Pakistan has one month to satisfy the International Monetary Fund before its stalled support program expires, raising the risk of a sovereign default. But just as the cash-strapped country enters crunchtime, friction between the government and the fund is clouding its prospects.
Commenting on Pakistan’s situation earlier this week, IMF Mission Chief Nathan Porter said Islamabad must arrange new foreign loans, approve a new budget in line with the fund’s guidelines and allow the open market to determine the value of the rupee, if it is to revive the $6.5 billion Extended Fund Facility (EFF) agreed in 2019.
Porter also said, “We do hope that a peaceful way forward is found, in line with the constitution and rule of law.”
This was taken as a veiled reference to Pakistan’s government delaying provincial elections in Punjab and Khyber Pakhtunkhwa, despite a constitutional requirement and court orders to hold them. This is a core issue in the ruling coalition’s bitter dispute with opposition leader and ousted Prime Minister Imran Khan, who has been pushing for local and federal polls to win his job back.
Government officials did not take kindly to the remarks. Aisha Ghaus Pasha, Pakistan’s state minister for finance and revenue, termed Porter’s comments interference. “Pakistan’s conduct was in line with the law,” she told local media.
Yet Pakistan can ill afford to antagonize the fund. The IMF has so far paid $3.9 billion of the envisioned support to Pakistan, which is now struggling to pass the ninth review of the program to unlock a nearly $1.2 billion tranche. A total of 11 reviews would have to be passed by the end of June to receive the full remainder. And global ratings agency Moody’s has warned that Pakistan could face a default if it does not secure another IMF package for the next fiscal year, which starts in July.
Pakistan’s foreign reserves were down to around $4.2 billion in mid-May. That is enough for only about a month of imports. Three months’ worth of import cover is considered the advisable limit.
Zeeshan Salahuddin, director of the Centre for Regional and Global Connectivity at the TabadLab think tank, said that without an IMF deal, it will be virtually impossible for Pakistan to arrange loans to repay its external and internal commercial financing commitments. The external financing commitments are $25 billion in the coming fiscal year.
Salahuddin stressed that Pakistan’s prospects for getting an IMF bailout are very much dependent on political stability and continuity, which make timely elections important.
As seen in neighboring Sri Lanka last year, a sovereign default would lead to shortages of food, medicine and fuel, as Pakistan would be unable to import the supplies. Another risk is hyperinflation, which would likely exacerbate social upheaval in a country already rocked by protests by Imran Khan’s supporters, as well as a surge in terrorism.
Pakistani Finance Minister Ishaq Dar has vehemently denied that Pakistan will default anytime in the near future, and recently vowed to share details of the country’s upcoming budget with the IMF to help unlock funding.
But Uzair Younas, director of the Pakistan Initiative at the Atlantic Council’s South Asia Center, believes there is still a significant gap between the IMF’s expectations and Pakistan’s performance. “The biggest indicator of the EFF, moving forward, will be a depreciation of the rupee in the interbank market to close the growing price gap with the open market of the dollar in Pakistan,” he told Nikkei.
Experts suggest that the long-term solution to Pakistan’s economic woes is a structural adjustment that loosens the grip of the elite on state resources.
“While the default window can be pushed into the future by putting the economy in a state of coma [by restricting imports], this strategy cannot be sustained forever,” Younas said.
Source: Nikkei Asia