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IMF criticises Pakistan budget as pressure mounts for bailout package


May 31, 2022
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IMF criticises Pakistan budget as pressure mounts for bailout package

Islamabad had hoped to end deadlock with multilateral lender over stalled $7bn support programme Pakistan will need more than $20bn to meet its foreign debt obligations in the coming financial year

IMF criticises Pakistan budget as pressure mounts for bailout package

Bokhari in Islamabad and Benjamin Parkin in New Delhi

The IMF has said Pakistan’s proposed budget needs more work before it can secure a critical bailout that many analysts believe is necessary to avoid default, in a significant setback as the government battles a deepening economic crisis.

Islamabad last week unveiled a Rs14.5tn ($51bn) budget for the financial year starting in July, which it hoped would break a months-long deadlock with the IMF over reviving a stalled $7bn lending programme.

In the multilateral lender’s first reaction to the budget on Thursday, its resident representative for Pakistan, Esther Perez Ruiz, said in a statement that the plan “misses an opportunity to broaden the tax base in a more progressive way”. Since late last year, the IMF has held back its two disbursements of about $2.5bn over disagreements with Pakistan on subsidies and measures to widen the tax base.

The IMF’s announcement marked a blow to Prime Minister Shehbaz Sharif’s government, which had counted on the budget to win over the multilateral lender and secure the next $1.1bn tranche of the support package.

The budget was also crucial for Islamabad to restore credibility with lenders ahead of national elections that are due by October.

“The federal budget was not only based on unrealistic assumptions, it set out a fiscal path that was completely at odds with Pakistan’s economic situation as well as the path of fiscal consolidation agreed with the IMF,” said Sakib Sherani, head of research firm Macro Economic Insights in Islamabad.

Ruiz said a “long list of new tax expenditures” in the budget “reduces further the fairness of the tax system” and would leave less money for welfare recipients, adding that a proposed tax amnesty “creates a damaging precedent”. “The IMF team stands ready to work with the government in refining this Budget ahead of its passage,” she added.

Finance minister Ishaq Dar had announced an amnesty in his budget speech, with a “no questions asked” policy allowing expatriates to transfer up to $100,000 without revealing the source of the income.

Critics said such measures weakened protections against money laundering. Pakistan is facing a mounting financial and humanitarian crisis, with foreign reserves falling to less than $4bn, enough for only about one month of imports. Inflation rose to 38 per cent in May, and the central bank has raised interest rates to 21 per cent, both the highest levels in Asia.

In the absence of IMF support, Pakistan has turned to longstanding allies such as China and Saudi Arabia. Officials expect Beijing to roll over $2.3bn worth of debt repayments due this month, which analysts said would help Islamabad avoid

But Pakistan will need more than $20bn to meet its foreign debt obligations in the coming financial year, and many economists expect the government will need to seek a new IMF programme — of which there have been more than a dozen since the 1980s — when the current package expires at the end of the month.

Efforts to turn around the economy have been complicated by severe political turmoil. Sharif’s government is engaged in a volatile stand-off with opposition leader and former prime minister Imran Khan, who remains widely popular.

Authorities last month arrested Khan and detained thousands of his supporters. Pakistan’s economic predicament has also become torturous for foreign companies, which have struggled to repatriate dollars from the country. On Wednesday, Shell announced it would sell its majority stake in its local unit, Shell Pakistan. Virgin Atlantic this year also said it would cease operations.

IMF Blasts Pakistan Budget, Signaling Bailout May Not Happen​

  • Moody’s has said nation could default without an IMF deal
  • Pakistan to face about $23 billion in debt next fiscal year

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