• Subject to IMF board’s approval, Pakistan expects to receive $1.18bn tranche
• Under revised target, govt must deliver primary budget surplus of 0.4pc of GDP
• Fund says Pakistan stands at challenging economic juncture, govt should be ready to take any additional measures
• Immediate priority is to stabilise economy through budget implementation, continued adherence to a market-determined exchange rate and proactive monetary policy

ISLAMABAD: The International Monetary Fund (IMF) announced a staff-level agreement with Pakistan on Thursday that will not only help resume the suspended loan programme and pave the way for a $1.18 billion disbursement but is also expected to alleviate Sri Lanka-like default fears — at least in the short term — and unlock funding from other multilateral lenders like the World Bank and the Asian Development Bank.

In a statement, the IMF said the agreement — which is still subject to its board approval — will bring to $4.2bn the amount disbursed under an extended fund facility (EFF) that could increase to $7bn and stretch until June next year.

The financial lifeline would be crucial for Pakistan’s economy buckling under pressure from a global price shock in the wake of the Russia-Ukraine war and declining foreign exchange reserves, among other factors.

Under the revised target given by the Fund’s team, the authorities would have to deliver a primary budget surplus of 0.4 per cent of GDP (or about Rs310bn) against 0.2pc of GDP (Rs153bn) envisaged in the federal budget approved by the parliament on June 29.

That would mean the government would have to finance all its expenditures, excluding debt servicing, through its own revenues and yet spare a buffer of about Rs310bn by making further fiscal adjustments of about Rs155bn through additional revenue measures, expenditure cuts or both.

On top of this, the Fund has also made it binding on the authorities to “stand ready to take any additional measures necessary to meet programme objectives, given the elevated uncertainty in the global economy and financial markets”.

Likewise, the government has also given a commitment to ensure timely implementation of power tariff rebasing, as already determined by the power regulator, along with quarterly and monthly adjustments to rein in rising circular debt, which the IMF estimated to have increased by Rs850bn last fiscal year ending June 30.

The authorities would improve and consolidate anti-corruption laws and efforts as committed under the original 2019 agreement and then made a structural benchmark for end-December 2021, and then revised to end-June 2022 in January this year by former finance minister Shaukat Tarin.

The IMF highlighted that “high international prices and a delayed policy action worsened Pakistan’s fiscal and external positions in FY22, led to significant exchange rate depreciation, and eroded foreign reserves”.

Therefore, the immediate priority was to stabilise the economy through the steadfast implementation of the recently approved budget for the ongoing fiscal year, continued adherence to a market-determined exchange rate, and a proactive and prudent monetary policy, it said.

At the same time, the two sides have also agreed to accelerate structural reforms, particularly the performance of public sector entities.

An original $6bn bailout package was signed by former prime minister Imran Khan in 2019, but repeatedly stalled when his government reneged on subsidy agreements and failed to significantly improve tax collection.

The new agreement follows months of deeply unpopular belt-tightening by the government of Prime Minister Shehbaz Sharif, which took power in April and has effectively eliminated fuel subsidies and introduced new measures to broaden the tax base.

Finance Minister Miftah Ismail welcomed the IMF’s statement and the prime minister, fellow ministers, secretaries and the finance division in reaching the agreement with IMF.

In return, Mr Sharif congratulated the finance and foreign ministers and their teams for reviving the fund programme. “The agreement with the Fund has set the stage to bring the country out of economic difficulties,” the premier said in a tweet.

On the other hand, former PTI finance minister Shaukat Tarin taunted the government for reviving the IMF programme for which the incumbents had been criticising the PTI government. He said the government had agreed to more stringent conditions than those committed by PTI.

Officials said the IMF executive board meeting would be convened in the second half of August to approve the staff-level agreement and disbursement of $1.18bn funds to Pakistan.

This would enable the government in the meanwhile to implement remaining measures in the pipeline, such as energy tariff adjustments already approved by the Economic Coordination Committee of the cabinet and further increasing the petroleum development levy by the end of the current month.

At the conclusion of the discussion, IMF’s mission chief to Pakistan Nathan Porter said that subject to board approval, “about $1.177bn (SDR 894 million) will become available [to Pakistan], bringing total disbursements under the program to about $4.2bn”.

“Additionally, in order to support programme implementation and meet the higher financing needs in FY23, as well as catalyse additional financing, the IMF Board will consider an extension of the EFF until end-June 2023 and an augmentation of access by SDR720 million that will bring the total access under the EFF to about $7bn,” he said.

Noting that Pakistan was at a challenging economic juncture, Mr Porter said, “A difficult external environment combined with procyclical domestic policies fuelled domestic demand to unsustainable levels. The resultant economic overheating led to large fiscal and external deficits in FY22, contributed to rising inflation, and eroded reserve buffers.”

He said the policy priorities under the agreement would include steadfast implementation of the FY23 budget to reduce large borrowing needs by targeting an underlying primary surplus of 0.4pc of GDP, underpinned by current spending restraint and broad revenue mobilisation efforts focused particularly on higher-income taxpayers.

Mr Porter said the development spending would be protected, and fiscal space would be created for expanding social support schemes. “The provinces have agreed to support the federal government’s efforts to reach the fiscal targets, and Memoranda of Understanding have been signed by each provincial government to this effect,” he added.

He noted that on the back of weak implementation of the previously agreed plan, the power sector circular debt (CD) flow was expected to grow significantly to about Rs850bn in FY22, overshooting programme targets, threatening the power sector’s viability, and leading to frequent power outages.

“The authorities are committed to resuming reforms including, critically, the timely adjustment of power tariff including for the delayed annual rebasing and quarterly adjustments, to improve the situation in the power sector and limit load shedding,” he said.

The SBP will adopt a proactive monetary policy to guide inflation to more moderate levels. Headline inflation exceeded 20pc in June, hurting particularly the most vulnerable. In this regard, the IMF appreciated the recent monetary policy increase “as necessary and appropriate” and emphasised that “monetary policy will need to be geared towards ensuring that inflation is brought steadily down to the medium term objective of 5-7pc”.

In this regard, to enhance monetary policy transmission, the rates of the two major refinancing schemes EFS and LTFF (which have over recent months been raised by 700 bps and 500 bps, respectively) will continue to be linked to the policy rate. Greater exchange rate flexibility will help cushion activity and rebuild reserves to more prudent levels.

The Fund also appreciated BISP support of Rs14,000 per family to eight million families and Rs2,000 per family to 8.6m as ‘Sasta Fuel Sasta Diesel’ and welcomed the increase in BISP allocation to Rs364bn from Rs250bn.

Published in Dawn, July 15th, 2022