Delhi kisses the dust as IMF approves $2.4b Pakistan loan
In a diplomatic embarrassment for India, the executive board of the International Monetary Fund on Friday approved two packages worth $2.4 billion, including a new $1.4 billion facility to mitigate climate challenges.
The global lender approved the $1 billion worth second loan tranche of the Extended Fund Facility and sanctioned a new $1.4 billion Resilience and Sustainability Facility (RSF), said the Pakistani authorities. The IMF board approved the deals by rejecting India's unwarranted objections to the financing package. New Delhi in total disregard to the IMF's charter tried to politicise the balance of support facility.
Pakistan's economic team, Finance Minister Muhammad Aurangzeb and mainly its Secretary Finance Imdad Ullah Bosal, put a lot of work into keeping the programme on track after initial setbacks. The Deputy Prime Minister Ishaq Dar used his good terms with the Pakistan Peoples Party to fulfill some pending conditions, including the introduction of Agriculture Income Tax laws in Sindh and Balochistan.
The IMF would immediately release the $1 billion second loan tranche under the EFF while the $1.3 billion would be disbursed over a period of next 28 months. With the approval of the $1 billion second tranche due to Pakistan's better fiscal performance, the total disbursements under the EFF would reach $2.1 billion.
The tranche would once again increase Pakistan's gross official foreign exchange reserves to $11 billion. The better than expected performance of foreign remittances has also helped sustain the reserves in double digits despite making some major foreign debt repayments.
Prime Minister Shehbaz Sharif showed satisfaction over the approval of the $1 billion tranche while denouncing India's dirty tricks to block the approval.
The IMF did not give a favour to Pakistan by approving these loans, as being the Fund member the country has a right to seek a programme. Islamabad qualified for the tranche only after meeting tough conditions that the IMF had set including putting more burden on the people.
The deals were reached after both sides made some adjustments in the 25th Extended Fund Facility (EFF), including lowering tax targets in absolute terms, setting a new deadline to trim the Pakistan Sovereign Wealth Fund and opening the economy to foreign companies.
India undertook an unwise move to block the approval despite having only 2.7% voting rights, the second defeat in less than 72 hours after losing five fighter jets to superior Pakistan Air Force.
The sources said that during the board meeting Indian representatives tried to block the approvals by arguing that Pakistan was a habitual borrower. The Indian representative argued that either the designs of the IMF programmes were ineffective or there were issues with the monitoring.
However, the IMF approved both the packages on the grounds that Pakistan successfully met all the conditions set by the board for qualifying the second loan tranche.
Pakistan will also impose carbon levy as part of the conditions of the new $1.3 billion programme with effect from July this year and increase water usage charges from next year as part of the conditions for the new facility.
About two months ago, the IMF team had reached a staff-level agreement with the Pakistani authorities on the first review of the 37-month Extended Arrangement under the EFF, and on a new 28-month arrangement under the IMF's Resilience and Sustainability Facility (RSF) with total access over the 28 months of around $1.3 billion.
Pakistan would continue fiscal consolidation to reduce public debt while creating space for social and development spending and reducing crowding out of private investment. Pakistan will also refrain from increasing current spending beyond that budgeted, indicating that no supplementary grants can be issued.
The IMF has projected Pakistan's economic growth for this fiscal year at 2.6% but the inflation rate forecast has been reduced to 5.1%. For the next fiscal year, the IMF sees economic growth at 3% and inflation around 7.7%.
The IMF has acknowledged the economic stabilization but said that there were still risks to Pakistan's economy. Among the risks are potential macroeconomic policy slippagesdriven by pressures to ease policiesalong with geopolitical shocks to commodity prices, tightening global financial conditions, or rising protectionism could undermine the hard-won macroeconomic stability .
The IMF's new climate facility is meant to scale up climate reform efforts to reduce vulnerabilities to natural disaster risks and to build climate resilience. In return for the loan, Pakistan has committed to strengthen public investment processes across all levels of government to prioritize projects that enhance disaster resilience, said Porter.
The government will also improve the efficiency of scarce water resource usage, including through better pricing mechanisms, he added.
It will enhance intergovernmental coordination on disaster financing; improve information architecture and disclosure of financial and corporate climate-related risks; and promote green mobility to mitigate significant pollution and adverse health impacts, said the IMF.
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