[🇵🇰] IMF Program for Pakistan - Updates

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Primary goals of new deal​

The primary goals of the new bailout package include stabilising Pakistan’s economy by consolidating public finances, rebuilding foreign exchange reserves, and reducing fiscal risks from state-owned enterprises. The programme also aims to create a more conducive environment for private-sector-led growth.

The loan deal, finalised in July, was contingent on Pakistan securing $12bn in financial commitments from key allies such as Saudi Arabia, China, and the UAE.

Pakistan secured $5bn in deposits from Saudi Arabia, $4bn from China, and $3bn from the UAE. An additional condition from the IMF required Pakistan to obtain $2bn in external funding from bilateral and commercial sources.

The remaining financing gap of $2-2.5bn was bridged through various means, including Saudi Arabia’s oil facility, a $400 million loan from the International Islamic Trade Finance Corporation (ITFC) and contributions from Middle Eastern commercial banks, such as Standard Chartered Bank.

 

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The fears of approval were laid to rest after the State Bank Governor Jameel Ahmad said that Pakistan planned to raise up to $4bn from banks by the next fiscal to plug the gap. According to him, Pakistan was in the “advanced stages” of securing $2bn in additional external financing required for IMF approval.

Pakistan has long relied on IMF programmes to avoid default, frequently turning to financial assistance from friendly nations to meet IMF requirements.

This is Pakistan’s 25th IMF programme since 1958 and its 6th under the EFF framework. Despite the influx of funds, the programme leaves unaddressed a crucial issue: restructuring Pakistan’s external and domestic debt, which consumed 81 per cent of the nation’s tax revenues in the last fiscal year.

Faced with chronic mismanagement, Pakistan’s economy had found itself on the brink, challenged by the Covid-19 pandemic, the effects of the war in Ukraine and supply difficulties that fuelled inflation, as well as record flooding that affected a third of the country in 2022.

In February 2023, the rupee had undergone a historic devaluation of 15pc while the foreign reserves shrunk to a meagre $3.7bn, exacerbating fears that Pakistan was heading towards a default without a comprehensive IMF programme to prop it up. However, the country managed to clinch a nine-month $3bn IMF deal in June after addressing the Fund’s concerns about its reform agenda — with reserves hovering around $3bn.

In April, the finance minister had confirmed that the country had initiated talks for a longer programme to support strengthening public finances, restoring the energy sector’s viability, returning inflation to the target, and promoting private-led activity.

 

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To meet the Fund’s criteria, the government announced new tax measures in several areas to generate additional revenue in the coming fiscal year in the finance bill, which included a 48 per cent increase in direct taxes, 35pc hike in indirect taxes, and a whopping 64pc increase in non-tax revenue such as petroleum levies.

The latest bailout, coming to Pakistan in the form of loans, follows a commitment by the government to implement reforms, including a major effort to broaden the country’s tax base.

In a nation of over 240m people and where most jobs are in the informal sector, only 5.2m filed income tax returns in 2022.

The government has amped up its efforts to raise nearly $46bn in taxes for the year, which includes drastic measures by the Federal Board of Revenue (FBR) such as ordering the telecommunications authority to block the connections of 210,000 SIM cards.

 

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IMF inflow: SBP-held foreign exchange reserves hit 2.5-year high, shoot above $10.7bn

Total liquid foreign reserves held by the country stand at $15.983 billion

 

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Nathan Porter, director of the International Monetary Fund’s (IMF’s) mission for Pakistan, in a recent interview with the Voice of America, while commenting on Prime Minister Shehbaz Sharif’s statement that this would be the last IMF programme of Pakistan, is reported to have stated that this could be possible if Pakistan sincerely acted on economic reforms.

The crux of Porter’s statement is “if Pakistan sincerely acted on economic reform”.

Implementation of economic reforms has always been the weak link in the IMF programmes - often condoned by the IMF itself. Reforms which truly matter like power sector fiscal viability, privatization of loss-making entities and enhancing the tax revenues through widening of the tax net and efficient implementation remain un-accomplished while moving from one IMF programme to another.

Added now to these long pending requirements are the economic reforms laid out in the current (25th) IMF programme. They are far more extensive, complex and challenging and are required to be accomplished in the next 37 months when this programme will run out. So far it is not in public knowledge if the government has prepared a road map with defined milestones to achieve this ambitious target of “no further IMF debt programme”.

Unlike in the past, when the provincial budgets were out of the purview of the IMF, the new programme is expanded to the provincial budgets and their revenues. Nearly one dozen IMF conditions directly impact the provinces under the new programme.

 

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the agricultural income tax rate is to increase from 12-15 per cent to 45 per cent in January next year. There will be no support price system for food and subsidies on agriculture. All the provincial governments will refrain from giving further subsidies on electricity and gas.

Under censorship is also the fiscal discipline of the country. One of such conditions is that Pakistan needs to show a primary budget surplus of 4.2 per cent of the Gross Domestic Product (GDP) during the three-year programme period.

The economists fear that this would significantly squeeze non-interest expenses and put an additional tax burden of 3 per cent on the existing taxpayers. Critical is Pakistan’s external debt repayments obligations for the next four years of $ 100 billion.

Pakistan is reported to have committed to the IMF that it would refrain from repaying the USD 12.7 billion debt to Saudi Arabia, China, the UAE, and Kuwait during the programme period. This may exhaust Pakistan’s chance of further bailouts from these sources.

While the government’s thumbs-up on the rising stock market, falling inflation and significant increase in taxpayers’ base can be celebrated for a while, but this alone will not move the country out of the IMF programme. The government needs massive revenues to retire loans, meet the expenditure to run the government and sustain loss-making public sector enterprises and the ailing power sector. With much of the industry, real estate and investors out of the revenue chain, the massive revenue generation is unlikely.

 

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Critical for Foreign Direct Investment (FDI) is the country perception. The prevailing political and institutional tensions within the country are undermining the country’s perception as an attractive destination for investment.

The IMF report has underlined the importance of political stability to achieve fiscal discipline and stability. The Asian Development Bank warned that the rising political and institutional tensions may make it difficult to implement the reforms that Pakistan has committed to deliver to the IMF. The ADB said these reforms were crucial to ensuring that external lenders keep lending to Pakistan.

The cherished goal to make the current 25th IMF debt programme as the last one sounds great. The least make-believe assurance the nation needs in this regard is a roadmap with defined milestones for the next 37 months, when the current programme will run out and the nation will be on its own.

 

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IMF spells out threats to reform momentum​

• Says political economy considerations and pressures from vested interests could delay or weaken the reform momentum and put at risk still-brittle stability

Tahir Amin
October 12, 2024

ISLAMABAD: Political economy considerations and pressures from vested interests could delay or weaken the reform momentum and put at risk still-brittle stability, says the International Monetary Fund (IMF).

The Fund in its latest report stated resurgence in political or social tensions could weigh on policy and reform implementation. Political economy considerations and pressures from vested interests could delay or weaken the reform momentum and put at risk still-brittle stability.

The external environment remains challenging as well, with still tight global financing conditions, volatile commodity prices, and elevated geopolitical tensions.

Notwithstanding the new government’s intent to deepen reforms under a new Fund-supported program, political uncertainty remains significant, and pressures for easing policies and providing tax concessions and subsidies are strong.

Policy slippages, including particularly on needed revenue measures, together with lower external financing, could undermine the narrow path to debt sustainability, given the high level of gross financing needs, and place pressure on the exchange rate and on banks to finance the government (further exacerbating crowding out of the private sector, which could entrench a low-growth—low-financial-development equilibrium).

Geopolitically driven higher commodity prices or tighter global financial conditions could also adversely affect external stability.

The report also noted that the Fund faces many major enterprise risks associated with a new program. Notably, business risks are elevated due to the potential for the program to go off-track, as well as, Pakistan’s challenging security situation, which could adversely impact FDI, among others.

Reputational risks would arise if the Fund were perceived as treating Pakistan differently from other members that ostensibly enjoy less support. Alternatively, not proceeding with a new program also raises reputational risks as the new authorities, or other members, may accuse the Fund of not being even-handed, especially following the successful SBA.

Although near-term financial risks have declined since SBA approval, they remain very elevated and are to be mitigated through phased access, burden sharing, and adequate financing assurances.

Operational risks concerning staff’s in-country activities persist, although Fund activities are closely coordinated in line with policies and supported by the United Nations Department of Safety and Security (UNDSS)

The report also noted that notwithstanding recent progress, deep structural challenges continue to weigh on Pakistan’s economic prospects.

Pakistani living standards have declined relative to peers in South and South East Asia over the past decades, reflecting weak policies, inadequate investment in human and physical capital, and distortions from an outsized role of the state.

At the same time, structural fiscal policy weaknesses and repeated boom-bust cycles have increased external financing needs and depleted buffers, leaving a narrow path to fiscal and external sustainability. To build on the hard-won transient stability created over the past year, sound policies and reforms need to be strengthened and sustained.

Copyright Business Recorder, 2024

 

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Fund sets 22 structural benchmarks and conditionalities​

Tahir Amin
October 12, 2024

ISLAMABAD: The International Monetary Fund (IMF) has set 22 structural benchmarks (SBs) and conditionalities for the new $7 billion Extended Fund Facility (EFF) program, including not granting tax amnesties, not issuing any new preferential tax treatment (including exemptions, zero rating, tax credits, accelerated depreciation allowances, or special rates), as well as average premium between the interbank and open market rate to be no more than 1.25 percent during any consecutive 5 business days.

The Fund in its latest report “2024 Article IV Consultation and request for an Extended Arrangement under The Extended Fund Facility” noted that 22 SBs have been set.

The SBs on fiscal side include;

(i) do not grant tax amnesties, and do not issue any new preferential tax treatment (including exemptions, zero rating, tax credits, accelerated depreciation allowances, or special rates) with the rational to protect tax revenue (continuous),

(ii) seek ex-ante parliamentary approval for any expenditures that are non-budgeted or that exceed the budgetary appropriation with the rational of improved parliamentary oversight of budget execution (continuous),

(iii) approve a National Fiscal Pact devolving some spending functions to the provinces aimed at addressing the mismatch of federal and provincial revenues and expenditures (end-September 2024),

(iv) share with the IMF staff a report detailing actions to reduce the federal government’s footprint aimed at reducing the footprint of the state (end-September 2024),

(v) each province amends their Agriculture Income Tax legislation and regime to fully align it with the federal personal income tax regime for small farmers and the federal corporate income tax regime for commercial agriculture, so that taxation can commence from January 1, 2025 to protect tax revenue (end-October 2024),

(vi) fully implement compliance risk management measures in Large Taxpayer Units in large markets in Islamabad, Karachi, and Lahore Regional Offices to improve tax compliance (end-December 2024),

(vii) develop and publish on the Ministry of Planning website: (i) the criteria for project selection, including a scorecard, detailing the weight assigned to each criterion and the methodology for calculating the score; and (ii) the annual limit on the total size of new projects entering the PSDP portfolio for better public investment management (end-January 2025), and

(viii) introduce a 5 percent FED on fertilizer and pesticide to protect tax revenue (end-June 2025).

On the governance, two SBs have been set which include;

(i) amend the Civil Servants Act to ensure that asset declarations of high-level public officials (including assets beneficially owned by them and a member of their family) are digitally filed and publicly accessible (with sufficient protection over private information) through the FBR, with a robust framework for risk-based verification by a single authority.

The rationale is to enhance the effectiveness of the anti-corruption framework (end-February 2025) and

(ii) publish the full Governance and Corruption Diagnostic Assessment report to publicly identify critical governance vulnerabilities (end-July 2025).

One SB is set on social sector which is annual inflation adjustment of the unconditional cash transfer (Kafaalat) to maintain purchasing power in real terms (end-January 2025).

Five SBs have been set on monetary and financial sector including;

(i) average premium between the interbank and open market rate will be no more than 1.25 percent during any consecutive 5 business day period to maintain FX market functioning (continuous),

(ii) parliamentary approval of amendments to the bank resolution and deposit insurance legislation, in a manner that preserves the integrity of the draft legal amendments to strengthen crisis management toolkit (end-October 2024),

(iii) place undercapitalized private banks under resolution unless (i) these banks are fully recapitalized by end-October 2024; or (ii) a legally binding agreement is in place by end-October 2024 towards a merger with other banks or with a new sponsor that would achieve full recapitalization by April 2025 to enforce regulatory standards (end-November 2024),

(iv) in consultation with Fund staff, revise regulations and underlying methodologies on risk mitigating measures, including enhanced collateral policy and by requiring counterparties to be financially sound to improve safeguards in monetary policy operations (end-December 2024), and

(v) implement revised regulations on risk mitigating measures to improve safeguards in monetary policy operations (end-September 2025).

Copyright Business Recorder, 2024