IMF may resume loan programme next month

Two sides likely to reach some compromise on increasing energy prices, tax revenue

KARACHI:

The International Monetary Fund (IMF) is likely to resume the $6 billion loan programme for Pakistan next month as officials of both sides, engaged in technical talks, are likely to find a middle ground on conditions of increasing energy prices and revenue collection.

Accordingly, Pakistan is considering increasing the benchmark interest rate, further depreciation of the rupee against the US dollar and other major currencies and increasing the duty on import of luxury items in the current fiscal year.

“We believe Pakistani authorities are likely to successfully complete the sixth review of the IMF programme in September/ October 2021,” Topline Research Director and Chief Economist Syed Atif Zafar said in a report titled “Pakistan and the IMF: Likely Scenarios and Implications” on Monday. “We believe Pakistan and the IMF are likely to reach a middle ground with respect to increase in energy prices and revenue measures.”

The IMF is likely to be encouraged by the tax collection in July 2021, which was 22% higher than the target for the month and grew 36% year-on-year at Rs410 billion. The government has also shared plans to reduce the power subsidy on lifeline consumers and move towards providing direct cash subsidy, which can potentially reduce the future accumulation of circular debt. “We believe that the government may agree to increase power and gas prices by an average of 5-10% and partly pass on the impact of petroleum levy on domestic petroleum products,” he said.

“We can also expect increase in taxes on the import of luxury products, which will serve the dual purpose of attracting higher revenues and discouraging non-essential imports.” The measures will increase inflation expectations and as a result, the central bank may increase the policy rate. “We expect the State Bank of Pakistan (SBP) to increase the policy rate by up to 50 basis points towards the end of (December) 2021 and by another 50 basis points in the first half of 2022.”

“Pakistani rupee may depreciate by around 6% against the US dollar in FY22, closing in the range of 168- 170 in June 2022,” Zafar said. The SBP, in its last analyst briefing in July 2021, highlighted that the gross external financing requirement of around $20 billion in FY22 was overfunded. “We believe it takes into account continuation of the IMF programme. We highlight that roughly 50% of this external financing, showed by the SBP, is through official creditors (nonIMF), who look towards the IMF for comfort.” The IMF programme has been on hold since June 2021.

Earlier, the IMF Executive Board approved the $6 billion 39-month Extended Fund Facility (EFF) for Pakistan in July 2019. Pakistan and the IMF had been unable to conclude discussions on the sixth review (based on endMarch 2021 performance criteria) in June 2021, where reportedly the two were not able to reach consensus over the future roadmap for the resolution of circular debt issue and revenue measures to achieve the targets. As per the research house’s understanding, technical-level talks are underway with staff-level discussions expected to begin next month - on the insistence of Finance Minister Shaukat Tarin.

“The size of loan tranche is expected to be bigger than the previous release, with $1 billion likely to be released after approval compared to the previous tranche of $0.5 billion,” he said. The talks will also coincide with the earlier agreed timeline for the seventh review (based on June 2021 performance criteria), which were scheduled to begin in September 2021. The tranche under the seventh review would be $0.7 billion, if approved, he said.