Pakistan and the International Monetary Fund (IMF) have reached a staff-level agreement, the international money lender revealed Monday.
“The agreement is subject to approval by the Executive Board, following the implementation of prior actions, notably on fiscal and institutional reforms,” reads a statement by the IMF.
“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 efforts in improving anti-money laundering and combating 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 coronvirus 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
Continued efforts to broaden the tax base by removing remaining preferential tax treatments and exemptions will help generate much-needed resources to scale up critical social and development spending.
Monetary policy needs to remain 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. While some key elements of IT are already in place, including a medium-term inflation objective and prohibition of monetary financing, additional efforts are needed, to modernize the SBP’s operational framework as well as to strengthen monetary transmission and communication.
Advancing the strategy for the electricity sector reforms, agreed with international partners, is important to bring the sector to financial 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. 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.
Strengthening the medium-term outlook, including by unlocking sustainable and resilient growth, creating jobs, and improving social outcomes, hinges on ambitious efforts to remove structural impediments and facilitate the structural transformation of the economy. To this end, increased focus is needed on measures to strengthen economic productivity, investment, and private sector development, as well as to address the challenges posed by climate change:
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.
Fostering the business environment, governance, and the control of 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. Ensuring a level playing field and the rule of law also remains essential, mainly by bolstering the effectiveness of existing anti-corruption institutions and accountability of high-level public officials and by completing the much-advanced action plan on AML/CFT.
Boosting competitiveness, and exports . To this end, key objectives include: (i) implementing the approved national tariff policy, based on time-bound strategic protection; (ii) negotiating new free trade agreements; and (iii) facilitating the integration in global supply chains by improving firms’ reliability and product quality, and registering firms with all necessary entities for tax and business purposes.
Promoting financial deepening and inclusion . To better channel savings toward productive investment, improve the allocation of resources, and diversify risks, key policies remain: (i) entrenching macroeconomic stability; (ii) strengthening institutional and regulatory frameworks; (iii) creating conditions that allow for a greater role of private credit; and (iv) boosting financial coverage of underserved segments of the population and SMEs.
Stepping up to climate change . Worldwide, Pakistan ranks both among the top 10 countries with the largest damages from climate-related disasters and top 20 countries with the largest greenhouse gas (GHG) emissions. Critical next climate policy steps are: (i) accelerating the finalization of the authorities’ National Adaptation Plan (NAP); and (ii) implementing an adequate set of measures to meet the COP26 Nationally Determined Contribution (NDC) targets and securing sufficient financing, including from international partners.
The IMF team is grateful to the Pakistani authorities for open and constructive discussions.