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Finally, the IMF review is done, and the country report is out. The tone of the report is critical on the government policies – especially, after the new finance minster assumed the position. The report explicitly mentioned that since April 2021 that programme implementation has been uneven. There have been structural reforms slippages since then. A few critics within the PTI camp were wary about the Shaukat Tarin (ST) policies. They had feared rollback of tough reforms the economic team took in the past two years. And the Fund is echoing that.

Nonetheless, the Fund acknowledged that recently the authorities have taken decisions to bring the EFF back on track. This on a lighter note implied that ST’s software has been updated. The pitch of ST to IK in April was to put the IMF programme on freeze and capitalize on the current account surplus to accelerate the growth. That strategy had hit back hard as inherent assumption of low commodity prices proved to be exact opposite of the reality.

IMF has mentioned about a key policies reversal in FY22 budget. On top of the list is reduction of taxes – petroleum levy (PL) and GST on petroleum products. The actions were to offset the rise in the international oil prices but has resulted in the reduction of revenues to the tune of 1 percent of GDP and were against the commitment made at the time of programme approval. Then the zero-rated GST was reinstated in some domestic sectors which had been removed at the time of the programme’s approval.

Nonetheless, now the same team is bringing the programme back on track. The Fund feels that with the locking of key tax reforms in the supplementary (mini) budget, tightening of monetary policies and adjustment of electricity tariff are bringing the programme back on the track.

The other notable mentioning is of SBP’s refinance schemes. The Fund noted that SBP is expanding those schemes to address long standing credit gaps and market failures. The outstanding amount of these are Rs1,225 billion (15.5% of GDP). This includes Rs322 billion related to COVID temporary schemes, and expansion of already existing schemes. IMF Staff has warned that if expansions are not rolled back, these would undermine SBP’s efforts to credibly implement monetary policy.

To phase out these policies, there is an agreement for Ministry of finance (MoF) and SBP to jointly design a plan to establish a DFI (development finance institution) by April 2022 to transfer the refinancing schemes. There has been an emphasis on ERF (export refinance scheme) to assess its efficacy and action to improve it. The deadline is February 2022. If these schemes move from SBP to MoF, then there would be budgetary allocations for credit subsides. Right now, it’s money creation while being rolled by the SBP. Then these schemes are cannibalizing banks’ credit to private sector – especially long-term credit in the backdrop of TERF. If the government is to roll out mere credit subsidies, banks would be able to deploy their capital. Nonetheless, the amended SBP Act allows refinancing schemes to be roll out by the central bank if it’s not compromising long term price stability and in pursuit of SBP’s mandate.

The key reform missing is in the energy sector. The financial condition in the energy sector remains difficult and the cost to the budget and economy has been unsustainably high. Though the flow of circular debt has remained within the limits of the plan, this is due to delays in upcoming generation capacity, stronger than expected demand and PKR appreciation. Now all these factors are moving in opposite direction. There are around 6,600 MW coming in the next 6-9 months, currency has already depreciated and there are early signs of demand slowing down. The energy sector pending reforms cannot be overstressed.

The overall macroeconomic stability is coming back as the stabilization policies are back in action. Had the government not tried to over-boost the economy since April 2021, the toughness of policies in the last 2-3 months could have been lower. The COVID related reforms break is seemingly over. The key is to instill energy, SOEs and remaining taxation reforms. More on these later.


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