[🇵🇰] IMF Program for Pakistan - Updates

[Ghazi52]

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.

 

[Ghazi52]

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.

 

[Ghazi52]

 

[Ghazi52]

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

 

[Ghazi52]

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.

 

[Ghazi52]

 

[Ghazi52]

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.

 

[Ghazi52]

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.