PM Shehbaz wants early IMF meeting to subdue volatility

ISLAMABAD: Prime Minister Shehbaz Sharif sought on Wednesday an urgent board meeting of the International Monetary Fund (IMF) to approve Pakistan’s request for a bailout package, as the rupee was beaten for the third day in a row due to high political volatility and a pause in major foreign loans inflows.
Chairing a meeting on rapidly deteriorating external sector situation, Shehbaz directed Finance Minister Miftah Ismail to request the IMF for approval of Pakistan’s loan before going on recess from next month, at least three meeting participants told The Express Tribune.
The prime minister chaired the meeting shortly after Ismail and a senior official of the State Bank of Pakistan (SBP) held separate meetings with journalists in Islamabad to explain the reasons behind a rapid fall in the value of the rupee and jittery markets.
The only positive news of the day was that Pakistan has sufficient stocks of diesel and furnace oil – enough for almost two months. This will help partially take the pressure off the exchange rate and create room for allowing some curtailed imports.
In desperate times, the country is now ready to sell its two LNG-fired power plants to the United Arab Emirates (UAE) at a negotiated price within a few days by cutting down the competitive privatisation process that takes about one and half years.
The government is also willing to give a seat to the UAE government on its blue-chip companies for another $1 billion to stop the current economic meltdown – that, too, through government-to-government deal and promulgating a presidential ordinance.
But the prime minister’s instructions about the IMF board meeting date appeared premature, as Pakistan had not yet fulfilled all the prior actions that the global lender demanded for calling the board meeting.
The IMF board would approve $1.17 billion loan tranche and extend the bailout package till June next year only after all the prior actions were met by Pakistan.
A senior Finance Ministry official said that the notification for increasing the electricity prices and the decision to impose Rs10 per unit levy on petrol and Rs5 per liter on high speed diesel from August 1 were still pending.
Also, Pakistan has not yet secured the concrete commitments for $4 billion financing from friendly countries -which is also a prerequisite for the board meeting.
Pakistan has also not yet sent the letter of intent -a document detailing the actions undertaken to qualify for the loan tranche -to the managing director of the IMF, indicating that a board meeting in July might not be possible.
The document has to be co-signed by the finance minister and the governor of the SBP. But there is no SBP governor since May 4, although the acting governor has the mandate to sign the document.
The IMF is going on holiday from August 1st and the prime minister was perturbed as to why the global lender did not take Pakistan’s case to the board at the earliest despite reaching a staff level agreement last week.
The IMF will hold the board meeting at the first available date after holidays that will end on August 15th, said a senior SBP official during a background briefing to the journalists.
These meetings took place the day the rupee closed at Rs225 to a dollar – sinking by Rs14 or 6.6% within 72 hours of a rout of the Pakistan Muslim League-Nawaz (PML-N) in by-election in Punjab -which used to be its basin of support.
“The exchange rate depreciation will have an impact on the inflation but if we stick to a fixed rate, the reserves will deplete to a point where it can take down the country,” an SBP official said. The reserves stood at $9.7 billion as of the end of last week.
The SBP official said that the central bank was not lying idle but it was moving cautiously to avert disorderly movement of the exchange rate.
The central banker admitted the adverse impact of rupee’s free fall on inflation and said that the consumer prices may increase in the range of 18% to 20%. The SBP official distanced himself from the 11.5% inflation target that is set by the government for the current fiscal year, saying he did not know how this target was set.
The central banker emphasised the need for staying on course with the IMF. “It is important for us that we fulfil all the commitments made to the IMF, as without the IMF, the next year will be very difficult”.
He explained that the IMF had not placed any condition on exchange rate devaluation and the central bank was also working to manage inflow and outflows of the foreign exchange.
The recent movement in the exchange market was because of the prevailing political uncertainty, he said. The domestic political uncertainty increased particularly after the vote of no-confidence and it again increased after the results of Punjab by-elections, according to the SBP official.
To a question, the SBP official said that except the Pakistan Tehreek-e-Insaf (PTI), all other political parties had backed the staff-level agreement and the IMF should not have a problem in working with the caretaker government, if something happens.
The IMF was angry due to the previous government’s decision to give subsidies on fuel and electricity. The economy overheated due to a constant 6% economic growth rate and that is being cooled down through tightening of monetary and fiscal policies. The growth rate will be moderated to 3% to 4%.
The central banker said that Pakistan should not be clubbed with Sri Lanka, as Islamabad had taken prompt measures to fix the economy. He added that Pakistan had also got assurances from the IMF and friendly countries, therefore, there would not be any balance of payment crisis like in Sri Lanka.
Pakistan’s all economic indicators were not worse, except the large external financing requirements and high interest payments as percentage of total revenues, according to the central banker.
“The panic in the market is primarily due to political turmoil, which will subside in a few days,” Finance Minister Miftah Ismail said, stressing that there were “no problems” in the agreement with the IMF.
The government, the finance minister said, had completed all prior actions and would not do anything to create hurdles in the approval of the staff-level agreement by the lender’s executive board.
According to the IMF, $4 billion funds would still be needed to bridge the financing gap, for which a friendly country had said it would provide $1.2 billion for oil financing, the minister said. He did not name the country but said he expected the deal to be finalised in a few days.
Ismail also said that another country would invest $1 billion in the Pakistan Stock Exchange (PSX), while another country had said it would deposit $2 billion with the central bank. The minister added that the government was considering measures to generate $2 billion to $3 billion through sale of the two LNG power plants.
“We will not breach the IMF agreement and will implement each and every prior action agreed with the IMF, including collection of the petroleum levy,” said the finance minister.
He vowed to raise external financing of over $11 billion from friendly countries. While sharing an ambitious plan, he said that the government would generate $11 billion through the transfer of Special Drawing Rights (SDRs), cash deposits, oil and gas import on deferred payments, and government to government (G2G) transactions.
He hinted that an announcement from one friendly country might be made during Prime Minister Shehbaz Sharif’s visit. The government, he said, would sell out two RLNG power plants to one friendly country for $2 to $3 billion.
The minister conceded that the rising inflation eroded the purchasing power of the middle class and their miseries increased manifold. He said that the government protected vulnerable and poor segments but added that he did not have sufficient resources to protect the middle-income earners from rising inflationary pressures.
He said that there was no choice available to the government to protect the middle class as if the subsidies on fuel and electricity continued just like in the pattern of Sri Lanka then no one could save Pakistan from plunging into default and bankruptcy.
The inflation, he said, had gone up making the lives of middle-income earners difficult but there was no other choice available to the government.