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Financial wizards split over default risk
• Miftah warns default risk won’t subside until IMF, other multilateral lenders ‘come to the table’
• Dar claims previous govt eroded credibility with Fund, says S. Arabia asked to double deferred oil payment facility
• Pakistan, other borrowers fail to persuade lender to review surcharges on loans
KARACHI: Two of the country’s financial managers — past and present — cannot agree on whether the national economy is still in the red or out of danger.
In interviews with private media broadcast on Tuesday night, Finance Minister Ishaq Dar and his predecessor Miftah Ismail put forward their views on the state of Pakistan’s economy: while Mr Dar argued that the country’s performance criteria were up to the mark and “complete” for the International Monetary Fund’s (IMF) ninth review, Mr Ismail insisted that the default risk wouldn’t subside unless the Fund came to the table, Dawn.com reported.
Meanwhile, borrowers like Pakistan have failed to persuade the IMF to review the surcharges it collects from them on loans that are not repaid quickly. The Fund’s executive board and these middle- and lower-income countries discussed the issue on Monday but failed to reach a conclusion.
Pakistan, Argentina and other borrowers want the IMF to drop — or at least temporarily waive — the surcharges, which the IMF estimates will cost affected borrowers $4 billion on top of interest payments and fees from the start of the Covid-19 pandemic through the end of 2022.
Credibility eroded
In an appearance on SAMAA TV, Finance Minister Ishaq Dar said the IMF looked at the overall direction of a particular quarter, including structural reforms and fulfilment of conditionalities, which was “logical”.
He said Pakistan had eroded its credibility before the IMF due to the actions of the previous government and the Fund was asking for further information rather than just the current quarter. He expressed the thought that the IMF might combine the ninth and 10th reviews for the country due to the upcoming holidays.
“They want that we give them [data for the] whole fiscal year after working it out,” Mr Dar said, adding that Pakistan was providing the information asked for.
The finance minister said the Fund was also asking questions about flood rehabilitation and where Pakistan would procure the funds for it, adding that it was “unfair” to do so.
“They’re basically asking about [our financing plan] and we are also preparing it,” he added, saying that a “realistic picture” would be provided to the IMF.
To a question on whether the ninth and 10th reviews would be complete by January, Mr Dar said the government was preparing for that and “we have to complete this task in the next few days”.
Help from Riyadh
The finance minister also said that Pakistan was seeking financial help from Saudi Arabia, including doubling the current deferred oil payment facility given by Riyadh to $2.4 billion per year.
“I have discussed both things (financial help and oil facilities) with the Saudi finance minister, and there are positive vibes from there. They said they would support us,” he said.
He said the government was in touch with Saudi authorities but did not give a time frame for the aid.
On buying discounted oil from Russia, Mr Dar said US officials had told him that a G7 pricing committee was being set up for Russian oil products and that there would be a price cap. “[They said] you shouldn’t buy [oil] for above that, and I agreed,” he said.
‘Pakistan back in jeopardy’
Meanwhile, in an appearance on Geo News, former finance minister Miftah Ismail said the IMF was the lender of last resort and when it came on board, other lenders like the World Bank and Asian Development Bank agreed to provide a country with loans.
“But if that connection with the IMF breaks or a programme is suspended, then other loans stop as well and after that you can’t save Pakistan,” he told journalist Shahzeb Khanzada.
Earlier this month, Mr Dar said that he was not concerned whether the IMF team arrived or not for the ninth review, asserting that the IMF could “not dictate” the government.
However, Mr Ismail said Pakistan “has gone back into jeopardy and the situation won’t get better until IMF comes on the table”.
“When the IMF gives you a loan, this means they are helping you out. But saying that the Fund is unreasonable […], we need to look at ourselves […] why did we go to the IMF previously. Dealing with the IMF is not an easy task,” he said.
He stressed that the country needed to do some things to bring the IMF mission to Pakistan, saying that funds from neighbouring countries could only last the country for so long.
Mr Ismail also insisted that all financial arrangements had been made before he was replaced with Mr Dar.
“Qatar had promised $3bn, the UAE had committed to $2bn and Saudi Arabia had promised $1bn. They had told this to IMF. Separately, our negotiations were under way with the World Bank and they too gave us a commitment along with ADB.
“But all of these agreements were subject to the IMF programme. If the IMF doesn’t come now, none of this money will come,” Mr Ismail warned, adding that it was time Pakistan took some difficult decisions.
He reiterated that if the IMF didn’t come, “it will be very difficult to save ourselves from a default”.
Surcharges
As for IMF surcharge fees, the lender imposed them on countries that hold large loans or owe for a long time. These charges are above and beyond regular loan and interest payments. The IMF defines loans exceeding 187.5 per cent of a country’s quota as “too much” while a loan period exceeding three years is defined as “too long.”
Pakistan paid an estimated $65 million in surcharges to the IMF from 2018 to 2020 and it is projected to pay $392m more from 2021-2030.
Pakistan and other borrowers want the Fund to drop or at least temporarily waive the surcharges. Advanced economies, such as the United States, oppose the suggested change, arguing that changing the financing model amidst a financial crisis will have a negative impact.
The US media quoted an IMF spokesperson as telling reporters that the board discussed potential changes to the policy during a regular review but failed to reach a consensus on changing the policy.
“Overall, views on changes to the surcharge policy continued to diverge, including on the merits of a temporary waiver of surcharges,” the spokesperson said.
The IMF said it would publish a staff paper and a press release in the coming days, providing more details of the board’s deliberations.
For countries like Pakistan, which are currently paying surcharges, surcharge costs are greater than the originally contracted interest payments on the loans.
Surcharges are paid in addition to interest payments and principal amortisations, thus adding to the country’s debt burden. Pakistan is one of the biggest borrower countries of the IMF. In 2020, Pakistan’s total public debt already stood at 87pc of GDP. In dollar terms, Pakistan paid external debt service amounting to $14.6bn in 2020 alone.
Kevin Gallagher, who heads the Global Development Policy Centre at Boston University, told Reuters news agency that big shareholders should rethink their opposition, given the global economic outlook.
“This is the most urgent time to address a fundamentally flawed business model where the IMF is generating revenues by taxing those most in need,” Mr Gallagher said.
But it was notable, he said, that the IMF’s shareholders had failed to outright reject a review. “One silver lining is that the biggest shareholders … didn’t have enough strength to kill the proposal,” he said.
Anwar Iqbal from Washington also contributed to this report
Published in Dawn, December 14th, 2022
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