The revival of the IMF programme will pave the way for the provision of a Letter of Comfort (LoC) from the Fund and the revival of programme/policy lending from the WB, ADB and IDB.
The IMF’s Executive Board is expected to meet after the second week of August 2022 to consider the combined approval of the seventh and eighth reviews and the release of $1.17 billion tranche under the Extended Fund Facility (EFF).
However, the revival of the IMF programme hinges upon price increases only, and the Fund failed to mention any desired structural reforms for removing bottlenecks of the economy that ultimately resulted in the surfacing of twin deficits, known as the budget deficit and the current account deficit.
The IMF literally ignored the rising inflation in its statement on the occasion of striking staff level agreement with Pakistani authorities, giving strength to the perception that Washington-based lender is totally indifferent to miseries being faced by inflation-stricken middle-income salaried and pensioners.
The flow of circular debt touching Rs850 billion has raised many eyebrows because there is total electricity billing of Rs1,600 billion out of which piling up of circular debt of Rs850 billion caused shocks and alarm bells among the policymakers.
The IMF statement also confirmed that the government had allocated Rs68 billion to Rs72 for the provision of Sasta Petrol and Sasta Diesel, which is a peanut amount in the aftermath of escalating inflationary pressures.
When contacted about plans for the IMF’s executive board meeting, Minister for Finance Miftah Ismail on Thursday said that it would be held after the second week of August 2022 for approving Pakistan’s request for the release of $1.17 billion tranche.
To another query regarding the resumption of programme loans from other multilateral creditors, Miftah Ismail replied that Pakistan was expecting $9 billion as budgetary/project loans and there would be a separate amount from the IMF as well. So, in totality, there are indications that Islamabad will muster up dollar loans of approximately $10 billion from multilateral creditors during the current fiscal year 2022-23.
A statement issued by the IMF on Thursday morning stated that an International Monetary Fund (IMF) team, led by Nathan Porter, has finalized discussions for the combined seventh and eighth reviews of Pakistan’s economic program supported by an IMF Extended Fund Facility (EFF). At the conclusion of the discussions, Porter stated, “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 SDR720 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 fuelled 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 stabilise 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 mobilisation 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 PRs850 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 loadshedding.
“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 PRs14,000 per family, while a one-off cash transfer of PRs2,000 (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 PRs364 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 anti-corruption 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.” When contacted, Dr Khaqan Najeeb, former adviser Ministry of Finance, said it was indeed comforting to see that Pakistan and the IMF have reached a staff-level agreement. “This paves the way for the completion of the 7th and the 8th Review. It should alleviate fears of a near-term challenging scenario and unlock funding from other multilateral lenders and friendly countries. All this should help build Pakistan’s foreign exchange reserves which have fallen below $10 billion. One hopes that this will calm the FX and Euro bonds market which have been quite uneasy for the past few months.”
He explained it would be wise to think of the next few months as breathing space, with the realisation of the severity of challenges both on the domestic and global front. The energy sector would be the most challenging. The circular debt of Rs850 billion reached in FY22 in the power sector is far above what one would have hoped and seriously threatens the financial viability of the power sector at a time of global energy shortages.
Much beyond pricing adjustments are needed to create sustainability, including reforms of DISCOs, a new tariff, strengthening the policy and regulatory environment besides negotiation with IPPs, he concluded.
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