Pakistan badly failed to implement 16 of the 28 conditions that the International Monetary Fund (IMF) had set for $1.1 billion tranche, including the core condition to increase foreign exchange reserves that instead have turned negative by a whopping nearly $11 billion.
The failure to meet the conditions has compelled the global lender to slap eight more conditions on Pakistan in addition to giving fresh deadlines to meet the actions that remained unimplemented, showed the combined report of the 7th and 8th programme reviews that the IMF released on Friday.
The report suggests that the global lender had every reason to set tough conditions for the revival of the bailout package due to a bad track record of the government led by the Pakistan Tehreek-e-Insaf.
Some of the conditions that were required to be implemented during the last quarter of the fiscal year were missed due to slippages that occurred before the coalition government came into power.
Also read: IMF approves $1.1b tranche for Pakistan
However, the coalition government led by the PML-N, too, could not immediately reverse the course, which would have repaired the trust deficit with the global lender.
The IMF board had to give a waiver this week to pave the way for the revival of the derailed programme and the release of the $1.1 billion tranche.
The country missed the conditions to increase its foreign exchange reserves and reduce the primary budget deficit to a sustainable level. It could also not ensure full disbursements to the beneficiaries of the Benazir Income Support Programme, failed to adequately spend on health and education, remained unable to pay the tax refunds and could not restrict the power sector losses.
Former prime minister Imran Khan, who used to be against the tax amnesty scheme but only when he was not in power, gave another tax amnesty scheme, days before his ouster. He also allowed tax exemptions and his government could not push forward the reforms agenda, revealed the report.
“Overall programme performance has remained weak since the completion of the last review (February 2022) and until recently,” according to the report. It added several quantitative criteria were missed and gaps in implementing particularly the fiscal and structural reform agenda arose amid challenging circumstances, including domestic political turmoil and spillovers from the war in Ukraine, but also a “waning decisiveness to push forward agreed reforms”.
Pakistan missed core programme conditions like restricting the net international reserves to negative $4.7 billion by June this year. Instead, the country’s net foreign exchange reserves remained negative by $10.8 billion, according to the report. This was a major slip that exposed Pakistan to the risk of default due to negative reserves levels.
The country’s credibility has hit the rock bottom in the eyes of the international creditors and the players. Some members of the executive board of the IMF also questioned the back paddling in the board meeting that had been held on August 29 to approve the $1.1 billion loan tranche.
The condition to restrict the primary budget deficit to Rs25 billion by June was also missed due to fiscal slippages. Instead the country booked around Rs2 trillion primary budget deficit. The IMF said that the reserves and deficit conditions were also missed for the end-March period.
Pakistan also missed the conditions of not to impose exchange restrictions and discourage multiple currency practices. It also failed to meet the condition of not imposing import restrictions. The coalition government had to take the steps to avoid default after the previous PTI government failed to build sufficient reserves.
Also read: The IMF needs to do more
Pakistan also missed the condition to distribute Rs250 billion funds among the BISP beneficiaries and missed the target by a margin of Rs15 billion. The federal and provincial governments were required to spend Rs2.1 trillion on health and education but the actual spending remained Rs218 billion short of the target.
The Federal Board of Revenue had failed to meet the condition of stopping accumulation of tax refunds arrears and instead added Rs147 billion more into the refunds pool.
The IMF had allowed to add Rs166 billion more in the circular debt in the previous fiscal year but the actual increase in the power sector payment arrears was Rs536 billion, missing the target by Rs370 billion mainly due to delayed tariff adjustments and higher-than-expected generation and financial costs. These targets had also been missed for the end-March 2022 period.
Out of 10 structural benchmarks set to bring reforms, Pakistan missed seven, showed the report.
In violation of its commitment, the PTI government gave yet another tax amnesty scheme before it was ousted from power. It also gave preferential tax treatment to a few favourites one. The previous government also failed to prepare the draft of the Personal Income Tax law at the agreed date of February 2022.
The government also could not ensure timely approval of the new state-owned enterprise (SOE) law. It also failed to make a plan for the phasing out of SBP refinance facilities. The previous government could not honour its commitment for first-stage recapitalisation of two private sector banks that are sinking.
It also could not establish an asset declaration system for the public office holders and the civil servants.
New deadlines and conditions
Due to the failure to meet the conditions, the IMF has now revised the targets and also added new conditions for qualifying the next loan tranches, amounting to $3 billion.
The IMF has asked Pakistan to increase the BISP beneficiary base to nine million families using the NSER by June next year.
Pakistan will have to fully implement the Rs7.91 per unit increase in electricity prices by the start of October to reduce circular debt, which is already under implementation.
It will also have to submit to NEPRA petitions for the July 2023 fuel price adjustment by end-August; and first quarter of this fiscal year quarterly tariff increase petition by end October to fully recover the revenue requirement, including lost revenue from the delayed first-stage Annual Rebasing.
According to the fourth condition, the government will have to adopt a comprehensive strategy to address high levels of non-performing loans (NPLs) in some banks, including by requiring bank-specific plans for reducing NPLs, and to write-off fully provisioned NPLs. This condition should be met by June next year.
The government will also have to initiate orderly liquidation of either or both of the two currently undercapitalised private sector banks by end-May 2023 after these banks failed to meet capital requirements.
The government will have to submit a plan to the federal cabinet to align Pakistan’s early intervention, bank resolution, and crisis management arrangements with international good practices, in line with IMF staff recommendations by end-October 2022.
The government ought to operationalise a Central Monitoring Unit (CMU) within the Ministry of Finance by end-January 2023 to monitor state-owned enterprises.
Importantly, Pakistan will publish a comprehensive review of the anticorruption institutional framework (including the National Accountability Bureau) by a task force with participation and inputs from reputable independent experts with international experience and civil society organisations by end-January 2023.
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