IMF arrangement under EFF: Pakistan reaffirms commitment to economic policies

ISLAMABAD: Pakistan has reaffirmed its commitment to the policies and objectives of the economic programme supported by an International Monetary Fund (IMF) arrangement under the Extended Fund Facility (EFF).

In the letter of intent, former finance minister Dr Abdul Hafeez Shaikh and Governor State Bank of Pakistan (SBP) Reza Baqir stated as follows:

In the attached supplement to the Memoranda of Economic and Financial Policies (MEFPs) from June 19 and December 2, 2019, we outline further steps toward meeting these objectives against the unprecedented backdrop of the Covid-19 pandemic.

Like the rest of the world, Pakistan has been hard hit by the Covid-19 outbreak on both the social and economic fronts. We have recorded 592,100 confirmed cases and 13,227 deaths as of March 8 — despite the broad-based containment and mitigation measures that we introduced since the start of the pandemic in March 2020.

At the same time, real GDP growth in fiscal year 2020 declined by 0.4 percent, the first economic contraction since fiscal year 1952, and growth is expected to remain subdued in fiscal year 2021.

To contain the economic fall-out from the pandemic, we have taken a number of emergency actions. Notably, we implemented a comprehensive fiscal package worth about 1 percent of GDP in fiscal year 2020—supported by emergency IMF financing under the Rapid Financing Instrument (RFI)—that was disbursed beginning in mid-April 2020 along with swift measures to support liquidity and credit conditions (including cumulative cuts in the policy rate by 625 basis points). Importantly, our Ehsaas Emergency Cash (EEC) Programme provided one-time cash assistance to over 15 million families, covering about 90 million people or more than 40 percent of the population.

The Covid-19 shock has taken a large toll on our economy, necessitating a swift adjustment to the macroeconomic policy mix. Despite the Covid-19 shock, we were able to meet several ITs by large margins, including net international reserves, net domestic assets, and government borrowing. However, the pandemic has temporarily affected the implementation of some policies and pace of the structural reforms envisaged under the EFF-supported programme. More specifically:

We missed the end-June 2020 indicative targets which had been set before the onset of the Covid crisis. These missed targets were due to the necessary fiscal response to the health and humanitarian crisis and also the dramatic deterioration in macroeconomic conditions in Q4 fiscal year 2020.

However, we want to particularly highlight that despite the budget pressures, we met the target on the cumulative floor on targeted cash transfers spending thanks to our one-time emergency assistance to 15 million families as part of our Covid-19 emergency response.

At the same time, we also missed the target on the ceiling on the stock of government guarantees as some previously excluded guarantees needed to be incorporated into our figures. Our measures, including the use of smart lockdowns, to contain the pandemic have produced positive results. Despite a second Covid-19 wave starting in late-2020, per capita confirmed cases and the mortality rate remain low by international experiences. The economy is showing positive signs of responding to the government policies, although uncertainty remains significant.

Our focus is now on policies to boost the economy, preserving the stabilization gains achieved in the first nine months of the programme, while minimizing the scarring effects from the impact of Covid-19 by pressing ahead with the implementation of critical structural reforms — including those under the EFF programme — to support the economic recovery and strengthen resilience (MEFP Table 2). As such, we have made good progress in the following areas: we (i) approved a CIT reform to simplify the tax system and support our fiscal objectives in March 2021 (PA for completion of the review); (ii) submitted the amendments to the State Bank of Pakistan Act (SBP) to parliament (end-March 2020 SB and PA for the completion of the review); (iii) approved the NEPRA Act reform that will strengthen our power sector strategy in March (PA for the completion of the review); (iv) contained the circular debt flow in the power sector with Cabinet approval of a timetable for outstanding adjustments, notifying the FY 2020 Q2 and Q3 quarterly tariff adjustments in a staggered way in October and December 2020 (end January 2020 SB), and implementing the first half of the annual rebasing (AR) determined for FY 2021 in January 2021, accompanied by first energy subsidy reform steps (PA for completion of the review); (v) secured Cabinet approval of the updated Circular Debt Management Plan (CDMP) in March 2021 (PA for completion of the review); (vi) published a triage of our state-owned enterprise (SOE) portfolio in March 2021 (end-September 2020 SB); and (vii) submitted a new SOE law to parliament in March 2021 (end-September 2020 SB). On the other hand, we have made progress toward the completion of our AML/CFT action plan to support our exit from the Financial Action Task Force’s (FATF) list of jurisdictions under increased monitoring (grey list), but owing to capacity constraints we require additional time to complete the two outstanding SBs, namely the adoption of measures to effectively: (i) strengthen the AML/CFT framework (end-June 2020 SB, reset to end-June 2021) and (ii) address terrorism financing consistent with FATF Immediate Outcomes 9 and 10 (end-March 2020 SB; subsumed under the end-June 2020 SB). Moreover, the finalization of the BISP beneficiaries’ database has faced delays as the Covid-19 pandemic hindered field work (June 2020 SB, reset to end-June 2021).

Based on the strong steps that we have already taken and our resolute commitments for the period ahead, we request the completion of the combined second, third, fourth, and fifth reviews under the EFF.

We also request the re-phasing of access and modification of the review schedule due to delays in completing reviews as well as to better align them with reform implementation. The programme will continue to be monitored through quarterly reviews (and, as our track record strengthens, move to semi-annual reviews) as well as quantitative and structural conditionality (i.e., through PAs, quantitative performance criteria, indicative targets, and SBs) as described in the attached MEFP and Technical Memorandum of Understanding (TMU).

We believe that the policies set forth in the attached MEFP are very strong and a guarantee for the successful implementation of our programme, although we remain committed to taking any additional measures that may be appropriate for this purpose. We are aware that the outlook remains uncertain, particularly if the trajectory of the Covid-19 pandemic reverses course in Pakistan. We will consult with the IMF on the adoption of any additional measures, and in advance of revisions to the policies contained in the MEFP, in accordance with the IMF’s policies on such consultation.

We will supply the IMF with timely and accurate data that are needed for programme monitoring. Reaffirming our commitment to our policy of transparency, we consent to the IMF’s publication of this letter, the MEFP, the TMU, and the accompanying Executive Board documents, the LoI concluded.

Copyright Business Recorder, 2021