After weeks of dilly-dallying, Pakistan on Monday announced approaching the International Monetary Fund (IMF) for a bailout package aimed at avoiding default on international debt obligations and restoring confidence among the investors.
“After taking into account the current situation and consultation with leading economists, the government has decided to approach the IMF for a bailout programme,” announced Finance Minister Asad Umar through a recorded video message.
The government took the decision after friendly countries did not bail it out despite Prime Minister Imran Khan himself went to Saudi Arabia with a begging bowl.
Adviser to the Prime Minister on Commerce Razak Dawood, who accompanied the prime minister, had described his Saudi Arabia visit as “it was awful to beg from Saudi Arabia”.
To further thrash out the details, the finance minister will hold meetings with the top IMF leadership during the annual meetings of the World Bank-IMF at Bali, Indonesia later this week.
The government took the decision after the prime minister on Monday won endorsements of leading economists for negotiating an IMF bailout package.
But the experts warned the premier that the loan conditions could undermine the PTI’s promise to provide millions of jobs and homes.
The members of the Economic Advisory Council and other leading economists said ‘Ayes’ after the State Bank of Pakistan informed them that the country faced approximately $10 billion financing gap that “cannot be filled without the support of the IMF”, said sources who attended the meeting.
The finance minister put a formal question before the economists: should Pakistan go to the IMF or not?
Their support would help neutralise any opposition during the IMF programme. The economists urged the government to immediately begin talks to end uncertainty in the market, as the stock market lost over 1,328 points to 37,898 at the end of first trading day of the week.
But one economist warned the prime minister that the PTI may lose the next general elections due to adverse impacts of the IMF’s conditions on jobs creation, economic growth and inflationary pressures.
In his announcement, the finance minister said that in order to address underlying imbalances, fiscal and monetary actions needed to be taken without delay.
Pakistan has obtained 10 IMF programmers since the 1990s, and every new government has been forced to go to the IMF programme due to the legacy of those who held power in the previous government, according to the finance minister.
“The challenge for the current government is to ensure that fundamental economic structural reforms are carried out to ensure that this spiral of being in an IMF programme every few years is broken once and for all,” he said.
On Sunday, the prime minister said that his government was trying to convince two to three friendly countries to place foreign exchange reserves with the State Bank of Pakistan to deal with the external sector crisis.
The meeting with the economists took place four days after the conclusion of the IMF’s staff level visit to Islamabad. After the visit, Pakistan’s negotiating team also informed the prime minister that the IMF bailout package remained the only viable option for Pakistan to arrest deterioration in the macroeconomic fundamentals and restore shattering confidence of the markets.
One economist initially opposed the IMF programme and urged the government to take alternate route to bridge the $10 billion financing gap, the sources said.
His suggestion was that if it was necessary to go to the IMF, Pakistan should negotiate one-year Stand-by Arrangement, they added.
However, others opposed the short-term arrangement and instead urged the government to enter into a three-year structural reforms programme, the sources said.
Pakistan owes $6 billion to the IMF and any future arrangement would be finalised by the fund keeping in mind the outstanding liabilities.
This could reduce the IMF bailout size to around $7.5 billion, the sources said.
A former finance minister, who in the past had dealt with the IMF, informed the prime minister that the IMF would ask Pakistan to complete the unfinished agenda of the last $6.2 billion programme that ended in September 2016.
His views were that the IMF could demand pushing forward the stalled privatisation programme — including the privatisation of Pakistan International Airlines.
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During one of the meetings with the IMF, he had said that if the fund wanted that the privatisation programme should fail, the fund could demand PIA’s privatisation.
The non-EAC member also told the prime minister that his government may be asked to devalue the currency by around 20%, which means the rupee will be traded at around Rs150 to a dollar.
The premier was also cautioned that at least 2.5% increase in interest rates on the demand of the fund would make credit expensive, which will hurt the PTI’s agenda to give homes to the homeless people, the sources said.
In an official handout, the finance ministry on Friday announced that “Going forward, the government of Pakistan is committed to take decisive corrective adjustments to restore the economy on the path of stability and growth”.
At the end of the talks, the IMF had also demanded “decisive actions” by Pakistan.
It underlined that “policies should include more exchange rate flexibility and monetary policy tightening, further fiscal adjustment…, strengthening the performance of key public enterprises together with further increases in gas and power tariffs”.
The government has already increased the gas prices by 143%, though the IMF demanded a much higher increase and. It also urged Pakistan to increase power tariffs.
The prime minister was also apprised that due to strict stabilisation policies of the IMF, the economic growth rate may slow down to close to 4.2% – even lower than the IMF’s assessment, the sources said.