Pakistan and IMF fail to reach staff level agreement again

Pakistan and the International Monetary Fund (IMF) have failed to reach a staff-level agreement to revive the 6 billion program. There is a massive gap between their economic assessment and the urgent action needed to avert a financial crisis. ۔

In a handout, the IMF on Wednesday stressed the “urgent need for concrete policy measures, including removing fuel and energy subsidies.”

The talks took place in Doha, Qatar, May 18-25, but ended on a “disappointing” note, a senior official revealed on Wednesday. Finance Minister Muftah Ismail and IMF Mission Chief in Pakistan Nathan Porter led their respective delegations.

The hands of the Pakistani negotiating team were tied to Islamabad and London, which was also felt by the IMF team.

This was the second time Pakistan and the IMF tried to reach a staff-level agreement on the seventh review of the 6 6 billion expansion fund facility but failed. Disagreements can shock markets. The previous PTI government had not persuaded the IMF to complete its seventh review and release a loan installment of about ً 1 billion.

A senior member of the Pakistani delegation insisted that ending the fuel subsidy was the only obstacle to announcing a staff-level agreement. But he acknowledged that there were flaws in the policy.

A person familiar with the conversation said that the main obstacle was the lack of decision-making power of the Pakistani delegation. Sources said that the government did not want to take any significant step during the current financial year, while the IMF wanted immediate action.

Failure to reach an agreement with the IMF could prove costly for both the government and the market. The rupee closed at around Rs 202 against the dollar in the interbank market on Wednesday. The PML-N government failed to stop the devaluation due to delays in making timely decisions and low foreign exchange reserves. The rupee has depreciated to 19 against the dollar since the PML-N came to power.

Announcing the end of the talks in a press statement, the IMF said that the negotiations took place personally and in practice on “policies to secure macroeconomic stability and support sustainable development in Pakistan.”

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

A day before the end of the talks, former finance minister Ishaq Dar had said on New TV that the IMF would not repay the loan installment before July, and at this stage increase in fuel prices would not be helpful.

Another source with direct knowledge of the talks said that the IMF is not looking at fuel subsidies in isolation. Still, it will be a package deal that will decide on two crucial issues. First is the withdrawal of fuel subsidies. And then the agreement on next year’s budget.

Sources said that the impression given to the IMF from the talks with the Pakistani delegation was that the government wanted immediate disbursement of the loan but was not willing to do anything meaningful.

Delays in the release of the IMF tranche have prevented the World Bank, Asian Development Bank, and other bilateral lenders from issuing new loans to Pakistan.

The two sides could not agree on the balance of basic budgets, revenue targets, plans for repayment of electricity subsidies, limitation of provincial cash surpluses, the need for any financial adjusters, and the need for external financing.

Sources said there was a difference in the target of the primary budget balance for the next financial year 2022-23, and this difference was between 1.2% of the GDP or about 800 billion rupees.

“On the financial side, the previous review deviated from the agreed policies, which partly reflected the fuel and electricity subsidies announced by the authorities in February,” the IMF said. The team stressed the urgent need for concrete policy measures in the context of eliminating fuel and energy subsidies and the FY 2023 budget to achieve the program’s goals, “the fund said.

Sources said that the IMF also demanded firm commitments from the four provincial governments on the cash surplus they could create to achieve the essential balance. Deep political divisions in Pakistan were also barriers to reaching a consensus on the provincial cash surplus.

The government requested some financial adjustments from the IMF against the essential budget deficit target, which the fund did not agree to.

There was also disagreement over the fuel and electricity subsidy amount for the remainder of the current financial year and the next financial year. The IMF had called for an immediate increase in electricity and petroleum product prices, which the government did not agree to.

Last month, the finance minister promised the top management of the IMF that it would start withdrawing fuel subsidies from May 1. But like his predecessors – former finance ministers Dr. Hafeez Sheikh and Shaukat Tareen – Ismail failed to deliver on his promise, marking the difference in a trust deficit with the fund.

Sources said that the new IMF mission chief also faced questions from the headquarters for making a positive statement at the end of Muftah Ismail’s visit to Washington. Sources said that this time the body language of the IMF team was aggressive.

Aggregate external finances for the next financial year
There was also disagreement over Sang’s requirements, as the IMF was looking for a quick adjustment to overcome the current account deficit.

“Significant progress has been made during the mission, including addressing high inflation and high fiscal and current account deficits, while ensuring adequate protection for the most vulnerable,” the IMF said. According to the IMF, a further increase in the policy rate applicable on May 23 was a welcome step.

The mission called the talks a “very constructive dialogue” aimed at reaching an agreement on policies and reforms that would lead to the conclusion of the seventh review of the authorities’ reform program.

According to sources, the IMF also opposed the government’s move to ban the import of about 41 items to block the import bill.

For many, the ban was not enough to reduce the bill, which is now estimated at $ 46 billion to $ 47 billion this fiscal year, when the monthly impact of the import ban was barely $ 300 million.

Former Prime Minister Imran Khan had fixed fuel prices at a four-month high on February 15, after which the hands of the new government are now tied. Shahbaz Sharif is facing the choice of raising prices and meeting the people’s wrath or giving subsidies and endangering the country’s solution.

There was disagreement on the target for next year’s revenue collection, as the IMF had demanded Rs 7.25 trillion. In contrast, the FBR had shown different scenarios ranging from Rs 6.8 trillion to Rs 7 trillion.

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