ISLAMABAD: Describing the failed four-year Extended Fund Facility (EFF) as a “missed opportunity”, the IMF blamed both the PTI and PDM, particularly under the economic stewardship of Shaukat Tarin and Ishaq Dar, for irresponsible budgetary expansion and exchange rate interventions, respectively.
The IMF staff report released after the signing of the $3 billion Standby Arrangement detailed step-wise ‘stop and go’ cycles of the $6.5bn EFF that repeatedly went off the track over almost four years.
The fund separated the programme period broadly into three phases: first, an early phase with considerable success in stabilising the economy; second, the pandemic phase; third, an extended stop-and-go phase.
The sequence of shocks (Covid-19, Ukraine war, 2022 floods) coupled with compounding policy reversals in the second half of the programme required multiple recalibrations and the original programme goals fell out of reach.
Calls out Tarin for ‘irresponsible’ budgetary expansion, Dar for ‘exchange rate interventions’
Soon after July 2019, the authorities’ decisive policy implementation started to reverse Pakistan’s large imbalances, allowing for successful completion of the first review in December 2019. The external adjustment advanced quickly as the transition to a market-determined exchange rate proceeded in an orderly way and fiscal performance was consistently strong.
Buffers built in the early phase of the EFF, along with quick support under the $1.4bn Rapid Funding Instrument, the Debt Servicing Suspension Initiative, and from other partners helped Pakistan mitigate the severe pandemic shock and the authorities’ policies proved critical in supporting the economy.
Aside from health-related containment measures, their response included a temporary fiscal stimulus, a large expansion of social safety nets, monetary policy support, and targeted financial initiatives.
Although policy priorities inevitably shifted and the pace of implementation slowed amid Covid-19, the authorities remained committed to medium-term objectives.
The programme resumed with the completion of the combined 2nd–5th reviews in March 2021 and in April 2021 Pakistan was able to access international markets for the first time since 2017.
Passage of an expansionary
At this stage enters then-finance minister Shaukat Tarin. “Amid the robust recovery…the authorities deviated from the EFF path with the passage of an expansionary FY22 budget. The EFF remained off track throughout 2021 (the end-June fiscal target had been missed) before the authorities corrected course with the passage of a mini-budget in January 2022,” the IMF said, adding that external imbalances, however, had started to build up amid the mistimed fiscal expansion and a delayed monetary policy response to rising inflationary pressures.
Moreover, the authorities viewed the terms-of-trade shock as temporary, with a role for foreign exchange interventions to smooth trend depreciation, against staff advice.
Despite delays in many areas, an important reform was completed with the passage of amendments to the State Bank of Pakistan Act. Again, positive sentiment around the 6th review, completed in early February 2022, allowed Pakistan to tap international markets, which would be the last time that Pakistan would raise fresh financing from commercial creditors during the programme period.
The second stop-and-go phase began only weeks after the completion of the 6th review. Amid the spike in commodity prices following the Russian-Ukraine conflict, the government proceeded with large, unbudgeted fuel subsidies, and continued efforts to stem depreciation pressures through large FX intervention.
PDM under criticism
The fund said that following political volatility and a change in government, the new authorities kept subsidies in place for months before deciding to bring the EFF back on track in June 2022.
Measures included the passage of an agreed FY23 budget, significantly increasing the policy rate, eliminating post-tax fuel subsidies, and increasing fuel taxation and electricity tariffs.
To signal their resolve to return to macroeconomic stability, the authorities also requested an extension of the EFF through June 2023, which was approved, supported by financing assurances from bilateral partners to fill a financing gap of $4bn, with the completion of the combined 7th–8th reviews in August 2022.
Around that time Pakistan was hit by devastating floods, which provided the backdrop for the programme’s final part as Ishaq Dar took over as finance minister. The exchange rate became tightly controlled and public statements about a possible debt restructuring caused market turmoil and a spike in sovereign spreads. Gaps in the functioning of the FX market and uncertainty around fiscal policy and the flood recovery prevented the completion of a review.
Meanwhile, amid limited external financing, debt service drained reserves to low levels, fiscal targets were missed, and SBP’s forward/book started to grow.
Following the conference on Climate Resilient Pakistan in Jan, understandings were reached on key policies. However, with policy slippages and a growing financing gap, including from the non-disbursement of financing pledged for the combined 7th–8th reviews, a review could not be completed.
But this is where Mr Dar had been blaming the IMF for increasing its position on higher external financing gap for geopolitical reasons. According to IMF in May-June, discussions resumed on the completion of the remaining EFF reviews, however time constraints prevented the review and the EFF expired on June 30, 2023.
