IMF programme targets

A typical IMF (International Monetary Fund) programme, including a Stand-by Facility, has a set of quantitative performance criteria, indicative targets and structural conditionalities.

These represent targets in different key areas of the economy to monitor the success in achieving the goals of the Programme.

The Stand-by Facility is a Programme of relatively short duration as compared to the Extended Fund Facility, which is usually for three years, like the last IMF Programme with Pakistan. The Stand-by Facility of the IMF with Pakistan is for nine months from July 12, 2023 to April 11, 2024. The amount to be disbursed in this period is approximately $3 billion in three installments. The first installment of $1.2 billion has already been released.

The second installment of $700 million will come on 1st of December 2023. This is subject to the satisfactory completion of the first review by meeting the end-September performance criteria.

The second and last review will commence from the 1st of March 2024. Successful completion by meeting the end-December performance criteria will lead to the disbursement of the final installment of almost $1.1 billion.

The reviews focus on the extent of achievement of the performance criteria, which are effectively targets. Failure to meet these criteria will require the issuance of waivers by the IMF. Indicative targets are of somewhat less importance but ideally should also be achieved.

Given the precarious financial condition of Pakistan, attainment of these performance criteria and indicative targets is likely to be monitored strictly by the IMF and actions prior or during a review are likely to be asked for if there is the likelihood of a big divergence.

There are altogether seven performance criteria and two continuous performance criteria. The first is the floor on net international reserves of the SBP. These are measured as the gross foreign exchange reserves with the SBP minus the foreign exchange liabilities and the outstanding loan with the IMF. The targets are that as of end-September 2023 they should be at least negative $14,500 million, and negative $13,800 million as of end-December 2023.

The net international reserves as of end-March 2023 were negative $14,378 million. Currently, they are estimated at close to negative $14,400 million. With the September target at $14,500 million, there is already a divergence of $100 million. Therefore, up to end-September there is no scope for a fall in foreign exchange reserves currently with the SBP at $8,154 million.

The next performance criterion is the ceiling on net domestic assets of the SBP. These are expected not to exceed Rs 15,048 million at the end of September and Rs 14,888 million at the end of December.

They stood at Rs 11,890 billion as of end-June 2023, with an increase of Rs 3,606 billion over the financial year. This was equivalent to 55% of the budget deficit in 2022-23. Now the IMF has limited the increase to Rs 2,998 billion in the first six months of 2023-24. This is equivalent to only 33% of the targeted budget deficit in 2023-24.

Therefore, the SBP is expected to significantly limit its open market operations, which will lead to greater pressure on interest rates. The third performance criterion limits SBP’s stock of SWAPs to $4 billion as of end-December 2023.

The fourth performance criterion is the ceiling on net government budgetary borrowing from the SBP at Rs 4,078 billion at end-September 2023 and to the same level as of end-December 2023. As of June 2023, the stock of budgetary borrowing from the SBP was significantly higher at Rs 5,246 billion. Therefore, the stock is to be reduced by Rs 538 billion and resort to more market borrowing. This will again put pressure on interest rates as the year progresses.

The fifth performance criterion is the ceiling on the general government primary budget deficit at only Rs 87 billion as of end-September and at Rs 1232 billion in end-December 2023.

Fortunately, during the last three years the first six months each year have witnessed a primary surplus. Large primary deficits have occurred in the second half of the year due to a peaking in expenditures, including debt servicing.

Therefore, based on historical trends, the federal government should be able to avoid a primary deficit of 1.1% of the GDP in the first half of 2023-24. However, as described below, there is the prospect of limited growth of FBR revenues in the first six months of 2023-24. This will increase the likelihood of a primary deficit even in the first two quarters.

An important performance criterion has been included as the sixth criterion. This relates to a ceiling on the stock of government guarantees. The magnitude has been restricted to Rs 4,000 billion as of end-September and to Rs 4,050 billion at end-December.

The Annual Budget Statement by the Ministry of Finance for 2023-24 reveals that the projected stock of guarantees is Rs 4,148 billion by end-June 2023, with 46% in domestic guarantees and 54% in external guarantees.

The restriction to Rs 4,000 billion by end-September implies that there will be pressure for earlier retirement of the guaranteed debt. In addition, the ceiling does not allow for the rise in the rupee value of external guarantees due to depreciation of the rupee.

Clearly, this is a very tough performance criterion. It leaves little scope for issuance of guarantees for new loans, especially for the power and aviation sectors. The cost recovery position in these sectors will have to be substantially improved and deficits thereby reduced.

The seventh performance criterion relates to the floor on targeted cash transfers spending in the BISP. The expected minimum magnitude as of end-September 2023 is Rs 87.5 billion and cumulatively at Rs 185.5 billion by end-December 2023. This is equivalent to 45% of the budgeted allocation for the year.

It should be possible to disburse Rs 185.5 billion by end-December. If the number of targeted beneficiaries remains at close to 9.3 million, then it will be possible to raise the individual cash transfer in the second quarter to above Rs 10,500 from Rs 9,000 currently, as required by the IMF.

There are two continuous performance criteria relating firstly to zero new flow of SBP’s credit to general government. This constraint has already been incorporated in the amended SBP Act.

The second continuous performance criterion relates to the zero-ceiling accumulation of external payment arrears by the general government. Clearly, this will tantamount to a default and must be avoided.

Turning to the Indicative targets, there are four such targets. The first relates to the cumulative floor on general government budgetary health and education spending at Rs 645 billion by end-September 2023 and cumulatively at Rs 1,031 billion by end-December. This target along with the level of BISP cash transfers represents the ‘human face’ of the Programme.

The public expenditure of Rs 1,031 billion on education and health is a modest target for half the year. Already, two years ago, in 2021-22, this spending was Rs 2,020 billion as reported by the Ministry of Finance in the PRSP progress reports. The implication is that rather than increase the IMF expects the general government spending on education and health to decline as a % of the GDP in 2023-24.

The second indicative target has special importance as it relates to the floor on net tax revenues collected by the FBR. These are projected to get up to Rs 1,977 billion by the end of the first quarter and cumulatively to Rs 4,425 billion by the end of the second quarter. This implies a minimum growth rate in FBR revenues of over 21% in the first quarter and much higher at 36.5% in the second quarter. This is in relation to the annual growth rate target of 30.8% in 2023-24.

The big variation by the IMF in target growth rates by quarter needs to be explained. The individual revenue targets in the federal budget for 2023-24 are relatively high for indirect taxes at above 40% as compared to less than 19% in income tax.

This big variation in growth rates is based by the IMF on the withdrawal of physical restrictions on imports which were imposed in 2022-23, to drastically reduce the current account deficit. In its projections for 2023-24, the IMF expects imports to rise in rupee terms by over 40%. This explains the ambitious target for growth in FBR indirect tax revenues, which are linked almost 65% to the growth in value of imports.

The assumption that there is enough space to increase imports drastically in 2023-24 hinges on the availability of adequate foreign exchange reserves, which are expected to be only at the present level of close to $9 billion throughout the year. As such, the increase of almost 29% in FBR revenues in the first half of 2023-24 is characterized by a high level of risk and will likely necessitate a minibudget after elections by the new government.

The last two indicative targets relate respectively to the ceilings on net accumulation of tax refund arrears by the FBR and power sector payment arrears. The FBR is notorious for building up arrears in an effort to achieve targets.

The ceiling on power sector payment arrears is essential to prevent the circular debt from rising any further. A start has been made by a decision by NEPRA to raise the power tariff substantially by Rs 7.50 per kilowatt hour from 1st of July 2023.

Overall, the targets in the IMF Stand-by Facility are ambitious and challenging in nature. Perhaps, the most difficult targets are the floor on the net international reserves of the SBP, ceiling on the amount of government guarantees, floor on FBR revenues and ceiling on power sector payment arrears. We wish the new caretaker government, with increased powers following the recent legislation, success in meeting the Programme targets for end-September 2023. Thereafter, the responsibility for achieving the end-December targets will rest with the newly elected government.

Copyright Business Recorder, 2023