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No surprise, as expected, the IMF programme is back. Four pending reviews (2nd to 5th) are completed and $500 million for budgetary support will be released very soon. The language of the press release is supportive. The domestic authorities have done some work to get the Fund’s nod – it was not easy. A few tough steps are being taken, and others are in process.

Not to mention between the last review in Dec19 and now things have improved considering the slippages due to the COVID situation. The net international reserves (NIR) have improved by $9.8 billion between June-19 and Dec-20, standing at minus $5.5 billion. Minus the pandemic, the number could have been even better.

Total disbursement from the IMF under this programme is now $2 billion. Other external inflow position is satisfactory. Pakistan received external inflows of $7.2 billion in 8MFY21 - $12.2 billion is budgeted for the full year. The government is soon going to issue Euro Bond. The authorities have hired a consortium for triple-tranche bond issuance. This will help in diversifying financing avenues for growing fiscal deficit. Nonetheless, IMF has shown satisfaction on attaining fiscal primary surplus in 1HFY21.

The political climate is improving. At the time of last approved review (Dec19) government did not have simple majority in both houses. After the Senate elections, government is in a position to carry legislation. The opposition alliance PDM is losing heat. NEPRA and SBP Act are likely to pass. The corporate income tax ordinance is in place and it probably will have parliament nod in the upcoming budget.

The IMF was not easy this time. And finally, it is appreciating government efforts for reforms. Power sector reform are the toughest to pass on. Government has increased the base tariff (across the board) by Rs1.95/Kwh in Feb21. More hike is in the pipeline. A comprehensive plan is being submitted to curb the flow and to resolve the stock of the circular debt. Once NEPRA Act is amended, the tariff increase would be automatic.

The increase in tariffs and high international commodity prices would have inflationary bearings. Nonetheless, IMF has shown satisfaction on the current monetary policy stance – by saying it is appropriate. The real interest rates are negative and there is a reason to keep it as such. SBP is clear in its policy forward guidance – any increase will be “measured” and “gradual” to take real interest rates into slightly positive territory. Don’t expect any sea change in the monetary policy stance after the IMF.

The key is the external account. As mentioned above, NIR is shaping up well. This will keep IMF happy. The flexible exchange rate regime continues – in the partial absence of the IMF – PKR/USD hovered between 154 and 168 – demonstrating that the market flows are driving it. This flexibility gives room to SBP for running an accommodative monetary policy. “The market-determined exchange rate remains essential to absorb external shocks and rebuild reserve buffers”, IMF said this categorically.

In the end, IMF has urged authorities to do more. The Fund stressed that further improvement in the structural impediments is imperative for strengthening productivity, confidence, and investment climate. SOEs transparency, efficiency and governance are important. IMF emphasized on the effectiveness of anti-corruption institutions. Last but not the least point is to not forget on the completion of much-advanced action plan of AML/CFT.

A detailed commentary on the quantitative and qualitative targets, will be done once detailed country report is published.


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