IMF Bailout: Who will be in the driving seat?

Pakistan’s macroeconomic stability has increasingly been questioned by domestic and international agencies, with all fingers pointing to a mounting external financing gap that could lead the country towards another IMF Bailout Program in the near term. The last time the country had to approach the IMF was in September 2013 when the PML-N Government obtained a three year Extended-Fund Facility, concluding the program in September 2016.

Research by AKD Securities Limited suggests that a considerable current account deficit accompanied by massive debt repayments of an expected amount of about US$ 7.5 billion in the coming fiscal year could push our external financing gap to around US$ 20.7 billion by the end of the next fiscal year and will consequently lead to a further straining of our already depleted foreign exchange reserves. As per the research, our foreign exchange reserves have fallen by US$ 6.1 billion in the current fiscal year to date and presently cover only about 2.23 months’ worth of imports. Unless adequate inflows are generated in a timely manner, these foreign exchange reserves could witness further depletion in the Fiscal year 2019 to a point where they would cover even less one month of imports. To add to that, a delay in the materialization of a financing facility is likely to keep the pressure on the currency intact in the coming fiscal year as well.

Approaching the IMF for a financing facility seems more likely given the rising external financing gap, whether it be through the External Fund facility or the Stand-by Arrangement facility. Contrary to popular opinion that a financing arrangement would only come about after the new government is brought in, history reminds us of a caretaker government’s ability to pursue these objectives if it feels such a move is necessary in the short run. The last time a caretaker government finalized an IMF bailout package was in 1993 by the interim Prime Minister Mr. Mueen Qureshi who concluded a three year extended structural adjustment facility program with the Fund. Even though the program was abandoned prematurely by the second Benazir Government, in 1995, it remains an alternate possibility that in light of our current situation, the present caretaker setup may choose to follow a similar path. Caretaker Finance Minister Dr. Shamshad Akhtar has been in talks with the IMF owing to the mandatory rules under Article IV and is due to shed some light today on the steps taken so far to stabilize the economy in a press conference in Islamabad.