Pakistan, IMF at last reach staff-level agreement

The International Monetary Fund (IMF) has agreed to the revival of  its six-billion-dollar extended fund facility programme to Pakistan after the two sides finally reached a staff-level agreement. 

In a statement released by the international money lender Monday, it said "the agreement is subject to approval by the Executive Board, following the implementation of prior actions, notably on fiscal and institutional reforms."

"Completion of the review would make available SDR 750 million (about US$1,059 million), bringing total disbursements under the EFF to about US$3,027 million and helping unlock significant funding from bilateral and multilateral partners."

The IMF recognised that "despite a difficult environment", Pakistan continues to make progress on implementing the Extended Fund Facility programme.

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

It listed the finalization of the National Socio-Economic Registry (NSER) update, the parliamentary adoption of the National Electric Power Regulatory Authority (NEPRA) Act Amendments as "notable achievements" by the Pakistani authorities.

The IMF also acknowledged Pakistan's efforts in improving anti-money laundering and combating the financing of terrorism framework.

It also approved of Pakistan's decision of the first tranche of outstanding arrears to Independent Power Producers (IPPs) to unlock lower capacity payments fixed in renegotiated power purchase agreements (PPAs).

IMF on the macroeconomic front

The IMF praised Pakistan's response to the coronavirus pandemic, adding that it had helped control the ramifications of the coronavirus pandemic. It also spoke highly of the Federal Board of Revenue's (FBR) tax revenue collection, saying that it has been "strong".

The IMF stated that Pakistan was bearing the brunt of external pressures in the form of a widening current account deficit and the depreciation of the exchange rate.

However, the international money lender said these were reflecting "the compound effects of the stronger economic activity, an expansionary macroeconomic policy mix, and higher international commodity prices."

"The State Bank of Pakistan (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 said.

The IMF said that Pakistan had shared with it its plans to introduce several fiscal measures to target 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)

(ii) Prudent spending restraint, while fully protecting social spending.

The IMF said that if Pakistan keeps up these fiscal policies, it will help the country reach, or exceed, 4% growth in FY 2022 and 4.5% in FY2023.

"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," said the IMF.

The IMF warned that the current account is expected to widen this year despite some growth in Pakistan's exports. It said this widening of the deficit will be reflective of the rise in prices of commodities worldwide and the rising import demand in the country.

The IMF on tax reforms, monetary policy and power sector

The IMF said that Pakistan will have to continue its efforts to abolish preferential tax treatments and exemptions, which will ultimately help the country allocate enough resources to spend on

The international money lender called on Pakistan to ensure its monetary policy remains focused on curbing inflation, preserving exchange rate flexibility, and strengthening international reserves.

"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 stated.

The IMF said additional efforts are needed by Pakistan to modernise the state bank's operational framework as well as to strengthen monetary transmission and communication.

The IMF said it is important to bring the power sector to viability, and tackle its adverse spillovers on the budget, financial sector, and real economy.

"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," it said.

"Substantially lowering supply costs, however, will require a modern electricity policy that: (i) ensures that PPAs do not impose a heavy burden on end-consumers; (ii) tackles the poor and expensive generation mix, including a wider use of renewables; and (iii) introduces more competition over the medium term," reads the IMF statement.

The IMF outlined certain steps for Pakistan which it deemed necessary to take in order to remove structural economic impediments and achieve sustained economic growth. These were:

Improving the governance, transparency, and efficiency of the state-owned enterprise (SOE) sector. Putting Pakistan’s public finances on a sustainable path—while leveling the playing field of firms across the economy and improving the provision of services—requires following through with the current reform agenda, especially with the:

(i) creation of a modern legal framework;

(ii) better sectoral oversight by the state, supported by regular audits, especially of the largest SOEs; and

(iii) reduction of the footprint of the state in the economy, based on the recently completed comprehensive stocktaking.

The IMF said for Pakistan to achieve sustainable economic growth, it is also important to foster the business environment, governance, and control corruption.

"The business climate would benefit from simplifying procedures for starting a business, approving FDI, preparing trade documentation, and paying taxes; and the empowerment of people and production of more complex goods from investing more in education and human capital," it said.