Pakistan to stay tethered to IMF

Interim finance minister signals prolonged engagement with lender

ISLAMABAD:

Pakistan would need another long-term International Monetary Fund (IMF) programme and will also have to increase electricity and gas prices for fulfilling the conditions of the ongoing bailout package, Caretaker Finance Minister Dr Shamshad Akhtar said on Thursday. Dr Shamshad also described the economic stability as “fragile” and “high external sector risks” – the conditions that warrant 25th IMF bailout package.

The minister’s remarks came a day after conclusion of the review talks for a $700 million tranche, which would unlock a total $1.6 billion in funding from the international financial institutions next month. In her interaction with media persons, the finance minister also announced to postpone the plan to float $1.5 billion Eurobonds due to adverse conditions.

Pakistan will have to be in the IMF programme for some time because of low domestic revenues and high needs of external financing, the interim finance minister said. She added that it would likely be an Extended Fund Facility (EFF) but maintained that no discussions took place with the IMF about the new bailout package. The EFF is a long-term structural adjustment programme that Pakistan had also availed in July 2019 but lapsed this year with $3.5 billion loan remaining undisbursed.

Read Pakistan to receive $700m from IMF

“The economic stability is fragile and needs consolidation through increase in domestic revenues and enhancing exports,” the interim finance minister said. “There is still very high risk to the external sector due to geopolitical tensions, situation in Afghanistan, stiff commodity prices and toughening global financial conditions,” she added. Dr Shamshad acknowledged that Pakistan would have to focus on macroeconomic stability.

Pakistan would pay back the $1 billion bond debt in April next year but it has postponed the plan to issue further Eurobonds to raise $1.5 billion debt, the finance minister noted, adding that the bonds issuance had been shelved due to high interest rates. Finance Secretary Imdadullah Bosal observed that a green bond could also be floated to raise the debt but claimed that Pakistan was in a comfortable position to meet all its financing needs.

Despite repeated questions, the finance secretary did not divulge the revised projected external financing requirements and the available financing. He promised to share these figures but no data was provided till the filing of the story. Bosal said that the government was in negotiations with a couple of foreign commercial banks for more loans but did not share the details.

The Express Tribune had reported that Pakistan was in negotiations for a $600 million loan from two Chinese banks. The circular debt has increased to 4% of the Gross Domestic Product, which is very concerning situation and the gas and electricity prices would have to be adjusted to contain it, the minister said while explaining one of the conditions agreed with the IMF.

The finance secretary stated that the gas prices would increase in January. The government has already increased the gas prices by up to 193% with effect from November to recover Rs406 billion more from the consumers. The prices had been increased by taking into account the total revenue requirements for the entire fiscal year.

Read  IMF seeks further power tariff hike

Dr Shamshad said that as part of the plan, the management of the power distribution companies would be handed over to the private sector.
She mentioned that the IMF had not yet given a date for the board meeting to approve completion of the first review and the release of the $700 million tranche. The total disbursements by the IMF after the approval under the current programme would jump to $1.9 billion, she added.

The finance minister explained that the support by Pakistan’s international partners was “very critical” for the external sector stability – in a reference to the critical position of the country’s bilateral and multilateral lenders for remaining afloat. The finance secretary detailed that with the approval of the first review, about $1 billion funding by the Asian Development Bank, the Asian Infrastructure Investment Bank and the World Bank would be unlocked by December.

The World Bank would give a $350 million loan, the ADB $300 million and the AIIB $250 million, he added. He highlighted that access to three programme loans related to social protection, flood resilience and women inclusiveness were also in the pipelines. The external and the fiscal sectors also showed improvement on the back of better management of the exchange rate market, the minister said, adding that this would improve the reserves position by the end of December.

The foreign exchange reserves depleted to $7.4 billion, the central bank reported on Thursday. The finance secretary said that there was no prior action for the board meeting but approval of the SOE policy by the federal cabinet before end of November and compatibility of the National Highway Authority Act, Pakistan National Shipping Corporation Act, Pakistan Broadcasting Corporation Act and Pakistan Post Office Act with the SOE Act were the two conditions that would be fulfilled.

Read more IMF agreement on second tranche expected this week: Georgieva

Compared to July there is an overall improvement in the economic conditions and the inflation rate has started slowing down, Dr Shamshad said, adding that there was also marked improvement in the investor’s confidence. The minister outlined eight major areas that the IMF would monitor during the programme period aimed at ensuring stability of fiscal, monetary, external sectors and improving management of the state-owned enterprises.

Pakistan will not distract from the path of fiscal consolidation, which is important for reducing the public debt, she added. The country’s total debt and liabilities have already peaked to Rs78 trillion, including the public debt mounting to Rs64.5 trillion. The minister said that the tax base would be further expanded and a Public Investment Management study would be launched soon to ensure better and targeted development spending by the federal and the provincial governments. She also noted that the stipend of the Benazir Income Support Programme beneficiaries would be increased from January in line with the prevailing inflation rate.

To a question about the interim government’s decision to set up a steering committee for the release of funds for the parliamentarians’ schemes, the finance secretary maintained that the funds would be released in line with the election commission’s policy. The finance minister said that 40% windfall tax on the income of the banks would generate additional Rs35 billion in taxes. She said that no mini-budget would be introduced but the contingency measures would be taken only if the FBR’s collection falls short of the target.