uring the first quarter of the current financial year, the combined seventh and eighth reviews of the Extended Fund Facility of the International Monetary Fund was completed and paved the way for the resumption of the Extended Arrangement and immediate disbursement of SDR 894 million (about $1.1 billion).

In the backdrop of Pakistan’s higher financing needs during the current year, the EFF, which was initially approved for SDR 4,268 million ($6 billion) was enhanced by SDR 720 million, bringing the programme outlay to approximately $6.5 billion.

However, this resumption of the EFF came with a long “to do” list including achievement of a primary surplus of 0.4 percent of the GDP, reversing tax arrears accumulation and reducing them to Rs 225 billion by end of September 2022, fully operationalising the Treasury Single Account (TSA) by end of December 2022 to ensure an efficient debt and cash management.

At the time of last review, Pakistan had foreign exchange reserves for about 1.5 months of imports. It was agreed that reserves would be built to a more prudent level of at least 2.2 months of imports by the end of the financial year. Earlier this year, the State Bank of Pakistan reduced the gap between its policy rate and the interest rate on the long-term financing and export finance scheme facilities to 500 bps.

The government committed itself to drawing a clear line between the SBP operations and the refinancing schemes to allow the SBP to focus on its core objectives and to extend support to the export sector in a transparent way. To this end, the government shared its plan to establish a development finance institution to support the eventual phasing out of the refinance facilities by end of December 2022.

The government also undertook numerous measures to restrict imports. In April 2022, a 100 percent cash margin requirement (was imposed on imports of 177 items. In May, import of 33 categories of luxury and non-essential items was banned. However, in August, the restrictions were toned down by reducing the CMR to 25 percent where the credit terms of import were more than 90 days. These conditions were completely relaxed in cases where the credit terms of import were more than 181 days. These measures were not in line with the agreement with the global lender which barred the imposition of import restrictions for the balance of payment purposes.

Adhering to the commitments was a tough ask due to various factors, including the unprecedented floods that drowned an area of around a third of the country and affected at least 33 million people, out of which, at least 7.9 million people were displaced. More than 1.2 million livestock got killed. Nearly 15 percent of the rice crop and 40 percent of the cotton crop were adversely impacted.

The post-disaster needs assessment report stated that the flooding caused damage amounting to $14.9 billion and economic losses of $15.2 billion. This added to the pressure on the government to channelise its resources and revenues towards the rehabilitation of flood victims. This has been reflected in the economic update issued by the Ministry of Finance for November 2022 which states that during the first quarter of FY2022-2023, acceleration in the expenditures is beyond the improvement in revenue collection.

It is expected that the IMF will take due cognizance of the impacts of the ongoing global economic challenges and that of floods on Pakistan’s macroeconomic framework. 

The Ministry of Finance publication states that during Q1 FY23, total revenue increased by 12 percent to Rs 2,017 billion against Rs 1,809 billion in the same period last year. The report shows that the total tax collection grew by 16 percent, however, receipts from non-tax sources dropped by 15 percent. Total expenditures grew by 26 percent to reach Rs 2,826 billion in Q1 against Rs 2,247 billion in the same period last year. This resulted in an increased fiscal deficit of 1.0 percent of the GDP in Q1 compared to 0.7 percent over the same period last year.

The loss of crops and livestock is expected to take a heavy toll on the business output and negatively impact local revenue and export inflows. In fact, the government may have to import food staples in greater quantity than before to meet the demand. This and the global economic landscape have made it difficult to meet the benchmarks set by the IMF.

The following extract from the World Bank’s publication Is a Global Recession Imminent? has raised serious concern about the overall economic situation of the world:

“Policymakers face a difficult balancing act. Concerns about high inflation and the rising risk of de-anchoring inflation expectations have already led to significant monetary policy tightening in many countries. At the same time, a marked erosion of fiscal space, especially across most emerging and developing economies, and excess demand pressures in many advanced economies, as well as a diminishing impact of the pandemic, have led to withdrawals of fiscal support. As a result, the global economy is in the midst of one of the most synchronous episodes of monetary and fiscal policy tightening of the past five decades.”

Talks for the ninth review are meanwhile reported to be in advanced stages. It is hoped that the IMF will take due cognizance of the impacts of the ongoing global economic challenges and that of floods on the macroeconomic framework of Pakistan.

If the IMF takes a sympathetic view the programme will remain on track with timely disbursement of the next tranche. Pakistan is claiming that it has already met its targets. The IMF should therefore facilitate the government in meeting its financial needs. This would enable the country to start rehabilitation activities in the flood affected areas. Otherwise, the government would be forced to take measures that will further test the flood affected. Many victims of the global warming caused by the First World might be forced then to live under open skies in the cold December nights.

On the other hand, the government should focus on introducing long-awaited fiscal reforms, implementing privatisation laws and taking suitable measures to reduce the circular debt. The government should also improve border controls to stop smuggling of goods and currency. It also needs to implement effective controls to stop waste.

We must explore new avenues for revenue generation and realise that a country of 222 million people cannot be run on loans, grants and aid alone.

Dr Ikramul Haq, an advocate of Supreme Court and writer, is adjunct faculty at Lahore University of Management Sciences (LUMS), a member of the Advisory Board and a Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).

Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in white collar crimes and sanctions compliance. They have recently coauthored a book, Pakistan Tackling FATF: Challenges and Solutions with Huzaima Bukhari