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Pakistan Reaches Staff Level Agreement With IMF to Resume Loan

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Ball in IMF’s court as Pakistan completes talks
ISLAMABAD: From Pakistan’s perspective, talks with the International Monetary Fund (IMF) are complete, and it is just the internal process of the crisis lender, which would come out with a formal announcement on the successful completion of the seventh and eighth quarterly reviews of a stalled loan programme.

“Our talks with the IMF are complete and they are now going through their internal approval process,” Finance Minister Miftah Ismail told Dawn, adding that the announcement should now come from the Fund.

He said the IMF had given the Memorandum of Economic and Fiscal Policies (MEFP) to Islamabad, which had been responded to. “The IMF accepted some of the changes we proposed and did not agree on many others. After discussions, finally, we have given our consent to an MEFP acceptable to the IMF,” he said, adding that there were no more outstanding issues between the two sides.
The IMF’s resident representative in Islamabad, Esther Perez Ruiz did not respond to requests for comment.

Pakistan entered the IMF programme in 2019, but only half the funds have been disbursed to date as Islamabad has struggled to keep targets on track.

The last disbursement was in February and the next tranche was to follow a review in March, but the government of ousted prime minister Imran Khan introduced costly fuel price caps, which threw fiscal targets and the programme off track.

The new coalition government has removed the price caps, with petrol and diesel prices going up by as much as 66pc and 92pc in over a month.

Sources said Pakistan had now accepted, completed or set in motion all conditionalities and prior actions set by the IMF, and some of them would remain under implementation as usual as per the schedule of structural benchmarks.

The authorities expect a formal announcement from the IMF about the staff-level agreement anytime to be followed by its approval by the executive board early next month along with the disbursement of funds.

The sources said the IMF dialogue this time had been tougher than usual and its staff repeatedly raised queries on settled issues. Apparently, Pakistan had become a rolling stone between the policies of the two biggest shareholders — the United States and China.

On June 21, Pakistan’s authorities and the IMF staff mission reached an understanding on the current fiscal year’s federal budget to revive the stalled loan programme after authorities committed to generating Rs436 billion more taxes and gradually increasing the petroleum levy to Rs50 per litre.

As a result, the IMF staff in a statement acknowledged that important progress had been made over the federal budget. Based on this, Pakistan provided written commitment from the provinces to provide Rs750bn in cash surplus to the Centre to contain fiscal deficit within 4.9pc of GDP and help generate a Rs152bn primary fiscal surplus.

Pakistan is now also required to increase the electricity tariff by Rs7.91 per unit besides direct pass-through of monthly fuel cost adjustments in a timely manner.

The revised MEFP is based on budgetary measures approved by the parliament envisaging over Rs1.716 trillion (2.2pc of GDP) of fiscal adjustment, mostly through taxation, including a 10pc super tax on 13 large industries and personal income tax covering monthly incomes above Rs50,000.

This is on top of a fixed tax regime for sectors like retailers, traders, jewellers, builders, restaurants, automobile and property dealers and so on.

This is the biggest fiscal adjustment in a single year that would help turn about Rs1.6tr primary deficit — the difference between revenues and expenditures excluding interest payments — during the current fiscal year into a Rs152bn surplus next year.

Under the structural benchmarks, the government started imposing the petroleum development levy from July 1 at the rate of Rs10 per litre on petrol and Rs5 per litre on high-speed diesel and other products. The levy will now keep going up at the rate of Rs5 per month to a maximum of Rs50.

The electricity rates would be notified to go up by Rs3.50 per unit in July and August each and about Re1 per unit in the September-October billing cycle.

Under the revised MEFP, the 39-month IMF loan programme will be extended by one year to September 2023 and enhanced in size to $7bn instead of the $6bn original size, of which $3bn has been disbursed so far.

Officials said the toughest part of the stabilisation measures had been completed. Pakistan was now out of the default threat but would have to tread a responsible taxation and expenditure path to ensure fiscal and monetary targets throughout the programme period. Any missteps could reverse the hard-earned gains, they said.

While the government had already introduced Rs1.25tr worth of fiscal adjustment in its original budget presented in the National Assembly on June 10, this was not acceptable to the IMF staff. The government then took additional taxation measures of about Rs466bn on June 24 to reach an understanding with the Fund for a bailout necessary in the face of a balance-of-payments crisis.
 

muhammadhafeezmalik

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IMF Reaches Staff-Level Agreement on the Combined Seventh and Eight Reviews for Pakistan’s Extended Fund Facility​

  • IMF staff and the Pakistani authorities have reached a staff level agreement on policies to complete the combined 7th and 8th reviews of Pakistan’s Extended Fund Facility (EFF). The agreement is subject to approval by the IMF’s Executive Board.
  • High international prices, and a delayed policy action worsened Pakistan’s fiscal and external positions in FY22, led to significant exchange rate depreciation, and eroded foreign reserves.
  • The immediate priority is to stabilize the economy through the steadfast implementation of the recently approved budget for FY23, continued adherence to a market-determined exchange rate, and a proactive and prudent monetary policy. It is important to expand social safety to protect the most vulnerable, and accelerate structural reforms including to improve the performance of state-owned enterprises (SOEs) and governance.

Washington, DC – July 13, 2022: An International Monetary Fund (IMF) team, led by Nathan Porter, has finalized discussions for the combined seventh and eight reviews of Pakistan’s economic program supported by an IMF Extended Fund Facility (EFF). At the conclusion of the discussions, Mr. Porter issued the following statement:


“The IMF team has reached a staff-level agreement (SLA) with the Pakistan authorities for the conclusion of the combined seventh and eight reviews of the EFF-supported program. The agreement is subject to approval by the IMF’s Executive Board. Subject to Board approval, about $1,177 million (SDR 894 million) will become available, bringing total disbursements under the program to about $4.2 billion. Additionally, in order to support program implementation and meet the higher financing needs in FY23, as well as catalyze additional financing, the IMF Board will consider an extension of the EFF until end-June 2023 and an augmentation of access by SDR 720 million that will bring the total access under the EFF to about US$7 billion.


“Pakistan is at a challenging economic juncture. A difficult external environment combined with procyclical domestic policies fueled domestic demand to unsustainable levels. The resultant economic overheating led to large fiscal and external deficits in FY22, contributed to rising inflation, and eroded reserve buffers.


“To stabilize the economy and bring policy actions in line with the IMF-supported program, while protecting the vulnerable, policy priorities include:


  • Steadfast implementation of the FY2023 budget. The budget aims to reduce the government’s large borrowing needs by targeting an underlying primary surplus of 0.4 percent of GDP, underpinned by current spending restraint and broad revenue mobilization efforts focused particularly on higher income taxpayers. Development spending will be protected, and fiscal space will be created for expanding social support schemes. The provinces have agreed to support the federal government’s efforts to reach the fiscal targets, and Memoranda of Understanding have been signed by each provincial government to this effect.
  • Catch-up in power sector reforms . On the back of weak implementation of the previously agreed plan, the power sector circular debt (CD) flow is expected to grow significantly to about PRs 850 billion in FY22, overshooting program targets, threatening the power sector’s viability, and leading to frequent power outages. The authorities are committed to resuming reforms including, critically, the timely adjustment of power tariff including for the delayed annual rebasing and quarterly adjustments, to improve the situation in the power sector and limit load shedding.
  • Proactive monetary policy to guide inflation to more moderate levels . Headline inflation exceeded 20 percent in June, hurting particularly the most vulnerable. In this regard, the recent monetary policy increase was necessary and appropriate, and monetary policy will need to be geared towards ensuring that inflation is brought steadily down to the medium-term objective of 5–7 percent. Importantly, to enhance monetary policy transmission, the rates of the two major refinancing schemes EFS and LTFF (which have over recent months been raised by 700 bps and 500 bps respectively) will continue to be linked to the policy rate. Greater exchange rate flexibility will help cushion activity and rebuild reserves to more prudent levels.
  • Reducing poverty and strengthen social safety. During FY22, the unconditional cash transfer (UCT) Kafalat scheme reached nearly 8 million households, with a permanent increase in the stipend to PRs 14,000 per family, while a one-off cash transfer of PRs 2,000 (Sasta Fuel Sasta Diesel, SFSD) was granted to about 8.6 million families to alleviate the impact of rampant inflation. For FY23, the authorities have allocated PRs 364 billion to BISP (up from PRs 250 in FY22) to be able to bring 9 million families into the BISP safety net, and further extend the SFSD scheme to additional non-BISP, lower-middle class beneficiaries.
  • Strengthen governance. To improve governance and mitigate corruption, the authorities are establishing a robust electronic asset declaration system and plan to undertake a comprehensive review of the anticorruption institutions (including the National Accountability Bureau) to enhance their effectiveness in investigating and prosecuting corruption cases.

“Steadfast implementation of the outlined policies, underpinning the SLA for the combined seventh and eighth reviews, will help create the conditions for sustainable and more inclusive growth. The authorities should nonetheless stand ready to take any additional measures necessary to meet program objectives, given the elevated uncertainty in the global economy and financial markets.


“The IMF team thanks the Pakistani authorities, private sector, and development partners for fruitful discussions and cooperation during the discussions.”


IMF Communications Department​

 

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