The negotiation on the ninth review (of a total eleven) of the International Monetary Fund (IMF) Extended Fund Facility (EFF) was left incomplete in June 2023.
Instead, a Stand-By Arrangement (SBA) was put in place on the last date before the expiration of EFF. Although such an arrangement is not a replacement for an EFF programme, it was intended to support the immediate efforts of the government to stabilise the economy until the IMF and Pakistan arrive at a consensus.
Due to the shorter term under consideration in a 9-month SBA, no improvement in revenue to GDP ratio was forecasted by IMF after the year FY24 i.e. a steady 12% revenue-to-GDP ratio assumed for FY25-28.
However, the EFF, which targets long-term structural reforms, would aim for a gradual improvement, annually.
Therefore, FY25 revenue target is expected to be approximately Rs16.5 trillion vs a target of Rs9.6 trillion in FY23 i.e. 31% p.a. growth in revenue during FY24 and FY25.
In addition, the target with the government would be to increase this ratio to at least 16% by the end of the approximately 4-year program period.
Improvement in this ratio is mostly a central point in discussion as both sides understand its importance to reduce reliance on borrowing.
Meanwhile, on the borrowing side, the IMF has projected gross financing needs for the year FY25 at $30.4 billion. As happened in FY23, there is a high probability that most of the loans will be rolled over, but availability of new funding sources creating net inflow of foreign currency, will be limited.
Despite precedence, proving to the IMF that sufficient sources of funding are available will be relatively tougher now than in FY20 when the government was able to obtain significant commitments from bilateral and multilateral partners. These resources have been extensively utilised in the past and therefore new net inflows from them might not be available in such size in the future.
FY24 gross financing requirement of $28.4 billion was also a bone of contention for completion of the ninth review, despite assurance from the ministry regarding availability of significant commitments for disbursements and rollovers.
On the sidelines, the negotiation for a medium-term EFF should be underway in parallel with the expiration of the current SBA. Ideally, a staff level agreement must be reached with the IMF in parallel, before April 2024.
Besides this, due to higher need for stabilisation measures, all the recent reviews in previous EFF were completed only after formal approval of additional revenue measures from parliament.
Such measures broadly included changes in corporate income tax to eliminate tax credits, imposition of super tax, withdrawal of exemptions from general sales tax and increase in personal income tax rates.
Based on the precedence, a new EFF is unlikely until budget for FY25 is approved.
Considering the funding situation, the size of the programme is also expected to be significantly larger than in 2019. At that time out of the $6 billion inflow under EFF, Pakistan had to repay $3.1 billion to IMF during the program period.
During 2024-27, a repayment of $6.4 billion is due. By this standard, the expected size of EFF should be around $12 billion or 440% of quota. This is not unprecedented, as the SBA negotiated in FY09 was 500% of the quota at that time.
Considering that this is a period of political change, the new government expected to be formed after elections in February 2024, will have a tough task of reaching an EFF in the initial days of the government takeover to continue the funding that it expects. The large programme size requirement will come with added conditions and an added responsibility on the government.
Although any one-off increase in foreign direct investments, due to privatisation or otherwise, will reduce the funding requirement, the task to increase revenue to GDP ratio, and reduce reliance on borrowing will remain to be a continuous challenge in the upcoming years.
The article does not necessarily reflect the opinion of Business Recorder or its owners
The writer is CEO at Kifayah Investment Management Limited
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