Will IMF be flexible?

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There are signs of the IMF moving away from Pakistan as the PTI government ditches contractionary fiscal policy to fuel growth ahead of the 2023 elections. The Fund has already pushed the sixth review of its $6bn facility to September when it will likely be clubbed together with the next one. Obviously, the delay in the review emphasises the lender’s reservations regarding Islamabad’s expansionary fiscal plan for the next year. Yet a potential break-up between the two is still some distance away. The finance minister is interpreting the deferment of the review as a sign of the Fund’s willingness to support the new growth policies and be flexible in its demands. Nonetheless, an IMF spokesman recently said that the Fund was holding “open, constructive discussions” with Pakistan before going on to state that further discussions were needed on the country’s fiscal spending plans, structural reforms — particularly in the energy and tax sectors — and social spending envisaged in the reforms programme. “…[W]e remain fully engaged with the Pakistani authorities, aiming to resume these discussions in the period ahead.” His statement shows that the cracks continue to persist over Islamabad’s decision to change course midway, with the lender underscoring the importance of accelerating the “implementation of policies and reforms needed to address … long-standing challenges facing the economy”.
Whether or not the two sides can bridge their differences, Pakistan would want to buy some more time without leaving the programme. The government has already ruled out the option of exiting the programme since it may send a wrong signal to other multilateral lenders and global financial markets from where it plans to raise billions of dollars in new debt to boost its forex reserves and meet its financing requirements of $25bn during the next fiscal year. The finance minister is confident that he can convince the Fund that the programme’s objectives will be achieved without raising individual income tax or increasing electricity rates. Apparently, the IMF is prepared to wait for a few months to see the results of the new pro-growth fiscal policies listed in the budget. If the government succeeds in boosting tax revenues, enhancing social spending and reducing the power sector debt, the IMF may show some flexibility. But what if the plan does not deliver? Will the lender of last resort be prepared to give Pakistan more leeway and dollars? Much depends on the regional geopolitical situation after the US pulls out from war-ravaged Afghanistan.