced economies.