The International Monetary Fund (IMF) is withholding the release of a US$1 billion tranche under an Extended Fund Facility (EFF) to Pakistan until the government closes commercial bank accounts held by the armed forces and other state entities and remits $17 billion worth of public funds into a single treasury account. The IMF is also demanding more central bank autonomy to release the facility.
The financial assistance drama has a sharp geopolitical twist. The United States, currently the single largest financial contributor to the IMF, has reportedly had a hand in the reform demands, using IMF monetary policy as a bargaining chip to force cash-strapped Islamabad to agree to the Biden administration’s counterterrorism operations in neighboring Afghanistan.
Pakistan and the IMF have been deadlocked over terms of reviving a $6 billion EFF facility, including over IMF demands for Prime Minister Imran Khan’s government to grant full autonomy to the State Bank of Pakistan, the central bank, which is now seen as captive to politicians. The two sides reached an agreement in March but Islamabad has been perceived since to stall on implementing the measure.
Market analysts say Islamabad needs IMF support to firm up confidence in its fast-crumbling stock and currency markets. The IMF negotiations have overlapped with talks with the US as the two sides seek to strike a new balance in relations.
Islamabad had hoped for a quick reset under Biden but relations have been dogged by US perceptions Pakistan clandestinely supported the Taliban’s insurgency against the US and NATO troops and subsequently its takeover of Kabul, and that Islamabad has become overly close to China via their $60 billion China-Pakistan Economic Corridor (CPEC) infrastructure-building project.
Last week, a CNN report revealed that Biden administration officials held a briefing session with US Congress lawmakers at which they claimed to be close to an agreement with Pakistan for use of its airspace and potentially military facilities to conduct so-called “over-the-horizon” operations against extremist groups still active in Afghanistan, not least the Islamic State–Khorasan (ISIS-K).
CNN claimed Pakistan has sought a new accommodation in exchange for US support for its homeland counterterrorism efforts amid rising attacks from terror outfits based in Pakistan-Afghan border areas as well as managing relations with rival India, according to alleged details of a classified briefing of US Congress members on October 22.
The US news channel quoted sources who said US negotiations with Islamabad were still ongoing and the terms of the agreement, which have not been finalized, could yet be modified. Pakistan officials refuted the CNN report, denying any such negotiations are underway.
The briefing comes at a time when the White House is evaluating options for new counterterrorism and reconnaissance operations against ISIS-K and other terror group adversaries in Afghanistan after its military withdrawal from the country in August. It also comes as certain US senators threaten to impose sanctions on Pakistan for its alleged role in facilitating the Taliban’s lightning strike seizure of power.
“Yes, of course, the IMF’s EFF program is huge leverage for the US administration and the Fund is resultantly using delaying tactics to make Islamabad approach the Biden administration,” Shahid Raza, an Islamabad-based security analyst, told Asia Times.
“A Pakistan delegation visited the US for negotiation but I think no progress has been made in this direction. Americans are trying to draw some kind of concessions in so far as air corridor access, basing rights and some forms of security intelligence are concerned,” Raza said. Pakistan has not commented publicly on the alleged negotiations.
The Ministry of Finance has likewise remained mum on the status of the $6 billion EFF, under which Pakistan received about $3.2 billion in foreign assistance in the first quarter of the current fiscal year. Sources privy to the negotiation told Asia Times that the extended talks in Washington between the two sides remained “edgy.”
On the financial front, they said Pakistan has been given tough targets to meet before a memorandum of economic and financial policies (MEFP) could be signed with the IMF. The program has been in abeyance since April this year; a sixth review should have been completed by July but is reportedly still ongoing.
Insider sources said that a key point of contention concerns Pakistan’s enduring poor fiscal situation and the failure of Khan’s economic team to find new revenue sources to fund its growth-oriented budget.
That fiscal crunch forced Khan last week to go hat-in-hand to Saudi Arabia to restore a $4.2 billion lifeline, which was earlier suspended by the kingdom due to diplomatic differences over Islamabad’s hobnobbing with Saudi rival Turkey.
Information Minister Fawad Chaudhry wrote in a tweet last week that those differences have been bridged and Saudi Arabia will deposit $3 billion in the State Bank of Pakistan’s coffers as well as restore $1.2 billion worth of oil shipments on deferred payments.
That will help but alone will not be enough to keep Pakistan’s economy, stock market and currency afloat.
A World Bank report released on Friday (October 29) predicted that Pakistan’s economy would run into serious trouble if the IMF loan program agreement was further delayed. It also expressed concern that economic reforms could be derailed for various reasons including rising political and economic turmoil in neighboring Afghanistan, which is teetering towards a famine situation.
The wider Western donor community wants Pakistan to impose across-the-board farm taxes, narrow its trade deficit, close interest-bearing accounts opened with public money in commercial banks and remit all funds held in a federal consolidated account to the State Bank of Pakistan.
The country’s powerful army and other autonomous bodies including the Frontier Works Organization (FWO), National Logistic Cell (NLC), Special Communications Organization (SCO), National Highway Authority (NHA) and Oil and Gas Development Corporation (OGDC) maintain personalized accounts in private banks with huge public funds running into the billions of dollar.
Commercial banks are earning big profits on deposits worth an estimated $17 billion on a 4-5% interest rate spread. The banks invest these funds in Treasury Bills (T-bills) and charge 8-9% from the government. Analyst estimates suggest the government loses $873 million annually due to this financial finagling.
Khan’s government, which is currently at loggerheads with the autonomous armed forces over a contested spy agency appointment and under rising popular fire for its perceived economic mismanagement, will be hard-pressed to wrest control of these deposits from the army and other autonomous state bodies.
Inflation has broken a 70-year record over the last three years, with cooking oil, sugar, wheat flour and poultry prices all soaring to historic highs. According to the Federal Bureau of Statistics (FSP), electricity rates have increased by 57% and petrol is up 49 % from October 2018 to October 2021, coinciding with Khan’s rise to power.
That’s giving fresh ammunition to the Pakistan Democratic Movement opposition alliance, which is spearheading a mass protest campaign against Khan’s ruling Pakistan Tehrik-e-Insaf (PTI) coalition. With that rising political pressure, Khan will be wary to enter any open agreement with the US that could be politicized to portray him as a willing stooge of the West.
Khan, who had replied “absolutely not” a few months back when an interviewer asked him would he be willing to give military basing rights to the US, will be vulnerable to such criticism if he is seen as flip-flopping on the sensitive issue. But, at the same time, he desperately needs the IMF facility to keep the economy upright, analysts say.
“It is going to be hard for him to backtrack on issues he already took a stand on. The US needs to come through diplomatic channels instead of employing blackmailing tactics to push for the facilities they require from Pakistan,” Raza said.