IMF: Steady does it

The IMF’s “no surprises” visit comes to a close and the team has gone back. The mission was here for a stock-taking exercise, as reviews are now biannual, rather than the usual quarterly reviews. No need to read too much into the mission visit. There is unlikely to be any significant change on the fiscal or external fronts.

Tax revenues are falling short of the target, and contingencies should have been triggered in the form of new or additional taxes. However, the IMF did not press the government on this issue, and the government seems ill-equipped to take action. The mission will likely present the revenue shortfall to the broader IMF framework, and a waiver will be granted. There’s no mini-budget on the horizon.

The reason for granting the waiver is that the primary balance remains in line with targets, and the overall fiscal position is comfortable. Revenue shortfalls are being offset by falling expenditures. Tamed inflation is lowering interest rates, which in turn is reducing the interest expense. Moreover, the Public Sector Development Program (PSDP) is expected to be cut before any new taxes are introduced.

On the provincial front, provinces have shown a surplus. There was some accounting issue with the Punjab government, which had invested its cash in government securities. The numbers have since been revised and are now in line with the Fund’s targets. As for the fiscal pact, progress on agricultural income tax is slow, but it’s not expected to delay anything.

Monetary and external sector numbers are also comfortable. The State Bank of Pakistan (SBP) is passing the IMF’s exam with flying colors. The central bank is buying dollars from the market, building up its reserves, and reducing its forward liabilities. The currency is stable. With inflation coming down, the IMF has no issues with the pace of monetary easing.

However, there is a problem with financial assurances. The gross financing gap for this year is $2 billion. Of this, $1.2 billion of deferred oil facilities from Saudi Arabia have yet to materialize, and the remaining $800 million is still missing. Rollover commitments from friendly countries have not yet been formalized. The IMF board is being somewhat lenient on this issue.

Things are moving smoothly on the energy side. The government has committed to making efforts to reduce power tariffs through the renegotiation of contracts, specifically with the 2015 Independent Power Producers (IPPs). However, coercive measures on local investors under the 1994 and 2002 policies are creating difficulties in attracting investment and private credit flows. This undermines the core principles of an IMF program aimed at opening up international flows.

Regarding captive power plants, the government initially tried to delay the conversion to the grid. However, the IMF showed no flexibility on this front, and all industries are now required to switch to the grid by January 1, 2025. Progress on this is slow. There has been no movement on the privatization front, and the Sovereign Wealth Fund (SWF) has yet to come under the State-Owned Enterprises (SOEs) law.

Overall, things are on track and moving smoothly, as the IMF board (dominated by the US) continues to support Pakistan’s regime. However, the situation may change once the Trump administration takes office.