Pakistan-IMF Loan Talks to Continue as Deal Proves Elusive

Pakistan and the International Monetary Fund pledged to continue loan negotiations after failing to reach a deal during the lender’s visit, indicating no immediate reprieve for the South Asian nation as it spirals deeper into an economic crisis.

(Bloomberg) — Pakistan and the International Monetary Fund pledged to continue loan negotiations after failing to reach a deal during the lender’s visit, indicating no immediate reprieve for the South Asian nation as it spirals deeper into an economic crisis.

Reaching a deal with the IMF for more money from a $6.5 billion loan program is crucial for Pakistan, which needs the funds to unlock more aid, avert a default and replenish foreign currency reserves that have fallen to less than $3 billion. IMF staff-level discussions have extended past a scheduled end date of Feb. 9 and it’s now unclear when they will wrap up.

The IMF’s priorities include strengthening Pakistan’s fiscal position with permanent revenue measures, reducing untargeted subsidies and allowing the exchange rate to be market-determined. The agency also seeks to ensure the viability of the energy sector, though Pakistani authorities have ruled out increasing electricity prices this week and resisted raising gas prices for months.

“The timely and decisive implementation of these policies along with resolute financial support from official partners are critical for Pakistan to successfully regain macroeconomic stability and advance its sustainable development,” IMF staff said in a statement. “Virtual discussions will continue in the coming days to finalize the implementation details of these policies.” 

Pakistan is still hopeful it will seal a deal with the IMF. The government will start virtual discussions on Monday after receiving an agreement draft on Friday, which will be reviewed over the weekend, Finance Minister Ishaq Dar said at a briefing.

Officials plan to raise new revenues of 170 billion Pakistani rupees (about $625 million) and increase diesel prices by 10 rupees a liter, though the government has backed away from adding a new tax on fuel.

But signs of trouble persist: Following the IMF’s statement, dollar bonds due in 2031 indicated nearly 4.2 cents lower, the most in more than four months, at 55.9 cents on the dollar on Friday.

Pakistan’s KSE-100 Index fell 1.7% at close. The movement indicates a change in sentiment that had been upbeat until now. Investor optimism will be impacted until a staff-level agreement is reached, said Mohammad Shoaib, chief executive officer at Al-Meezan Investment Management, which manages about 250 billion rupees.

Still, Pakistan has made some progress in meeting IMF expectations. Prime Minister Shehbaz Sharif’s government loosened its grip on the rupee and raised fuel prices last month, showing a determination to complete the IMF’s bailout plan after months of delay implementing key measures. The rupee slumped almost 15% in January and touched a record low this month against the dollar.

“There is a certain level of resolve we have seen from the government due to which we expect sooner or later Pakistan’s deal with the IMF would happen,” said Syed Atif Zafar, a chief executive officer at Uraan, a research house. The “expectation is that the deal is inevitable.”

Depleted resources have stranded thousands of containers of supplies at ports, pushing inflation to a 48-year high and forcing companies to shut factories from a lack of inventory.

Elevated social and political risks compound the government’s difficulty in implementing reforms, including revenue-raising measures, that would improve the country’s fiscal position and liquidity position, Moody’s Investors Service said in a statement.

The “government liquidity and external vulnerability risks are elevated, and there remains considerable risks around Pakistan’s ability to secure required financing to fully meet its needs for the next few years,” said the statement.

Sharif’s remarks on Feb. 3 that the IMF’s demands were “beyond imagination” shows the dilemma that Pakistan faces. The IMF requires a market-determined exchange rate, higher energy prices and a sustainable fiscal sector — all of which portend more hardship for a country that hasn’t recovered from last year’s devastating floods and endless political turmoil. A suicide bombing last month killed at least 92 people.

Pakistan has a tumultuous track record with the IMF. Most of its previous bailouts — 13 since the late 1980s — weren’t completed. The government secured a $1.1 billion in August, part of a $6.5 billion package agreed upon in 2019. But it has been halted multiple times because of Islamabad’s failure to meet loan conditions and disagreements over spending plans after the floods.

If the IMF talks don’t yield a positive outcome, “it’s like a default situation waiting,” Emre Akcakmak, a Dubai-based senior consultant to East Capital, said before the IMF statement. Pakistan’s reserves are good for only up to two months, given the current burn rates, he added.

What Bloomberg Economics Says…

We now expect the economy to shrink in the current fiscal year, instead of eking out growth. We don’t expect any significant rebound in coming months. The government’s efforts to meet the demands of the IMF for aid — letting the rupee float and hiking fuel prices and electricity tariffs — will fuel inflation and squeeze consumers. Higher interest rates will also suppress credit demand, while sagging consumer and business confidence damp activity.

Ankur Shukla, India economist in Mumbai

Click to read the full note here

–With assistance from Ismail Dilawar, Kamran Haider, Ronojoy Mazumdar, Karthikeyan Sundaram, Kristine Servando, Sanjit Das, Aradhana Aravindan and Ruchi Bhatia.

(Updates with closing prices in seventh paragraph)

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