KARACHI: With Pakistan expressing interest in a bigger International Monetary Fund (IMF) bailout program following the successful completion of a short-term loan facility, independent financial experts believe the South Asian state could follow in the footsteps of Egypt by seeking about $8 billion in the coming days.
Earlier this month, Egypt signed an expanded $8 billion program with the IMF in expansion of the $3 billion Extended Fund Facility (EFF) which both sides agreed in December 2022. Cairo witnessed currency depreciation by about 38 percent and the ensuing interest rate hike of a record 600 basis points after the IMF deal.
Local financial experts said they expected Pakistan to follow the same example to avail a larger program from the international lender due to the similarities between the economic imbalances of the two countries.
“Pakistan’s new government would like to avail as much as about $8 billion program by taking a cue from Egypt as economic imbalances of Pakistan are largely similar to that of Egypt,” Dr. Vaqar Ahmed, Joint Executive Director at the Sustainable Development Policy Institute (SDPI), told Arab News on Wednesday.
He added, however, the IMF was likely to insist to keep the quantum of the next program at the minimum because the fund believes the Pakistani administration has not implemented politically difficult measures under previous program including the privatization of state-owned entities and cost reduction programs in energy sector.
The global lender and the Pakistani authorities reached a staff-level agreement on the second and final review under a $3 billion stand-by arrangement (SBA), paving the way for the disbursement of $1.1 billion, the fund announced earlier in the day.
To avail the SBA, cash-strapped Pakistan had to take painful measures including budget revision, interest rate hike and tariff hikes in the electricity and gas rates that resulted in record high inflation in the country.
The IMF said on Wednesday the authorities have also expressed interest in a successor medium-term program with the aim of permanently resolving fiscal and external sustainability weaknesses, strengthening its economic recovery, and laying the foundations for strong, sustainable and inclusive growth.
It informed the discussions for the new program are expected to start in the coming months.
The IMF statement said the upcoming discussions are set to focus on strengthening public finances by gradually consolidating fiscal policies and broadening the tax base. This will include integrating undertaxed sectors and enhancing tax administration to improve debt sustainability and allow increased spending on development and social assistance for the vulnerable.
Additionally, plans are in place to restore the energy sector’s viability through cost-reducing reforms, such as improving electricity transmission and distribution, transitioning captive power demand to the grid, enhancing governance in distribution companies and intensifying efforts to combat theft.
Efforts to bring inflation back to the target will also be supported by a more transparent and flexible foreign exchange market, aiding external rebalancing and the replenishment of foreign reserves.
Moreover, promoting private sector-led activity, coupled with the removal of market distortions, advancing state-owned enterprise reforms, and increasing investment in human capital, aims to foster resilient and inclusive growth, enabling Pakistan to achieve its economic potential.
However, financial experts believe that the size and duration of the next program will largely depend on the economic performance in next six to 12 months.
“The quantum and the length of the next program would be determined by the fact that how the economy is going to start playing out in the coming six months to a year with some gradual opening required on the imports and a pickup in growth,” Dr. Khaqan Najeeb, former adviser of the finance ministry, told Arab News.
The primary determinant of the program specifications would largely depend on the extent to which the country is willing to address several key areas.
“These include repairing public finances, revaluating the energy sector, shifting the focus of inflation management from solely monetary tightening to enhancing productivity within the economy, and ensuring the efficiency of the real sector,” he added.
Pakistan’s current macro stability has resulted in a slowdown with very modest growth of around two percent expected this year after it shrunk to 0.2 percent last year. The country is experiencing elevated inflation at 23.1 percent while the interest rates are at all-time high of 22 percent.
