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Pakistan, IMF agree on measures to revive stalled programme

ISLAMABAD: Pakistan and the International Monetary Fund (IMF) have reached a staff-level agreement on taking needed steps for completion of pending sixth review of the economy, laying the foundation for approval of new legislation by the Parliament to secure the loan of slightly over $1 billion.

“The Pakistani authorities and IMF staff have reached a staff-level agreement on policies and reforms needed to complete the sixth review under the EFF”, according to a statement issued early Monday morning by the IMF from Washington.

The statement suggests that Pakistan is still only halfway to securing the $1 billion loan, as the IMF’s Executive Board approval is formally linked with the implementation of pre-conditions, already spelt out by Finance Adviser Shaukat Tarin and also underscored by the IMF in the handout.

Pakistan will be required to introduce a mini-budget to meet another condition on achieving primary surplus – which means revenues have to be more than the expenditures after paying interest on the loans.

The government will also have to get the State Bank of Pakistan amendment Bill 2021 passed from the Parliament.

The IMF underscored that “the agreement is subject to approval by the Executive Board, following the implementation of prior actions, notably on fiscal and institutional reforms”.

The fiscal prior action is related to mini-budget and institutional reforms are related to SBP amendment Bill approval.

Both sides reached the agreement on taking needed steps after prolonged rounds of talks spanning over six months, which included two rounds of formal parlays, first in June and then in October.

The IMF said that the external pressures have started to “emerge” and inflation “remains high” -the two weakest points that will now require tough actions on part of Pakistan. The IMF has projected the economic growth to reach, or exceed, 4 percent in the current fiscal year and 4.5 percent in the next fiscal year.

Completion of the review would make available SDR750 million or about $1.059 billion, bringing total disbursements under the EFF to about $3 billion and helping unlock significant funding from bilateral and multilateral partners, said the IMF.

An IMF mission led by Ernesto Ramirez Rigo held virtual discussions from October 4 to November 18, 2021, in the context of the 2021 Article IV consultations and the sixth review of the programme, stated the IMF

To win a press statement from the IMF, Pakistan has already increased the electricity prices by Rs1.68 per unit, increased the petroleum levy rates by Rs4 per litre and above all jacked up the interest rates by 1.5%. Another increase in interest rate is also expected before the meeting of the IMF board that will approve the staff-level agreement. The government also notified all the pending increases in electricity prices on account of quarterly tariff adjustments.

After the release of $1 billion, the total loan amount will still be $3 billion in over two years, which is far less than what had been agreed in May 2019 due to derailment of the programme, first in January 2020 and then in June this year.

However, the agreement has yet to be approved by the Executive Board of the IMF, which will take up Pakistan’s request only after the government implements all prior actions.

The introduction of the Finance Bill in the National Assembly to increase taxes and approval of the State Bank of Pakistan (SBP) Amendment Bill are pre-conditions for the revival of the International Monetary Fund (IMF) loan programme, Finance Adviser Shaukat Tarin said on Tuesday.

The IMF said that despite a difficult environment, progress continues to be made in the implementation of the EFF-supported programme.

“All quantitative performance criteria (PCs) for end-June were met with wide margins, except for that on the primary budget deficit”, said the IMF.

Pakistan will have to secure a waiver from the IMF on violation of the primary budget deficit target for the end of June.

The IMF said that notable achievements on the structural front include the finalization of the National Socio-Economic Registry (NSER) update, parliamentary adoption of the National Electric Power Regulatory Authority (NEPRA) Act Amendments, notification of all pending quarterly power tariff adjustments, and payment of the first tranche of outstanding arrears to independent power producers (IPPs) to unlock lower capacity payments fixed in renegotiated power purchase agreements (PPAs).

The IMF said that on the macroeconomic front, available data suggests that a strong economic recovery has gained hold benefiting from the authorities’ multifaceted policy response to the COVID-19 pandemic that has helped contain its human and macroeconomic ramifications.

The Federal Board of Revenue’s (FBR) tax revenue collection has been strong.

External pressures build-up

The external pressures have started to emerge: a widening of the current account deficit and depreciation pressures on the exchange rate—mainly reflecting the compound effects of the stronger economic activity, an expansionary macroeconomic policy mix, and higher international commodity prices, said the IMF.

The IMF said that Pakistan has started adjusting policies, including by gradually unwinding COVID-related stimulus measures.

The SBP has also taken the right steps by starting to reverse the accommodative monetary policy stance, strengthening some macroprudential measures to contain consumer credit growth, and providing forward guidance, it added.


However, inflation remains high, although it should start to see a declining trend once the pass-through of rupee depreciation is absorbed, and temporary supply-side constraints and demand-side pressures dissipate. However, the current account is expected to widen this fiscal year despite some export growth, reflecting the rising import demand and international commodity prices. However, this economic outlook continues to face elevated domestic and external risks, while structural economic challenges persist.

Monetary policy needs to remain focused on curbing inflation, preserving exchange rate
flexibility, and strengthening international reserves, said the IMF.

As economic stability becomes entrenched and the independence of the SBP is strengthened with the approval of the SBP Act Amendments, the central bank should gradually advance the preparatory work to formally adopt an inflation targeting (IT) regime in the medium term, underpinned by a forward-looking and interest-rate-focused operational framework, it added.

Fiscal Measures

On the fiscal policy front, staying on course on achieving small primary surpluses remains critical to reducing high public debt and fiscal vulnerabilities, said the IMF.

Continued efforts to broaden the tax base by removing remaining preferential tax treatments and exemptions will help generate much-needed resources to scale up critical social and development spending.

In addition, the government plans to introduce a package of fiscal measures targeting a small reduction of the primary deficit with respect to last fiscal year based on: (i) high-quality revenue measures to make the tax system simpler and fairer (including through the adoption of reforms to the GST system); and (ii) prudent spending restraint, while fully protecting social spending.

Energy Policies

Advancing the strategy for the electricity sector reforms, agreed with international partners, is important to bring the sector to financial viability, and tackle its adverse spillovers on the budget, financial sector, and real economy, said the IMF.

It said that in this regard, steadfast implementation of the Circular Debt Management Plan (CDMP) will help guide the planned management improvements, cost reductions, timely alignment of tariffs with cost recovery levels, and better targeting of subsidies to the most vulnerable.



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