Pakistan faces last IMF board review before passing crucial budget

A Fund official said on Thursday that Pakistan can only have one more board review under the present bailout agreement before its budget is unveiled on June 9, which is a step towards a successful review.

“It is critical to restoring the proper functioning of the foreign exchange market in order to pave the way for a final review under the current EFF,” the international lender’s resident representative for Pakistan, Esther Perez Ruiz, told Reuters.

She noted that other criteria included approving a budget for the fiscal year 2023-24 that exceeded programme objectives and receiving strong and credible finance commitments to bridge a $6-billion gap ahead of the board review.

Analysts believe the coalition government will strike a balance in its budget, which will be unveiled tomorrow, between reforms to please the Washington-based lender and efforts to win over voters in an upcoming election.

Pakistan’s IMF programme expires this month, with over $2.5 billion in cash yet to be released as the country seeks to reach an agreement with the lender while dealing with record inflation, fiscal imbalances, and low reserves.

A general election is scheduled for November, which the government hopes will resolve the uncertainty caused by the protest movement led by the chairman of the Pakistan Tehreek-e-Insaf (PTI) since his ouster in a no-confidence vote last year.

Former finance minister Miftah Ismail stated that the government needed to acquire IMF money in order to avoid an expansionary budget.

“Without the IMF, Pakistan would struggle to survive the next fiscal year,” Miftah added. “I’m confident the government will present a budget that is more or less in line with IMF prescriptions.”

Since November, an IMF staff decision to release $1.1 billion of a $6.5 billion package has been postponed.

The funds are critical for Pakistan to avoid a balance-of-payments crisis, and most analysts believe that even when the current programme expires, Pakistan will need to seek a bailout in order to avoid defaulting on debt obligations in the 2019 fiscal year.

Central bank reserves are enough to fund imports for around a month.

In May, inflation in the country of 220 million people reached 37.97%, a record for the second consecutive month and the highest rate in South Asia.

The planning minister said on Tuesday that the new fiscal year’s budget for development spending would be 1,150 billion rupees ($4.02 billion), with inflation expected to be 21%.

With the general election just around the corner, some observers anticipate the administration will propose vote-winning measures on Friday, even if the pledges must be dialled back later.

Fahad Rauf, head of research at Karachi-based brokerage Ismail Iqbal Securities, predicted a salary increase for government personnel as well as a package for the farm sector, with further burdens imposed on an already narrow tax base and few, if any, real measures to broaden it.

“Banks and taxed industries will continue to feel the heat,” Rauf said, adding that he believed a 10% super tax on more than 15 sectors would be imposed again, despite the government’s claim last year that it was a one-time payment.

The government established a total expenditure target of Rs9.5 trillion for the fiscal year 2022-23, up from Rs8.49 trillion the previous year due to IMF dissatisfaction.

Rauf predicted that will happen again this year.

Sakib Sherani, an independent economist, agreed that the budget will be full of populist pre-election initiatives that would be unlikely to survive the July-September quarter, given the need for more IMF funding.

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