Govt-IMF agreement: Deal done on tough terms

ISLAMABAD: The IMF on Monday announced that Pakistan and the Fund authorities had reached a staff-level agreement after evolving a consensus on prior actions. After implementation on agreed prior action, the IMF’s Executive Board will consider approval of the next tranche of over $1 billion.

According to IMF’s announcement made here on Monday, an International Monetary Fund (IMF) mission led by Ernesto Ramirez Rigo held virtual discussions during October 4-November 18, 2021, in the context of the 2021 Article IV consultations and the sixth review of the authorities’ reform programme supported by the IMF’s Extended Fund Facility (EFF).

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. Meanwhile, Pakistan will have to make fiscal adjustments of over Rs800 bn by raising revenues and slashing down expenditure for striking a staff-level agreement with the IMF.

Now Islamabad will have to implement ‘toughest prior actions’ including getting approval of Parliament on SBP Amendment Bill for seeking approval of IMF’s Executive Board over $1 billion tranche probably on January 12, 2022. The government will have to present a mini-budget for seeking approval of Parliament to remove GST exemptions in order to fetch Rs350 billion.

After striking a staff-level agreement for holding the toughest ever negotiations with the IMF, Prime Minister’s Adviser on Finance Shaukat Tarin confirmed in a press briefing that the Fiscal and Monetary Coordination Board would cease to exist in the proposed draft of ‘rationalised’ State Bank of Pakistan (SBP) Amendment Bill.

Instead of tabling two bills in Parliament including SBP Amendment Bill 2021 and Supplementary Tax Law to abolish GST exemptions, the IMF has placed as prior action to pass these two bills from Parliament to make it laws of the land. Now the question arises how the IMF can dictate the sovereign Parliament as submission of law before the Parliament was accepted as conditions in the past but the first time approving of laws were made part of prior action under the IMF programme.

The prior action means that until and unless these actions will be taken or implemented, the IMF’s Executive Board will not consider approval of the next tranche. Keeping in view the thin majority, it will be challenging for the PTI-led regime to get these bills approved within the desired timelines of January 12, 2022, when the IMF’s Executive Board was expected to take up Pakistan’s case for approving the next tranche of over $1 billion.

“The government has agreed with the IMF to jack up petroleum levy by Rs4 per litre every month to increase it up to Rs30 per litre for collection of revised amounts of Rs356 billion against initial collection estimates of Rs610 billion during the current fiscal year 2021-22. The government also agreed with the IMF for passing GST supplementary bill for abolishing tax exemptions of Rs350 billion,” Shaukat Tarin said along with Minister for Energy Hammad Azhar during a news conference held at Pak China Friendship Center on Monday.

He said that the IMF envisaged the budget deficit at 6.3 percent of GDP while the primary balance was asked to bring from a deficit of 0.7 percent of GDP to surplus in the current fiscal year.

Prime Minister’s Adviser on Finance Shaukat Tarin accepted that the poor living in urban areas were facing a difficult situation but he expressed hope that when international oil prices, commodities, coal, and palm oil would come down, the inflation would start receding, however, he added in the same breath that the government started providing targeted subsidy to 20 million households to bring solace in their lives.

He said that it was the toughest negotiation with the IMF because the Fund staff argued that the policy action approved by its Executive Board could not be altered. Pakistan had obtained $500 million additional in March 2021 and agreed for withdrawal of tax exemption of Rs700 billion, submission of State Bank of Pakistan Amendment Bill, and raising of power tariff by Rs4.95 per unit.

Now the government convinced the IMF for removal of GST exemptions to the tune of Rs350 billion from the initially envisaged plan of Rs700 billion, power tariff was hiked by Rs1.38 per unit and the SBP Amendment Bill was rationalised as the clauses where the constitutional amendments were required those were removed from the rationalised and agreed draft with the IMF.

He said that Pakistan and the IMF agreed to make fiscal adjustments as the FBR’s collection target was increased from Rs5,829 trillion to Rs6.1 trillion, Petroleum Levy was revised downward from Rs610 billion to Rs356 billion, grants were reduced by Rs50 billion, Public Sector Development Programme (PSDP) was slashed down from Rs900 billion to Rs700 billion for the current fiscal year.

Although the government had hiked baseline tariff, it was hinted that more tariff increase in the range of 40 to 50 paisa per unit will be on the cards in coming months. Hammad Azhar also said that the definition of baseline tariff would also be changed as only those users up to 200 units would get subsidy who would consume up to 200 units on monthly basis for six months period.

Shaukat Tarin said that the SBP’s autonomy was necessary related to monetary policy and exchange rate regime. When asked about the Monetary and Fiscal Coordination Board under the proposed revised draft of the SBP Amendment Bill, he said that there would be no Coordination Board but there would be a liaison forum for holding coordination between finance minister and SBP governor. He said that the SBP would have the objective of price stability. He said the indemnity for SBP governor was excluded from the revised draft. Now the proposed SBP Amendment Bill was made more balanced, he added.

He said that the recent hike in the discount rate and other measures taken by the SBP would have an impact on overall growth and there was an indication of overheating but despite all these measures he still opined that the GDP growth would touch 5 percent mark for the current fiscal year.

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 $1,059 million), bringing total disbursements under the EFF to about $3,027 million and helping unlock significant funding from bilateral and multilateral partners. An additional SDR 1,015.5 million (about $1,386 million) was disbursed in April 2020 to help Pakistan address the economic impact of the COVID-19 shock.

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. Notable achievements on the structural front include the finalisation 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 authorities have also made progress in improving the anti-money laundering and combating the financing of terrorism (AML/CFT) framework, although some additional time is needed to strengthen its effectiveness.

On the macroeconomic front, available data suggest 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. At the same time, 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.