WASHINGTON/ISLAMABAD: The International Monetary Fund (IMF) board approved the 37-month Extended Fund Facility (EFF) programme of $7 billion for Pakistan on Wednesday evening and authorised immediate release of the first tranche of about $1 billion.
However, it also expressed its concerns in a statement that despite the stability achieved under the nine-month 2023 stand-by arrangement (SBA), Pakistan’s vulnerabilities and structural challenges remain formidable. “A difficult business environment, weak governance, and an outsized role of the state hinder investment, which remains very low compared to peers,” it added.
The IMF press release said that the new programme would require sound policies and reforms to support the government’s ongoing efforts to strengthen macroeconomic stability, address deep structural challenges and create conditions for a stronger, more inclusive, and resilient growth.
Continued strong financial support from Pakistan’s development and bilateral partners would also be critical for the programme to achieve its objectives, it added.
The statement said that Pakistan had taken key steps to restoring economic stability with consistent policy implementation under the 2023-24 Stand-by Arrangement (SBA). Growth rebounded (2.4 per cent in FY24), supported by activity in agriculture, while inflation receded significantly, falling to single digits, amid appropriately tight fiscal and monetary policies.
A contained current account and calm foreign exchange market conditions have allowed the rebuilding of reserve buffers.
It said: “Reflecting disinflation and steadier domestic and external conditions, the State Bank of Pakistan (SBP) was able to cut the policy rate by a total of 450 bps since June, also supported by an appropriately tight FY25 budget. Because of the progress and stability achieved under the nine-month 2023 SBA, the government had embarking on renewed efforts to address these challenges, build resilience and enable sustainable growth.”
However, the IMF release also highlighted that spending on health and education had been insufficient to tackle persistent poverty, and inadequate infrastructure investment had limited economic potential and left Pakistan vulnerable to the impact of climate change.
The key priorities under the new EFF-supported programme include: (i) rebuilding policy making credibility and entrenching macroeconomic sustainability through consistent implementation of sound macro policies and a broadening of the tax base; (ii) advancing reforms to strengthen competition and raise productivity and competitiveness; (iii) reforming the state-owned enterprises (SOEs) and improving public service provision and energy sector viability; and (iv) building climate resilience.
The IMF said the loan programme would not have been possible without the support of China.
At the end of 2023, Pakistan had amassed a total debt of more than $250 billion, or 74 per cent of GDP, according to the IMF’s latest report on the country. About 40 per cent of its debt is owed to external creditors in foreign currencies. Its biggest single foreign creditor is China and Chinese commercial banks, at just under $30 billion, followed by the World Bank at more than $20 billion, according to the report.
In a related development, Prime Minister Shehbaz Sharif held a meeting with IMF Managing Director Ms. Kristalina Georgieva on the sidelines of the UNGA in New York.
Appreciating the collaboration with the Fund for successful staff-level agreement (SLA) for a 37-month US$7 billion EFF for Pakistan, he highlighted the government’s commitment to implementing structural reforms and promoting private sector development.
The PM also expressed appreciation for the IMF’s technical assistance and capacity-building programmes, which helped strengthen the country’s institutions and improve its economic management. The IMF MD expressed the Fund’s support for Pakistan’s efforts and emphasized the importance of maintaining macroeconomic stability and promoting inclusive and sustainable growth.
During the meeting, they also discussed the urgent need of mobilising adaptation financing for climate change. The PM agreed to have the finance minister take up the critical issue with senior management at the IMF during the annual meetings in October.
The two leaders agreed to strengthen cooperation between the government and the IMF to promote economic stability and growth.
Meanwhile, Finance Minister Muhammad Aurangzeb said the government planned to impose strict restrictions on non-filers, which would “further limit their ability to conduct various activities”. In an interview with Voice of America, he emphasised that fundamental economic reforms were needed to make the existing IMF programme “the last one for the country”.
“Transformation of the economy into an export-driven one necessitates structural reforms, only then could the country move forward in the next three years.”
Aurangzeb said the friendly countries have assured financial support to meet the financial needs through the new Fund programme. “We had no choice but to implement economic reforms, which included bringing sectors currently outside the tax net into the fold,” he noted.
However, the minister said the burden on salaried and manufacturing classes would be reduced and highlighted the need to bring into tax net retailers, wholesalers, agriculture and property sectors. He said that despite a 29pc increase in revenues last year, the tax-to-GDP ratio remained at 9pc, which is insufficient to stabilise any country’s economy.
In line with the conditions of IMF — which had repeatedly demanded improved tax collection, the federal government presented the tax-loaded Rs18.877 trillion budget for the fiscal year 2024-25 (FY25) in June. The budget aimed at raising Rs13 trillion by next July, a roughly 40pc increase from the current financial year, to bring down a ruinous debt burden that has caused 57pc of government revenue to be swallowed by interest payments.
In response to a question, Aurangzeb mentioned that the government was abolishing the term “non-filer” and will impose restrictions on tax evaders, limiting their ability to conduct various activities. The finance minister also noted that the government possesses data on individuals’ lifestyles, including the number of vehicles owned, international travel and other expenditures. This information will enable the FBR to bring tax evaders into the tax net without arrest, he added.
He pointed out that Pakistan’s undocumented economy has been valued at Rs9 trillion, which needed to be documented. “Prime Minister Shehbaz Sharif believed that business should be handled by the private sector and not by the government. To achieve this, the cabinet’s privatisation committee has advanced the privatisation process of government institutions to its final stages,” he added.
Earlier, while speaking at ‘Private sector dialogue, CPEC-II and the region’ virtually through Zoom, Muhammad Aurangzeb said Pakistan was committed to bringing about structural reforms under the IMF programme. He said Pakistan needed to stay on reforms agenda whether on taxation, energy sector, state-owned enterprises or privatisation side. “We will stay on the course,” he resolved.
Meanwhile, economists say the IMF has laid out a series of stringent conditions for its new loan programme for Pakistan, including reassessing its formula for the National Finance Commission (NFC) Award, a move that could affect resource allocation to provinces. The Fund will also monitor provincial government expenditures closely, as ongoing discussions between the federal and provincial governments regarding the National Finance pact continue.
In a bid to tighten fiscal discipline, the government will refrain from determining support prices for food grains, which is expected to affect farmers and agricultural productivity.
Moreover, the country will not provide more than 1 per cent of its GDP as subsidies to the energy sector, as to eliminate fiscal imbalances. This may lead to further increase in electricity tariff in coming days. The Punjab government will not be given any relief on electricity prices in future. This measure is expected to impact consumers across the region as the government seeks to stabilise its financial commitments.
Further austerity measures will see a reduction in the federal government’s structural expenses, with an emphasis on cutting unnecessary expenditures, sources said.
Pakistan will strictly halt supplementary grants during the IMF programme, which is a significant shift in its financial strategy. To broaden the tax base, Pakistan will have to bring the agricultural sector into the tax net, along with the property and retail sectors, which have previously enjoyed exemptions.
In response to concerns over electricity prices, the government will introduce a comprehensive reforms package in power sector. Sources say that reforms will be implemented to facilitate reductions in electricity tariffs.
During the EFF programme, the government’s commitment to fiscal responsibility will be put to the test amid rising public concerns over the economic impact of these measures.
A source said the IMF didn’t force Pakistan to obtain a commercial loan of $600m at an 11 per cent interest rate. It was a decision of the government and the Washington-based lender had nothing to do with it, the source added.
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