Pakistan spends 2022 to avert default

It is hard to recall the last time when Pakistan mounted three abortive attempts to restart one IMF programme in a single year.

This was the year it all fell apart - the "hybrid experiment" and the growth bubble it spawned, as well as the joyous triumph with which the PDM government swore itself into power. The whole year Pakistan spent trying desperately to avert default and manage crippling shortages of foreign exchange.

The year opened with the government of the time moving desperately to complete the sixth review of the IMF programme signed in July 2019. That programme was suspended in March 2020 with the arrival of Covid and the attendant lockdowns. Efforts to restart it began in November 2020 by Hafeez Shaikh in negotiations that were supposed to be completed by the following January, but which dragged on to March 2021.

Discussions with the Fund had ended in February and the staff report of the review was completed in March. Cabinet approval was required since two key conditions involved getting two key pieces of legislation approved and presented before parliament.

One of those was the much-debated bill to amend sections of the State Bank Act with an eye to granting the central bank greater autonomy. The cabinet approved these amendments and transmitted the bill to parliament in March 2021 without much debate and on the 24th of that month, the Executive Board of the IMF approved the release of Pakistan's tranche of $500 million which arrived a few days later. Less than a week later Pakistan issued $2.5 billion in Eurobonds plus another $1.5bn borrowed from the World Bank. In one week immediately after board approval of the IMF review, Pakistan borrowed $4.4bn from global markets and international financial institutions.

No sooner had the funds arrived than the government reneged on the commitments made to the fund, Shaikh lost his election to the Senate and was removed from his position, and a few weeks later Shaukat Tarin was appointed in his place. Immediately upon arrival, Tarin made public comments about how stiff the IMF conditions were and expressed his disapproval

of the proposed amendments to the SBP Act.

There followed a long nine months of wrangling in which Tarin tried to first argue that the proposed SBP amendments might require a constitutional amendment to approve, then argued that he can meet the revenue target of the fund programme by taxing retailers using "point of sale" machines and additional revenue measures need not be resorted to. By November 2021 all these measures were failing. The fund had told the government that the SBP Act amendments will have to be passed by parliament before the review could be completed and revisions in the revenue target will not be allowed.

In November 2021 came the first acknowledgement from the government that its strategy of trying to "renegotiate" the programme was not working and the pressures in the economy were mounting. Foreign exchange reserves began depleting in September 2021, falling relentlessly month after month ever since.

The current account balance had remained briefly in surplus between May and November 2020, but plunged into a spiralling deficit from the next month, continuing relentlessly month after month ever since, draining the foreign exchange reserves.

This is how 2022 opened. In January the government passed the amendments to the SBP Act from both houses of parliament without a debate. As soon as the amendments were passed, the IMF staff forwarded Pakistan's case to the Executive Board for consideration.