July 15, 2022
ISLAMABAD – The International Monetary Fund (IMF) confirmed on Thursday that it had reached a staff-level agreement with Pakistan on the combined seventh and eighth reviews for a $6 billion loan facility, a development that paves the way for the release of the much-awaited $1.17bn.
The deal materialised after Pakistan met the IMF’s demand that the country achieve a primary budget surplus of Rs152 to revive the bailout package.
In a statement on its website, the Fund said the agreement was subject to approval by its Executive Board.
“The IMF team has reached a staff-level agreement (SLA) with the Pakistan authorities for the conclusion of the combined seventh and eight reviews of the extended funded facility (EFF) supported programme. The agreement is subject to approval by the IMF’s Executive Board,” the IMF statement read.
It added: “Subject to Board approval, about $1,177 million (SDR 894m) will become available, bringing total disbursements under the programme to about $4.2bn.”
The international money lender said a team led by IMF Mission Chief to Pakistan Nathan Porter finalised the discussions with Pakistan and that it had also agreed to consider extending its EFF, currently worth $6bn, till the end of June 2023, as well as augmenting it by $720m to expand its size to $7bn.
The statement said this decision was taken to support the programme’s implementation, meet Pakistan’s higher financing needs in FY23 and catalyse additional financing.
The announcement by the IMF also comes a dy after after Finance Minister Miftah Ismail told Dawn that talks with the money lender had concluded.
Soon after the IMF released the statement, the minister also confirmed the news on Twitter.
“I want to thank the prime minister, my fellow ministers, secretaries, and especially the Finance Division, for their help and efforts in obtaining this agreement,” he said.
Pakistan and IMF have reached an agreement. We will soon receive $1.17b as the combined 7th & 8th tranche. I want to thank the PM, my fellow ministers, secretaries and especially the finance division for their help and efforts in obtaining this agreement. https://t.co/376sCHLc1Y
— Miftah Ismail (@MiftahIsmail) July 14, 2022
In the same way, Prime Minister Shehbaz Sharif congratulated Ismail and Foreign Minister Bilawal Bhutto-Zardari, as well as their teams, for their efforts.
“The agreement with the Fund has set the stage to bring [the] country out of economic difficulties,” the premier said.
Congratulations to our Finance & Foreign Office teams led ably by Ministers Miftah Ismail & Bilawal Bhutto for their efforts in getting the IMF program revived. It was a great team work. The Agreement with the Fund has set the stage to bring country out of economic difficulties.
— Shehbaz Sharif (@CMShehbaz) July 14, 2022
In the statement issued today, the Fund noted that Pakistan was at a “challenging economic juncture”.
“A difficult external environment combined with procyclical domestic policies fuelled domestic demand to unsustainable levels,” it said, adding that the resultant economic overheating led to large fiscal and external deficits in FY22, contributed to rising inflation, and eroded reserve buffers.
In light of this, the money lender outlined “policy priorities” for Pakistan to “stabilise the economy and bring [its] policy actions in line with the IMF-supported programme”‘.
These priorities include the steadfast implementation of the budget for the current fiscal year, reforms in the power sector, working out a monetary policy to bring down inflation to “moderate levels”, reducing poverty and strengthening governance.
With regards to the budget for fiscal year 2022-23, the IMF noted that it aimed to “reduce the government’s large borrowing needs by targeting an underlying primary surplus of 0.4 per cent of GDP (gross domestic product), underpinned by current spending restraint and broad revenue mobilisation efforts focused particularly on higher income taxpayers”.
“Development spending will be protected, and fiscal space will be created for expanding social support schemes” under the new budget, it said, adding that the provinces had agreed to support the federal government’s efforts to reach the fiscal targets, and memoranda of understanding had been signed by each provincial government to this effect.
The IMF further highlighted that due to the “weak implementation” of the plan previously agreed with it, Pakistan’s power sector circular debt flow was expected to “grow significantly” to around Rs850bn in FY22, “overshooting programme targets, threatening the power sector’s viability, and leading to frequent power outages”.
Therefore, it said, Pakistani authorities were committed to resuming reforms in the power sector, including, “critically, the timely adjustment of power tariff”.
This adjustment, it added, covered the “delayed annual rebasing and quarterly adjustments, to improve the situation in the power sector and limit load shedding”.
On the recent monetary policy increase — wherein the State Bank of Pakistan increased the interest rate by 125 basis points to 15pc — the IMF termed the measure “necessary and appropriate”.
The IMF stressed that the monetary policy “will need to be geared towards ensuring that inflation is brought steadily down to the medium-term objective of five per cent to seven per cent”.
It further emphasised that the rates of export finance scheme (EFS) and long-term financing facility (LTFF) — two major financing schemes — “will continue to be linked to the policy rate” to enhance the monetary policy transmission. In this connection, the IMF statement mentioned that the rates for EFS and LTFF had been raised by 700 bps and 500 bps respectively over the recent months.
“Greater exchange rate flexibility will help cushion activity and rebuild reserves to more prudent levels,” the IMF said.
The IMF further said: “To improve governance and mitigate corruption, the authorities are establishing a robust electronic asset declaration system and plan to undertake a comprehensive review of the anti-corruption institutions (including the National Accountability Bureau) to enhance their effectiveness in investigating and prosecuting corruption cases”.
Road to the agreement
Pakistan entered the IMF programme in 2019, but only half the funds have been disbursed to date as Islamabad has struggled to keep targets on track.
The last disbursement was in February and the next tranche was to follow a review in March, but the government of ousted prime minister Imran Khan introduced costly fuel price caps, which threw fiscal targets and the programme off track.
The new coalition government has removed the price caps, with petrol and diesel prices going up by as much as 66pc and 92pc in over a month.
On June 21, Pakistan’s authorities and the IMF staff mission reached an understanding on the current fiscal year’s federal budget to revive the stalled loan programme after authorities committed to generating Rs436 billion more taxes and gradually increasing the petroleum levy to Rs50 per litre.
As a result, the IMF staff in a statement acknowledged that important progress had been made over the federal budget. Based on this, Pakistan provided written commitment from the provinces to provide Rs750bn in cash surplus to the Centre to contain fiscal deficit within 4.9pc of GDP and help generate a Rs152bn primary fiscal surplus.
Moreover, Pakistan is now required to increase the electricity tariff by Rs7.91 per unit besides direct pass-through of monthly fuel cost adjustments in a timely manner to meet IMF demands.
On June 28, Ismail had announced that Pakistan had received the Memorandum of Economic and Fiscal Policies (MEFP) from the IMF for the combined seventh and eighth reviews.
The revised MEFP was based on budgetary measures announced by Ismail in his winding-up speech on the revised budget in the National Assembly, envisaging over Rs1.716 trillion (2.2pc of GDP) of fiscal adjustment, mostly through taxation, including 10pc super tax on 13 industries and personal income tax covering monthly incomes above Rs50,000 per month.
This is on top of a fixed tax regime for sectors like retailers, traders, jewellers, builders, restaurants, automobile and property dealers and so on.
This is the biggest fiscal adjustment in a single year that would help turn about Rs1.6tr primary deficit — the difference between revenues and expenditures excluding interest payments — during the current fiscal year into a Rs152bn surplus next year.