IMF approves $1 billion tranche, makes public new conditions

Decision comes after Islamabad gave absolute autonomy to SBP

Shahbaz Rana February 03, 2022
The programme was suspended since June last year. PHOTO: REUTERS


The executive board of the International Monetary Fund (IMF) on Wednesday revived Pakistan’s $6 billion Extended Fund Facility (EFF) programme, paving the way for the disbursement of about $1 billion tranche.

The move comes after the Pakistan Tehreek-i-Insaf (PTI) government had narrowly managed to get the crucial State Bank of Pakistan (Amendment) Bill passed from the opposition-controlled Senate on Friday.

Sources told The Express Tribune that the review largely remained smooth. They said the Indian executive director, who represents a constituency of four countries, abstained from the meeting.

The executive board, which met in Washington, also waived some conditions necessary for the release of the fourth loan tranche under the sixth review of the EFF.

The government has missed the primary budget deficit reduction target. The programme was suspended since June last year.

“I am pleased to announce that the IMF board has approved [the] sixth loan tranche of its programme for Pakistan,” tweeted Finance Minister Shaukat Tarin on Wednesday.

The finance minister’s tweet suggested that it was the IMF’s programme; however, IMF has always said that it is Pakistan’s programme.

The Fund’s statement

The IMF in its press statement after the board meeting has plainly told Pakistan that personal income tax measures are “essential” along with harmonisation of sales tax across the provinces and the federation.

Moreover, increasing electricity prices was still part of the conditions for remaining in the IMF programme.

The IMF has also warned about elevated risks to Pakistan’s economy from the growing current account deficit that it projects will widen to 4% of the GDP in the current fiscal year. The inflation is also projected to remain in double-digit at the year end.

More taxes

The IMF has laid naked the next difficult steps that Pakistan now needs to take to remain in the programme.

“Maintaining the momentum on the reform of personal income taxation and harmonisation of general sales taxes is essential,” said Ms Antoinette Sayeh, deputy managing director and acting chair.

Finance Minister Shaukat Tarin had claimed that he did not accept the IMF’s demand to slap Rs150 billion taxes on the salaried class.

However, the statement suggests that Pakistan will now need to increase income tax rates for the inflation stricken salaried class and also implement single sales tax rate across the four provinces along with integrating their systems.

The government will also require to further increase the electricity prices to make the power sector financially viable, according to the IMF statement.

“Strong efforts to advance electricity sector reform are needed to restore the sector's financial viability and address adverse spillovers on the budget, financial sector, and real economy,” said the deputy managing director.

The IMF further stated that the IFI-supported Circular Debt Management Plan (CDMP) will help guide the planned management improvements, cost reductions, alignment of tariffs with cost recovery levels, and better targeting of subsidies to the most vulnerable.

“The Pakistani economy has continued to recover despite the challenges from the Covid-19 pandemic, but imbalances have widened and risks remain elevated,” according to the IMF.

Timely and consistent implementation of policies and reforms remain essential to lay the ground for stronger and more sustainable growth, it added.

‘Economy vulnerable to external factors’

The IMF said that the external pressures also started to emerge in 2021, including a widening current account deficit and depreciation pressures on the exchange rate which also reinforced domestic price pressures.

It has projected current account deficit equal to 4% of the GDP. The government is also required to increase the gross official foreign exchange reserves to $21.2 billion by June 30th – an addition of $5 billion in just five months.

The IMF said that the economy is set to continue recovering in FY 2022 with real GDP growth projected at 4%, while inflation is expected to pick up this year before gradually slowing down.

The IMF has projected 10.2% inflation rate for year end.

Continued commitment to a market-determined exchange rate and a prudent macroeconomic policy mix will help reduce the current account deficit and ease external pressures over the medium term.

However, Pakistan remains vulnerable to possible flare-ups of the pandemic, tighter international financial conditions, a rise in geopolitical tensions as well as delayed implementation of structural reforms, said the IMF.

It said that strengthening the medium-term outlook hinges on ambitious efforts to remove structural impediments and facilitate the structural transformation of the economy.

To this end, increased focus is needed on measures to strengthen economic productivity, investment and private sector development, as well as to address the challenges posed by climate change.

Along with careful spending management, revenue mobilisation will help create space for much-needed spending on infrastructure and social protection, while improving debt sustainability, said Miss Sayeh.

The IMF welcomed absolute autonomy for the central bank and said that: “The adoption of amendments to the central bank Act is a welcome step toward strengthening its independence to pursue its mandates of price and financial stability.”

The recent monetary policy tightening was necessary and continued proactive, data-driven monetary policy will help anchor inflation, it added.

It also emphasised that preserving a market-determined exchange rate was crucial to absorb external shocks, maintain competitiveness and rebuild reserves.

Pakistan also assured the IMF that it will be “removing the existing exchange restrictions and multiple currency practices when BOP conditions stabilise.”

“The authorities are focused on state-owned enterprises reform, fostering the business environment and reducing corruption, promoting financial inclusion; and addressing the challenges posed by climate change,” according to the deputy managing director.

After dragging feet for eight months, the government of Prime Minister Imran Khan signed off all the conditions that it tried to resist first in June and then in October last year.

The government agreed to take Rs800 billion measures through a combination of cut in expenditures and imposition of about Rs500 billion in taxes, including Rs20 per litre fuel tax, to revive the stalled $6 billion IMF programme.

The prior actions for the IMF board meeting that Pakistan met were approval of Rs360 billion mini-budget by the National Assembly, increase in the petroleum development levy rates every month (except in February), approval of the SBP Amendment Bill and the audit of Covid-19 expenditures and sharing of details about the beneficial ownership of coronavirus vaccines.

Earlier, the government had decided to keep the Covid-19 expenditures audit report confidential in violation of the IMF agreement. The report has disclosed Rs40 billion irregularities in the PM’s Covid relief package.

In November last year, Tarin had admitted that as a result of the IMF’s condition, “difficulties of the lower income groups will increase marginally but targeted subsidies will be given”.

The inflation rate in January skyrocketed to 13% -the highest in two years.

To qualify for the tranche, the Public Sector Development Programme was cut by Rs200 billion or 22% and the “contingency grants” were reduced by Rs50 billion, Tarin had said in November.

The tax collection target of the Federal Board of Revenue (FBR) has been increased to over Rs6.1 trillion – an addition of roughly Rs350 billion.

The revised petroleum development levy target is now Rs356 billion – down from Rs610 billion that the government had set in the budget.

Pakistan will have to ensure a primary budget surplus after paying the cost of debt servicing against the budget target of Rs376 billion deficit, requiring strict fiscal discipline that would have severe implications for the economy.

The government has given absolute autonomy to the SBP.

“Price stability, exchange rate of the rupee and the level of the interest rate will be the responsibility of the central bank in which the government will have no role."

With the approval of the $1 billion tranche, the total IMF lending will increase to $3 billion under the programme.

Still $3 billion will remain which the IMF will disburse subject to completion of the remaining programme reviews.

Read: "Pakistan needs to put ‘economic house in order’, says Qureshi"


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