In an unexpected turnaround, successful negotiations recently took place between Pakistani Prime Minister Imran Khan and International Monetary Fund (IMF) chief Christine Lagarde. They met on the sidelines of the seventh World Government Summit in Dubai (February 10-12), which was attended by heads of state, ministers and business leaders. Sharing his vision for the future of Pakistan in his keynote speech at the summit, Khan highlighted the pivotal importance of his country’s socioeconomic development.
Urging investors to take the plunge in new sectors of Pakistan’s economy, Khan highlighted fields such as artificial intelligence and green development. Referring to reforms aimed at improving the country’s financial outlook, Khan disclosed his plans to accelerate human development by spending more on health and education. Significantly, the prime minister observed, “The most important thing is that we must in Pakistan start a reform program. Reforms are painful but it is essential.”
As Lagarde was in the audience, this might have been the statement that set the tone for the pivotal talks between the IMF and Pakistan. Recounting the details, Khan said his government had undertaken to correct the country’s economic policies but it was not possible to address the ongoing crisis without taking lasting measures. Basically, increasing imports are Pakistan’s main problem and steps are being taken to reduce spending and narrow the fiscal gap. Changes in the tax laws have been implemented to facilitate business.
Previously, both meetings with IMF representatives since November 2018 had yielded no results even though there was an economic emergency. Having stressed the need for an improved tax revenue collection mechanism and narrowing the current account deficit, which is expected to be 5% of this year’s GDP, the IMF team left without reaching an agreement. This time, however, the discussions have been described as “positive” by IMF officials.
The economic package had mainly been held up because the Pakistani government was unwilling to go through with the severe structural reforms called for by the Fund. Instead, the government opted to ask friendly countries such as China, the UAE and Saudi Arabia for financial assistance. But despite having succeeded in raising more than $10 billion in loans and credit arrangements, Pakistan’s economic travails have not ended. Recently, Moody’s gave Pakistan’s banking sector a negative ranking as institutions have large bond holdings that “link their credit profiles to the low-rated government.”
Along with Finance Minister Asad Umar, Khan discussed the financial bailout plan with Lagarde. Encouragingly, these talks have ended with a convergence of views on various conditions set by the IMF. Stating that the Fund stands ready to support Pakistan, Lagarde was optimistic that the country could bounce back with the implementation of an effective and “strong package of economic reforms’ that would “restore the resilience of its economy and lay the foundations for stronger and more inclusive growth.”
Khan took to Twitter to announce a “convergence of views on structural reforms” in his meeting with Lagarde
According to a press release from the IMF chief, the Pakistani government’s policy agenda was praiseworthy as it focused on shielding the poor and consolidating good governance, alongside the main priority of improving living standards. Likewise, Khan took to Twitter to announce a “convergence of views on structural reforms” in his meeting with Lagarde. Consequently, a breakthrough with the IMF deal seems near as the economic outlook worsens.
As Pakistan’s foreign currency reserves have fallen to just $8 billion, going ahead with the bailout plan now is crucial as only about two months of imports can be covered at present. Bolstering the dollar reserves has become even more important as payments have to be settled for essential imports like oil, machinery and raw materials. Thus, it is expected that the IMF loans will be announced soon to keep the economy on track.
The economic situation has apparently worsened further due to a delay of several months, and the Pakistani rupee saw a 20% decline in the past year. As a result, inflation and economic challenges have risen and Standard & Poor’s has reported: “Negotiations with the International Monetary Fund have taken longer than anticipated, and we now believe the reform timeline will be more protracted in nature.”
At times, talks with the IMF have dragged on for months without any deal, just like in the case of Turkey and Hungary in the past decade. Usually, the basic condition is the ability to repay on time and for that, it is mandatory that revenue targets are met. Nevertheless, it is safe to assume that the economic program from the IMF should come through in the days ahead.