The International Monetary Fund (IMF) has raised objections to Pakistan’s plan to directly borrow from local commercial banks in relaxation of competition rules, resisting the move that might cause distortion in the debt market.
The objections were raised during a meeting held on Monday between Pakistani authorities and an IMF team, according to sources. The IMF did not endorse federal cabinet’s decision in which the Ministry of Finance was authorised to borrow from commercial banks in closed-door negotiations.
“Direct lending issue is still being discussed with the IMF,” said Secretary Finance Hamed Yaqoob Sheikh on Tuesday.
Pakistan and the IMF are heading towards a staff-level agreement at a snail’s pace. A couple of issues remain pending in addition to finalisation of the Memorandum of Economic and Financial Policies (MEFP), a set of policies that the country will implement during the remaining period of current fiscal year.
Both sides on Monday also discussed the contours of next quarterly performance criteria in core programme areas and also fine-tuned the draft of MEFP. Electricity and taxation areas have almost been finalised, except for a notification about imposition of 25% general sales tax (GST) on dozens of items.
The Ministry of Finance wanted to borrow at least one-tenth of its financing needs through direct negotiations with commercial banks. It had planned to initially raise Rs400 billion from conventional and Islamic banks, a move that the IMF principally opposed due to its adverse implications for the debt market, according to sources.
Sources said that the Ministry of Finance tried to convince the IMF that the direct borrowing option would be used for emergency purposes only aimed at avoiding any blackmailing from commercial banks.
However, the IMF did not agree to direct lending as it wanted to avoid any further distortion in the debt market. It is already struggling to end distortions created in the currency exchange market by the government and central bank.
The Express Tribune had reported about two weeks ago that the federal cabinet allowed the government to directly borrow from commercial banks by withdrawing a public bidding condition.
Discussions with the IMF took place two days ahead of a major debt auction. The government is targeting to borrow Rs1.8 trillion through treasury papers on Wednesday. The money is needed to repay the maturing debt of Rs1.7 trillion.
The Ministry of Finance is maintaining a cash buffer of around Rs600 billion, which it can utilise in case of low participation by the banks.
As part of an IMF condition, the central bank last week raised the key policy rate to 20%, the highest in the country’s history. However, the central bank also gave a negative signal to the market by announcing that the monetary policy committee would next meet on April 4.
For the current fiscal year, the government had set the debt servicing cost at Rs3.95 trillion, which it last month revised to Rs5.2 trillion while seeking approval of the mini-budget.
Sources said that during the recent interaction, the IMF assessed the cost of debt servicing at around Rs5.4 trillion after the recent rate hike. The estimated debt servicing cost of Rs5.2 trillion was based on the assumption of 18-19% interest rate.
The government is set to borrow around Rs7.2 trillion in domestic debt from now till the end of June but it is apprehended that banks may exploit the situation due to the growing budget financing needs.
Against the budgeted figure of around Rs4.6 trillion, the Ministry of Finance has now assessed the federal budget deficit at Rs6.22 trillion for the current fiscal year.
The ministry was of the view that due to an increase in the policy rate as well as the advances-to-deposit ratio (ADR)-related tax, banks were reluctant to participate in auctions and were inclined to give loans through direct negotiations.
The cabinet’s decision to allow the finance ministry to directly borrow also ended the 16% additional ADR tax, providing up to Rs25 billion bonanza to commercial banks.
Normal income tax on a bank is 39% but if a bank’s gross ADR remains up to 40%, the government charges 55% income tax. For ADR in the range of 40% to 50%, an income tax of 49% is charged.
The finance ministry stated that various banks had raised concern over the challenges being faced by the banking sector while meeting the high ADR requirement as well as the difficulties faced by the government in refinancing significant auction maturities.
The government may not be able to directly borrow after the IMF’s objection but it has separately issued a notification to abolish the additional 16% tax. Last week, it abolished the ADR tax on banks for tax year 2024.
“The provisions of sub-rule (6A) of Rule 6C shall not apply to a banking company for the tax
year 2024,” read an SRO of the FBR.
Published in The Express Tribune, March 8th, 2023.
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