IMF agrees to resume Pakistan loan after fuel, tax hikes
Reaches staff-level agreement on combined seventh and eight reviews for Pakistan’s Extended Fund Facility: Fund to inject $1.17 billion into Pakistan’s ailing economy: Increases loan amount to $7 billion: Miftah Ismail thanks everyone
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A statement from the IMF said a "staff level agreement" -- which is still subject to board approval -- will bring to $4.2 billion the amount dispersed under an extended fund facility (EFF) that could increase to $7 billion and stretch until June next year.
An original $6 billion bailout package was signed by former prime minister Imran Khan in 2019, but repeatedly stalled when his government reneged on subsidy agreements and failed to significantly improve tax collection.
Confirming the agreement struck with the IMF, Finance Minister Miftah Ismail in a tweet 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.”
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
The new agreement follows months of deeply unpopular belt-tightening by the government of Prime Minister Shehbaz Sharif, which took power in April and has effectively eliminated fuel subsidies and introduced new measures to broaden the tax base.
"Pakistan is at a challenging economic juncture," Nathan Porter, who headed the IMF team, said in a statement, adding external factors and domestic policies were to blame.
Pakistan is desperate for international support for its economy, which suffers from poor revenue collection and dwindling foreign reserves to pay its crippling debt.
The new government has slashed a raft of subsidies to meet the demands of global financial institutions but risks the wrath of an electorate already struggling under the weight of double-digit inflation.
A new coalition government -- which came to power after Khan was ousted by a parliamentary no-confidence vote -- has said it will make the tough decisions needed to turn the economy around.
Successive administrations blame their predecessors for the country's economic woes, but analysts say the malaise stems from decades of poor management and a failure to tackle endemic corruption and widespread tax avoidance.
In a bid to secure the IMF loan, Prime Minister Sharif has imposed three fuel price hikes -– cumulatively totalling 50 percent -– and raised the cost of electricity to effectively end the subsidies introduced by Khan.
Islamabad has so far received $3 billion from the programme, but with the facility due to end later this year, officials sought an extension until June 2023.
"We knew it would damage our political reputation, but still we did it."
The latest budget has earmarked 3.95 trillion rupees ($18.8 billion) just to service the country's whopping debt of $128 billion.
Agreed policy priorities included steadfast implementation of the budget, the IMF's Porter said in the statement.
Pakistan also agreed to continue power sector reforms, introduce a proactive monetary policy to tackle inflation, strengthen governance, combat corruption, and improve the social security net.
"The authorities should nonetheless stand ready to take any additional measures necessary to meet program objectives, given the elevated uncertainty in the global economy and financial markets," the statement added.
Following is the text of the IMF statement:
An International Monetary Fund (IMF) team, led by Nathan Porter, has finalized discussions for the combined seventh and eight reviews of Pakistan’s economic program supported by an IMF Extended Fund Facility (EFF). At the conclusion of the discussions, Mr. Porter issued the following statement:
“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 EFF-supported program. The agreement is subject to approval by the IMF’s Executive Board. Subject to Board approval, about $1,177 million (SDR 894 million) will become available, bringing total disbursements under the program to about $4.2 billion. Additionally, in order to support program implementation and meet the higher financing needs in FY23, as well as catalyze additional financing, the IMF Board will consider an extension of the EFF until end-June 2023 and an augmentation of access by SDR 720 million that will bring the total access under the EFF to about US$7 billion.
“Pakistan is at a challenging economic juncture. A difficult external environment combined with procyclical domestic policies fueled domestic demand to unsustainable levels. The resultant economic overheating led to large fiscal and external deficits in FY22, contributed to rising inflation, and eroded reserve buffers.
“To stabilize the economy and bring policy actions in line with the IMF-supported program, while protecting the vulnerable, policy priorities include:
* Steadfast implementation of the FY2023 budget. The budget aims to reduce the government’s large borrowing needs by targeting an underlying primary surplus of 0.4 percent of GDP, underpinned by current spending restraint and broad revenue mobilization efforts focused particularly on higher income taxpayers. Development spending will be protected, and fiscal space will be created for expanding social support schemes. The provinces have agreed to support the federal government’s efforts to reach the fiscal targets, and Memoranda of Understanding have been signed by each provincial government to this effect.
* Catch-up in power sector reforms . On the back of weak implementation of the previously agreed plan, the power sector circular debt (CD) flow is expected to grow significantly to about PRs 850 billion in FY22, overshooting program targets, threatening the power sector’s viability, and leading to frequent power outages. The authorities are committed to resuming reforms including, critically, the timely adjustment of power tariff including for the delayed annual rebasing and quarterly adjustments, to improve the situation in the power sector and limit load shedding.
* Proactive monetary policy to guide inflation to more moderate levels . Headline inflation exceeded 20 percent in June, hurting particularly the most vulnerable. In this regard, the recent monetary policy increase was necessary and appropriate, and monetary policy will need to be geared towards ensuring that inflation is brought steadily down to the medium-term objective of 5–7 percent. Importantly, to enhance monetary policy transmission, the rates of the two major refinancing schemes EFS and LTFF (which have over recent months been raised by 700 bps and 500 bps respectively) will continue to be linked to the policy rate. Greater exchange rate flexibility will help cushion activity and rebuild reserves to more prudent levels.
* Reducing poverty and strengthen social safety. During FY22, the unconditional cash transfer (UCT) Kafalat scheme reached nearly 8 million households, with a permanent increase in the stipend to PRs 14,000 per family, while a one-off cash transfer of PRs 2,000 (Sasta Fuel Sasta Diesel, SFSD) was granted to about 8.6 million families to alleviate the impact of rampant inflation. For FY23, the authorities have allocated PRs 364 billion to BISP (up from PRs 250 in FY22) to be able to bring 9 million families into the BISP safety net, and further extend the SFSD scheme to additional non-BISP, lower-middle class beneficiaries.
* Strengthen governance. 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 anticorruption institutions (including the National Accountability Bureau) to enhance their effectiveness in investigating and prosecuting corruption cases.
“Steadfast implementation of the outlined policies, underpinning the SLA for the combined seventh and eighth reviews, will help create the conditions for sustainable and more inclusive growth. The authorities should nonetheless stand ready to take any additional measures necessary to meet program objectives, given the elevated uncertainty in the global economy and financial markets.
“The IMF team thanks the Pakistani authorities, private sector, and development partners for fruitful discussions and cooperation during the discussions.”
With inputs from IMF.