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KARACHI: Pakistan and IMF reached a staff-level agreement on policies and reforms needed to complete the sixth review under the Extended Fund Facility (EFF). The agreement is subject to approval by the Executive Board, following the implementation of prior actions, notably on fiscal and institutional reforms.

Completion of this review would make available SDR 750 million ($1.0 billion), bringing total disbursements under the EFF to about $3bn and helping unlock significant funding from bilateral and multilateral partners.

Pakistan needs to meet some ‘prior actions’ before the case is presented to the IMF executive board for final approval, Muhammad Sohail, leading analyst and CEO of Topline Securities said.

These prior actions include amendment to the SBP act and taxation measures (removal of tax exemptions) to become part of finance (amendment bill), he said adding that Finance Minister Shaukat Tarin had also conceded that the five prior actions agreed with IMF includes SBP amendment bill, withdrawal of tax exemptions and an increase in energy tariff.

Executive board approval and final disbursement of IMF tranche will be dependent on how swiftly Pakistan adopts the two main prior actions including the SBP amendment act and removal of tax exemptions bill which needs to be passed in parliament for final approval. First phase of increase in energy tariff has already been carried out, he added.

For the staff level agreement, Pakistan has met all quantitative criteria by a wide margin except for that on the primary budget deficit. Pakistan primary deficit clocked in at 1.4 percent in FY21 or (deficit of Rs 654 billion) as against Quantitative Performance criteria of primary balance surplus of Rs 246 billion.

All other quantitative criteria for June end including National Socio-Economic Recovery (NSER) update, parliamentary adoption of National Electric Power Regulatory Authority (Nepra) act, notification of power tariff adjustment, and payment of first tranche of outstanding arrears to IPPS were met.

To recall, the IMF executive board approved a $6.0 billion EFF program for Pakistan in July-2019. In November-2019, Pakistan successfully completed its first review and in February-2020 reached staff level agreement on second review. However, the release of the tranche under second review was delayed due to Covid-19 outbreak.

In order to combat challenges pertaining to Covid-19, the IMF disbursed $1.4 billion in April 2020 under the rapid financing agreement. Later on after prolonged discussion with Abdul Hafeez Shaikh, the then finance minister, the IMF board successfully approved the Second, Third, Fourth and Fifth Tranche in March 2021.

Abdul Hafeez Shaikh was replaced by Shaukat Tarin in April 2021. Tarin then carried out talks with the IMF. He had initially vowed for pro-growth economic policies and was against increasing energy tariffs.

Consequently, Pakistan and the IMF were not able to conclude discussions over the sixth review (based on end March-2021 performance criteria) in June 2021. Consensus was not reached on 1) future roadmap on resolution circular debt, and 2) revenue measures to achieve fiscal targets.

The program was delayed since June 2021 and a staff level agreement between the two parties would bring the much needed clarity and uncertainty hovering around the IMF program.

As per reports, the government has already made some changes to SBP amendment act from the initial draft presented in Cabinet in February 2021 to find a middle ground in order to be passed by parliament as it is politically difficult for government to pass this SBP act.

In contract, bill on additional taxation measures of Rs170-180bn is likely to be passed without much opposition. “We expect Pakistan to receive the IMF tranche of $1.0 billion by December-end,” Sohail said. This will pave way for Pakistan getting loans from other bilateral and multilateral agencies which bodes well for Pakistan foreign exchange reserves and currency outlook, he added.

Foreign exchange reserves held by the SBP have lately seen pressure declining from $20 billion in August 2021 to $17 billion as of November 12, 2021. Similarly, Pak rupee has depreciated by 11 percent against US dollar since July 2021 owing to uncertainty over the outlook of the IMF program.

Copyright Business Recorder, 2021


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