KARACHI: Pakistan has agreed to eliminate regulatory duties on imports to support balance of payments, details of the $6 billion-International Monetary Fund (IMF) agreement revealed on Monday.

“The authorities are committed to eliminating the existing administrative restrictions, which have been imposed to support the balance of payments,” said the document.

The government has also agreed to remove regulatory duty on imported items including luxury goods.

In the wake of intervention in the form of regulatory duties, the government in the last fiscal year succeeded in narrowing the current account deficit by $7bn; however, the removal of duties is likely to increase the trade deficit — which lies at the heart of current account gap.

Rs7.7tr stock of govt debt held by SBP to be converted into tradable securities with market returns

The IMF document said the government has agreed to eliminate regulatory duties on imported intermediate, consumer, and luxury goods, as well as import restrictions for balance of payments purposes and multiple currency practices (MCP)—in the form of requirement to fully pre-fund letters of credit, imposed in early 2017; and restrictions on advance payment for imports against letters of credit, imposed in July 2018.

“During the programme period, they [Pakistan] will not introduce or tighten exchange restrictions, MCPs, or import restrictions for balance of payments purposes,” says the report.

The document also reveals that the State Bank of Pakistan (SBP) has asked all small undercapitalised banks to submit their strategies to ensure they will meet minimum capital requirement by September — including their plans to enter into mergers or sale to new private investors.

Failure to submit the plans will result in SBP intervention and resolution under the relevant provision of law.

“The SBP has also initiated the liquidation of a small undercapitalised publicly-owned bank,” said the IMF document.

Moreover, with regards to the exchange rate, the document says that “going forward, we are committed to maintaining a flexible market determined exchange rate, with SBP intervention in the foreign exchange market limited to preventing disorderly market conditions and a possible exchange rate overshooting but not suppressing a trend.”

This will be supported by an appropriate monetary policy to shore up confidence and contain inflation, conducted by an independent central bank.

“The authorities (IMF) will closely monitor the potential adverse impact of adjustment policies on non-performing loans and individual banks’ capitalisation and will stand ready to take the necessary measures to ensure that all banks remain well capitalised,” said the document.

Moreover, the SBP and the Ministry of Finance have also agreed to reprofile short-term government debt held by the SBP into short- and long-term tradable instruments of various maturities (one, three, five, and ten years) at interest rates close to market levels.

“The strong financial support to the authorities’ policy efforts by Pakistan’s international partners is essential to meet the large external financing needs in the coming years and allow the programme to achieve its objectives,” said the IMF.

Without urgent policy action, economic and financial stability could be at risk, and growth prospects will be insufficient to meet the needs of a rapidly growing population, it added.

“The authorities recognise that incomplete policy implementation derailed past adjustment efforts and allowed for repeated cycles of economic and financial stress,” said the fund document adding that strong and steadfast programme implementation will be the key to mitigating the risks to the programme.

The fund said the effectiveness of Pakistan’s Anti-Money Laundering/Combating the Financial of Terrorism regime must be urgently strengthened to support its exit from the Financial Action Task Force (FATF) list of jurisdictions with serious deficiencies.

Pakistan was placed in the FATF list in June 2018 owing to shortcomings in effectively addressing terror financing risks. The authorities are stepping up efforts to implement all measures committed to in an action plan with the FATF — end-October 2019 structural benchmark – to support the country’s exit from the list.

Listed as one of the structural benchmarks, the government has also agreed to amend the SBP Act to strengthen the central bank’s autonomy, governance, and mandate.

The amendments will address the recommendations of the upcoming 2019 Safeguards Assessment Report, including operational independence and governance, governor’s tenure, and financial autonomy and accountability.

The amendments will also ensure price stability as SBP’s primary objective and prohibit any form of direct credit to the government.

“Amendments to the SBP Act will be submitted to parliament by end-December, 2019.”

Published in Dawn, July 9th, 2019