The International Monetary Fund (IMF) on Wednesday announced a staff-level agreement with Pakistan on the completion of the first review of the $3 billion bailout package after Islamabad assured it of refraining from intervening in the currency market and continuing on the path of fiscal consolidation.
In a statement issued after the end of the IMF visit to Pakistan, the global lender also sought greater transparency in management of the assets under the Sovereign Wealth Fund and in the operations of the Special Investment Facilitation Council (SIFC).
Pakistan would also be required to make public the asset declarations of the cabinet members and a task force would conduct a comprehensive review of the country’s anti-corruption framework.
“The IMF team has reached a staff-level agreement (SLA) with the Pakistani authorities on the first review of their stabilisation programme supported by the IMF’s $3 billion,” stated Nathan Porter, the IMF’s Mission Chief to Pakistan after the end of talks.
The agreement is subject to approval of the IMF’s Executive Board. Upon approval, around $700 million or SDR 528 million will become available bringing total disbursements under the programme to almost $1.9 billion, he added.
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The talks mostly remained smooth during two-week long engagements. The IMF did not accept the Ministry of Finance’s creative budget accounting, which would now result in revision in the reported budget figures.
Contrary to the IMF’s timely handout, Pakistan’s Finance Ministry remained afraid of the media. It deployed the Frontier Constabulary and the Police in the Q block to keep media away, although the talks took place in a five-star hotel. This was for the first time that there was a complete breakdown between the Finance Ministry and media persons.
Pakistan has also assured the IMF to take additional taxation measures in case the Federal Board of Revenue’s tax collection falls short of the monthly targets. The country would keep the monetary policy in line with inflationary trends.
The IMF emphasised upon continued fiscal consolidation to reduce the public debt, while protecting development needs – in a statement that suggests that the IMF did not appreciate the Finance Ministry’s policy to slash development spending for the purpose of achieving the primary budget surplus target.
The IMF said that Pakistan is “determined to achieve a primary surplus of at least 0.4% of GDP in FY24, underpinned by federal and provincial government spending restraint and improved revenue performance supported, if necessary, by contingent measures. This shows that the annual target remains unchanged during the review talks.
Pakistan would also be required to “complete the return to a market-determined exchange rate”, according to Porter.
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“While inflows following increased regulatory and law enforcement helped normalise import and forex payments and rebuild reserves, the authorities recognise that the rupee must remain market-determined to sustainably alleviate external pressures and rebuild reserves,” according to the IMF.
To support this, they plan to strengthen the transparency and efficiency of the FX market and to refrain from administrative actions to influence the rupee, it added.
The IMF did not approve Pakistan’s policy to manage the rupee, which again started depreciating by mid of last month and closed over Rs288 to a dollar on Wednesday.
Pakistan would also pursue state-owned enterprise and governance reforms to attract investment and support job creation, while continuing to strengthen social assistance, said the IMF.
The steadfast execution of the FY24 budget, continued adjustment of energy prices, and renewed flows into the foreign exchange (FX) market have lessened fiscal and external pressures, said the IMF.
The IMF said that inflation was expected to decline over the coming months amid receding supply constraints and modest demand.
However, Pakistan remains susceptible to significant external risks, including the intensification of geopolitical tensions, resurgent commodity prices, and the further tightening in global financial conditions. Efforts to build resilience need to continue, it added.
Pakistan is building capacity to expand the tax base and raise revenue mobilisation and is committed to improving the quality of public investment and spending. Pakistan has assured the IMF that it would increase the tax base to 6.5 million filers by the end of June next year and meet the tax target of Rs9.415 trillion despite challenges.
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The IMF said that Pakistan’s combined circular debt across power and gas sectors has exceeded 4% of GDP, immediate action was critical. It acknowledged implementation of power tariff adjustments that were pending since July 2023 and increase in gas prices after a long time, effective November 1, 2023.
The authorities are also moving to tackle cost-side pressures, including bringing private sector participation to DISCOs, institutionalising recovery and anti-theft actions, improving PPA terms, and reducing the incentives for captive power, it added.
Improving the Power Purchase Agreements (PPAs) terms mean that the IMF has again highlighted the outstanding issue of renegotiating CPEC energy deals, said the sources.
The IMF also said that there was a need for proactive monetary policy to lower inflation toward its target. With appropriately tight monetary policy, inflation should steadily decline and the authorities stand ready to respond resolutely if near-term price pressures reemerge, including due to second-round effects on core inflation or renewed exchange rate depreciation, it added.
The IMF said that Pakistan also needs continued vigilance to safeguard the soundness of the banking system. Priorities include addressing undercapitalised financial institutions, ensuring foreign exchange exposures within regulatory limits, and aligning bank resolution and crisis management frameworks with best practice.
Nathan Porter stated that high governance and transparency standards will apply to the management of assets under the ownership of the newly created Sovereign Wealth Fund (SWF) and the operations of the SIFC.
The IMF had taken a briefing from the SIFC’s apex committee secretary and raised concerns about lack of transparency and accountability of its decisions. The IMF also questioned the need of the SIFC in presence of other departments responsible for performing similar functions.
Nathan said that to further strengthen governance, Pakistan will ensure public access to asset declarations from Cabinet members and a task force, with participation from independent experts, will complete a comprehensive review of the anti-corruption framework.
The Mission Chief further stated that Pakistan has accelerated the engagement with multilateral and official bilateral partners. “Timely disbursement of committed external support remains critical to support the authorities’ policy and reform efforts,” it added.
Pakistan will also continue the timely disbursements for social protection under BISP’s budget allocation—which are about a third higher than in the fiscal year 2023. This will allow for the expansion of the Unconditional Cash Transfers (UCT) Kafaalat programme to 9.3 million families this fiscal year, with an annual inflation adjustment of the stipend, said Porter.