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IMF team to visit Pakistan soon for bailout negotiations

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Pakistan officially asked for financial support from the International Monetary Fund on Thursday in a meeting with IMF Managing Director Christine Lagarde in Bali, Indonesia, reported Dawn (Pakistan).

“Today, I met with Pakistan’s Minister of Finance, Revenue and Economic Affairs, Asad Umar, Governor of the State Bank of Pakistan Tariq Bajwa, and members of their economic team,” said a statement released by Ms Lagarde’s office. “During the meeting, they requested financial assistance from the IMF to help address Pakistan’s economic challenges.”

No statement was released by the Pakistani team, though Finance Minister Umar had made it official that he would be seeking Fund’s support before his departure for Bali on Monday.

“An IMF team will visit Islamabad in the coming weeks to initiate discussions for a possible IMF-supported economic programme,” Ms Lagarde said, adding that the Fund looked forward to “the continuing partnership” with Pakistan.

This will be Pakistan’s 13th loan from the IMF since 1988 when the era of structural adjustment began.

Just before going into the meeting with Pakistan’s finance team, Ms Lagarde was asked about Pakistan’s growing stockpile of Chinese debt at a press conference. “[W]e need to have a complete understanding and absolute transparency about the nature, size, and terms of the debt that is bearing on a particular country,” she replied, words that echoed widely around the world as multiple global news outlets picked them up.

“[To] really understand the extent and composition of that debt, both in terms of sovereign, in terms of state-owned enterprises and the like of it,” she continued, “the Fund needs a full picture so that we can actually really appreciate and determine the debt sustainability of that country, if and when we consider a programme.”

Nowhere did she specifically mention Chinese debt, though global news outlets added that missing link for her, causing concerns about Pakistan’s growing stockpile of Chinese debt to grow further still. The question of how the IMF will deal with the Chinese debts of Pakistan has dogged the run-up to the approach for assistance that began formally on Thursday.

US Secretary of State Mike Pompeo had in July issued a stern warning to the IMF that its funds should not “go to bail out Chinese bondholders or China itself”. Those sentiments were later echoed by a number of US senators, as well as a few global media outlets.

Ms Lagarde, instead, made it clear that the issue of debt transparency and appropriate understanding of debt was not only applicable to Pakistan but also to all countries. “It is part of a necessary disclosure exercise that we have to agree with our members for the purpose of a debt sustainability analysis,” she said, adding that debt disclosure was also important for the purpose of the governance and corruption project approved by the IMF board and now being implemented.

The Fund appears to be caught in a high wire act. The United States is the largest contributor of resources for the IMF and has 16 per cent of the votes on the Fund’s board, but China is not far behind with 6pc, and the Fund cannot by its own rules refuse to lend to a member country.

Ms Lagarde cannot afford to anger either of these two countries. “We have to serve the entire membership, each and every one of them,” she told reporters when asked specifically about Pakistan’s Chinese debt.

Officials said the finance minister is scheduled to return to Islamabad on Friday night. A heavy agenda of choices awaits him on his return, including a Rs2 per unit (almost 18pc) increase in electricity tariff. This will be followed by a Fund mission. The process can take four-five weeks before an agreement is reached, during which both sides need to work out the exact size, tenure and conditionalities of the programme.

The finance ministry expects a three-year programme of $7.5bn based on a recent weeklong discussion with the IMF, but a final decision will be made by the Fund, ministry officials told Dawn.

Sources said the government was in the process of completing some ‘prior actions’, including increase in gas and electricity rates, currency depreciation following IMF’s call for a free float and increase in central bank’s policy rate.

The Fund has already indicated authorities to take further tough decisions, including increase in energy prices, additional taxation measures and structural reforms like “strengthening the performance of public sector enterprises”.

On Thursday, the government also announced the appointment of an air marshal to lead the Pakistan International Airlines, saying he had been tasked with “immediately fixing the institutions financial condition”.

An IMF team led by mission chief Harald Finger concluded a 10-day visit to Pakistan on Oct 4, a week before the Bali meeting. The official reason given for that team’s presence in Pakistan was for routine Article IV consultations, but the government dropped hints that these talks could lead to programme negotiations. That is what appears to have happened.

The team noted that Pakistan had begun taking corrective action against its growing fiscal and external imbalances as far back as December 2017, noting also more recent steps by the current government. But it added that these were inadequate, and “[a]dditional decisive policy action, anchored in a comprehensive strategy, and significant external financing will be needed in the near term.

Policies should include more exchange rate flexibility and monetary policy tightening, further fiscal adjustment anchored in a medium-term consolidation strategy, and strengthening the performance of key public enterprises together with further increases in gas and power tariffs”.

***

Pakistan has not yet formally approached the International Monetary Fund for financial assistance, but if bailout talks get underway this week, the goal will be to help Pakistan reach its full potential, the IMF’s chief economist said on Tuesday.

Addressing a news conference at the IMF and World Bank annual meetings in Bali, the IMF’s Maurice Obstfeld cautioned that increased Chinese involvement in Pakistan’s economy could bring both benefits and risks.

Obstfeld said Pakistan is facing financing gaps as it has been hit by a large fiscal and current account deficit, a low level of reserves and a currency he described as “too rigid” and over-valued.

Finance Minister Asad Umar said on Monday the government would seek to open talks with the IMF in Bali this week for emergency financial assistance.

Prime Minister Imran Khan had earlier sought alternatives to a second bailout programme in five years from the IMF as it impose austerity and limit his vision of an Islamic welfare state.

Obstfeld said that if the IMF does enter into talks with Pakistan this week on a possible new financing programme, the goal would be reforms that would help Pakistan reach its “immense potential” without providing specific details.

“The government has expressed its desires to enact deep structural reforms that might break the cycle of Pakistan needing financial support from the Fund,” he said.

Infrastructure needs
Pakistan needs more infrastructure development, Obstfeld added, and the country could benefit from China’s role in supporting its project financing.

But China’s involvement could also bring potential risks, he said.

“It is important that the design of the projects... be solid and excessive debts which cannot be repaid are avoided,” the IMF chief economist said.

Islamabad has cut the size of the biggest Chinese “Silk Road” project in Pakistan, a reconstruction of the main rail line between the port city of Karachi and Peshawar in the northwest by $2 billion, citing government concerns about the country’s debt levels.

The changes are part of Islamabad’s efforts to rethink key Belt and Road Initiative projects in Pakistan, to which China has pledged about $60bn in financing.

The Trump administration has been critical of China’s Belt and Road initiative, saying that it has saddled some developing countries with debts they cannot afford to repay.

In July, US Secretary of State Mike Pompeo said there was “no rationale” for an IMF bailout of Pakistan that pays off Chinese loans to Pakistan.

Chinese officials have rejected criticism that the so-called China-Pakistan Economic Corridor projects have burdened Pakistan with unsustainable debts. Instead, the Chinese maintain, they have boosted the country’s economic growth and provided 70,000 jobs.

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