Pakistan faces further economic pressure as World Bank links $450m loan to IMF review

The World Bank has linked its approval of the second RISE-II loan, which is worth $450 million, to the completion of the stalled International Monetary Fund (IMF) program, which has dealt a blow to Pakistan’s efforts to secure loans from multilateral creditors.

The RISE-II program also includes $250 million in co-financing from the Asian Infrastructure Investment Bank (AIIB), bringing the total amount of program loans that Pakistan is aiming to secure during the ongoing fiscal year 2022-23 to $700 million. However, the approval of the second RISE program hinges on macroeconomic stability and the conclusion of the pending IMF review, which has been difficult to achieve despite in-person talks between Pakistan and the IMF since February.

The staff-level agreement has yet to be reached mainly due to the fact that the gross external financing gap could not be fulfilled up to the satisfaction of the Fund. When Pakistan and the IMF concluded their talks on February 9, the IMF estimated that Pakistan needed gross external financing of $7 billion for the ongoing financial year.

However, due to the improvement in the current account deficit, which turned into a surplus of $654 million for the last month, the IMF lowered the requirement of external financing needs to $6 billion and eventually to $5 billion. Of the $5 billion in external financing needs, Pakistan secured confirmation on $2 billion in financing from Saudi Arabia and $1 billion from the United Arab Emirates, but formal agreements have not been signed yet.

The Pakistani authorities claim that they have exchanged a formal agreement with Saudi Arabia and that it would be signed soon. However, the remaining $2 billion in external financing remains unfulfilled.

Pakistani authorities argue that the World Bank and AIIB were expected to disburse $700 million in program loans within the period of the ongoing financial year. Of the remaining $1.3 billion, Pakistan expects $300 million in project financing from international donors for flood-affected areas till the end of June 2023.

Now the remaining $1 billion in financing is required from international commercial banks, and it is not yet clear how this financing from the commercial banks would be secured as the banks were asking for signing an agreement with the IMF but the Fund has been asking for confirmations. The Pakistani side did not rule out the possibility of a “political angle” behind these dilly-dallying tactics on the part of the IMF.

According to the World Bank spokesperson, the bank is working with the government of Pakistan on the preparation of the RISE-II Development Policy Operation, including discussions around supported policy actions on which there has been considerable progress recently, the adequacy of the macroeconomic framework, the financing amount, and the timeline for approval, especially as it relates to the completion of the ongoing IMF review.

Dr. Khaqan Najeeb, the former economic adviser, stated that the ninth review based on September 22 data with the IMF was largely stuck on the issue of the financing gap. Both sides have moved closer as the KSA, UAE, and multilateral financing gets confirmed.

As far as commercial financing is concerned, with a very low country credit rating, it is a tough call, but the restoration of the program with the IMF can help in this regard. He stressed that Pakistan’s access to multilateral project aid and program financing, like RISE II and associated co-financing, was largely dependent on the IMF program’s revival. With $3.7 billion in repayments till June 30, it is imperative that Pakistan secures all the dollar financing, including the IMF, friendly countries, bilateral, multilateral, and some commercial loans.

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