Pakistan: Prior action needed to reach Staff Level Agreement

After recent visit by IMF delegation to Pakistan, the much awaited Staff Level Agreement (SLA) with the visiting IMF team was not executed.

The IMF statement was encouraging as it stated that virtual discussions will continue and hinted towards certain prior actions. The statement also said considerable progress was made during the mission on policy measures to address domestic and external imbalances.

These developments came after a long 9-day visit that was unusually longer than past IMF review team interactions. As a precursor to the visit, the government of Pakistan had let go of the dollar peg late last month where the Pak Rupee devalued by around 14% since Jan 26, 2023 till date.

The Finance Minister in a press conference early Friday morning indicated that Rs170 billion of additional taxes will now be imposed. Circular debt accumulation will also need to be stopped and the finance minister hinted towards energy sector reforms.

As per news reports, the government has decided to implement tax and non-tax measures as demanded by IMF as a prior action through a Presidential Ordinance.

Even though the exact timeline of events may move, it is believed that the SLA will be signed in next couple of weeks or so. In a month's time after that, the IMF Board approval will likely come though paving the way for the disbursement of the US$1 billion tranche by next month. This will be followed by disbursements from World Bank, ADB and friendly nations.

Funding from friendly countries is very critical this time around for the resumption of the IMF program, and could be one of the IMF demand. Disbursement from Saudi Arabia, UAE, Qatar and China may be to the tune of US$5 billion (other than already committed or expected rollovers).

The IMF may also seek assurances of exact amounts of funding from these countries before its Board approval.

The time period from now to the disbursement of the IMF tranche could pose risks in terms of shortages of goods in the country as the country’s focus will be ensure debt repayments and maintain only critical imports. There is already hint of petrol rationing in some parts of the country coupled with selected capital controls and slow processing of non essential imports.

It will be interesting to evaluate the Pakistan Country Report issued by IMF after the IMF board approval. Especially condition related to reach foreign exchange reserves of US$16 billion by June 2023 as per the news reports.

There is also a need to see IMF condition on Pakistan L/Cs payment. According to news reports, IMF has insisted on immediate removal of restrictions on imports for which US$4 billion will be needed to open L/Cs.