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Coronavirus
LOW Source: covid.gov.pk
Pakistan Deaths
28,777
1024hr
Pakistan Cases
1,287,161
33624hr
0.78% positivity
Sindh
476,830
Punjab
443,519
Balochistan
33,507
Islamabad
107,930
KPK
180,383

Finally, the wait is over. Yet, the anxiety is not. The IMF mission’s concluding statement is out. Staff level agreement for the sixth review is reached. The news came right after SBP’s increase in the policy rate by 150 bps in a monetary policy review preponed by a week. The executive board level approval of the IMF is subject to prior actions on fiscal (a mini-budget in offing) and institutional reforms (progress in the SBP Amendment Act). Consider that almost done. However, markets are still jittery. And they should be due to so much uncertainty in the last six weeks and slippage in the current account deficit.

Fund staff and the Pakistani authorities conducted a long mission that covered Article IV consultations as well as the discussions on the 6th review under the EFF at the same time. The last Article IV review for Pakistan was done in 2017. And later, it was supposed to be completed in the first part of 2020 (together with a second review), but then due to COVID, it got rescheduled as priorities changed. The press release this time includes the announcement of a staff-level agreement and a zest of the medium-term outlook and challenges related to discussions on Article IV consultations. Therefore, this press statement issued yesterday was a bit longer than usual. Expect a country report after the board’s approval, and that would be an interesting analytical document with pieces on competitiveness, climate change, GST harmonization, and management of SOEs to name a few.

The important and much-awaited news was on the completion of the sixth review. The discussions started at the start of October 2021, took six long weeks before reaching the conclusion. The authorities in Pakistan were confident of this happening while the markets were getting jittery due to the delay. An agreement is reached with some prior actions being already implemented while in the case of others – as per agreed terms - actions are required before the board’s approval.

Pakistan will get SDR 750 million (a little over $1 billion) after the board’s approval. This will help in unlocking significant funding from multilateral and bilateral partners, the statement emphasized. This could imply that the paperwork delay in Saudi Arabia’s deposits is perhaps linked to the Fund’s nod. Pakistan may reach out to the international capital debt market with the Fund’s nod to get better yields and healthy participation. Expect decent chunks to come from other multilaterals too. These all are much needed for external account stability.

The presser is showing satisfaction on the quantitative targets for June end. All performance criteria are met with wide margins except the primary fiscal deficit. And perhaps to meet the shortfall on the primary deficit, some taxation measures are to be unveiled before the board’s approval. They are likely to be more on GST harmonization. Then the non-tax revenues could be jacked up by imposing a higher petroleum levy on the petroleum products.

The IMF is not worried about the economic growth, which is projected to reach 4 percent in FY22 and 4.5 percent in FY23. However, the Fund has shown concerns about external pressures which are attributed to expansionary macro policies mix and higher international commodity prices. IMF has acknowledged SBP’s recent efforts on reversing an accommodative monetary policy stance. The market is expecting another 75-100 bps increase in the policy rate which is reflected by an upward revision in secondary market yields and KIBOR yesterday.

This is to be followed by some fiscal measures to bring primary fiscal balance in line with what is being agreed with the Fund. The primary fiscal deficit in FY21 stood at Rs654 billion (1.4% of GDP) as against the IMF’s target of a surplus of Rs246 billion. The government has agreed with the Fund to have high-quality revenue measures to make the tax system simpler and fairer by adaptation of reforms in the GST system. Expect similar measures in personal income tax by the next review. Then the government is likely to slash development spending too.

The Fund has emphasized that the monetary policy remains focused on curbing inflation, preserving exchange rate flexibility, and strengthening international reserves. This implies that there could be a further increase in the policy rate in upcoming monetary policy reviews, and the exchange rate may continue to remain as a line of defense in curbing imported demand. With higher rates and undervalued currency, the foreign portfolio flows can be attracted (as was the case in 2019) and this could help in building international reserves which are falling with the growing current account deficit - SBP reserves are down by $3 billion since August.

The third area of concentration is electricity sector reforms. Fund stressed upon steadfast implementation of the circular debt management plan. In this regard, cost reduction, timely alignment of tariffs, and better targeting of subsidies are critical. There are some steps already taken by the authorities including a parliamentary adaptation of NEPRA Act Amendments, notification of all pending quarterly power tariff adjustments, and first tranche payments to IPPs. The Fund emphasized a modern electricity policy for lowering supply costs.

On the medium-term outlook, the Fund is emphasizing the ambitious plan of removing structural impediments and facilitating the structural transformation of the economy. In the press release, four areas are being touched upon to strengthen economic productivity, investment, and private sector development, as well as to address the challenges posed by climate change. Expect more analytical and numerical work on these in the upcoming country report. Pakistan authorities should religiously focus on attaining these to come out of the fire-fighting mode and to avert repeated bailout packages.

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