A representative image. Photo: File

Pakistan and the International Monetary Fund (IMF) have reached a staff-level agreement, the international moneylender revealed on Monday.

“The agreement is subject to the approval of the Board of Directors, following the implementation of prior actions, in particular on fiscal and institutional reforms,” ​​reads an IMF press release.

“Completion of the review would provide SDR 750 million (approximately US $ 1,059 million), which would bring total EFF disbursements to approximately US $ 3,027 million and help unlock significant funding from bilateral and multilateral partners. “

The IMF acknowledged that “despite a difficult environment” Pakistan continues to make progress in implementing the Extended Finance Facility program.

“All the quantitative performance criteria (PC) for the end of June have been met with wide margins, with the exception of the one on the primary budget deficit,” the IMF said.

He cited the finalization of the update of the National Socio-Economic Register (NSER), the parliamentary adoption of the amendments to the law on the National Electricity Regulatory Authority (NEPRA) as “notable achievements” by Pakistani authorities.

The IMF also recognized Pakistan’s efforts to improve the framework for combating money laundering and terrorist financing.

It also endorsed Pakistan’s decision on the first tranche of overdue arrears to independent power producers (IPPs) to unlock lower capacity payments set in renegotiated power purchase agreements (PPAs).

The IMF on the macroeconomic front

The IMF hailed Pakistan’s response to the coronavirus pandemic, adding that it had helped control the ramifications of the coronavirus pandemic. He also praised the Federal Board of Revenue’s (FBR) tax revenue collection, saying it had been “strong.”

The IMF said Pakistan was suffering most of the external pressure in the form of a widening current account deficit and the depreciation of the exchange rate.

However, the international money lender said these reflected “the combined effects of stronger economic activity, an expansionary macroeconomic policy mix and rising international commodity prices.”

“The State Bank of Pakistan (SBP) has also taken the right steps by starting to reverse the stance of accommodative monetary policy, strengthening some macroprudential measures to contain consumer credit growth, and providing forward guidance. “, did he declare.

The IMF said Pakistan had announced its intention to introduce several fiscal measures aimed at slightly reducing the primary deficit compared to the previous year, on the basis of:

(i) Quality tax measures to make the tax system simpler and fairer (in particular by adopting reforms of the GST system)

(ii) Prudent spending restraint, while fully protecting social spending.

The IMF has said that if Pakistan maintains these fiscal policies, it will help the country meet or exceed 4 percent growth in FY2022 and 4.5 percent in FY2023.

“However, inflation remains high, although it should start to see a downward trend once the pass-through from the depreciation of the rupee is absorbed and the temporary constraints on the supply and demand side abate. will dissipate, ”the IMF said.

The IMF has warned that the current account is expected to widen this year despite some growth in Pakistan’s exports. He said this widening of the deficit would reflect rising commodity prices around the world and growing demand for imports into the country.

The IMF on fiscal reforms, monetary policy and the electricity sector

The IMF said Pakistan will need to continue its efforts to abolish preferential tax treatments and exemptions, which will ultimately help the country allocate enough resources to spend on

The international money lender called on Pakistan to ensure that its monetary policy remains focused on controlling inflation, preserving exchange rate flexibility and strengthening international reserves.

“As economic stability takes root and the independence of the SBP is strengthened with the approval of changes to the SBP law, the central bank is expected to progressively advance the preparatory work to formally adopt an inflation targeting regime. (IT) in the medium term, underpinned by a forward-looking, interest-rate-focused operational framework, ”he said.

The IMF said further efforts are needed from Pakistan to modernize the operational framework of the state bank as well as to strengthen monetary transmission and communication.

The IMF has said it is important to make the electricity sector viable and to address its negative spillover effects on the budget, the financial sector and the real economy.

“In this regard, the continued implementation of the Circular Debt Management Plan (CDMP) will help guide planned management improvements, cost reductions, rapid alignment of tariffs with cost recovery levels and a better targeting of subsidies to the most vulnerable, ”he said.

“The substantial reduction in supply costs, however, will require a modern electricity policy that: (i) ensures that PPAs do not impose a heavy burden on end consumers; (ii) tackle the poor and costly production mix, including wider use of renewable energies; and (iii) introduces more competition in the medium term, ”reads the IMF press release.

The IMF described some measures for Pakistan that it has deemed necessary to take in order to remove structural economic barriers and achieve sustained economic growth. They were:

Improve the governance, transparency and efficiency of the public enterprise sector. Putting Pakistan’s public finances on a sustainable path, while leveling the playing field for businesses across the economy and improving service delivery, requires following the current reform agenda, in particular with:

(i) creation of a modern legal framework;
(ii) better sectoral surveillance by the State, supported by regular audits, in particular of the largest public enterprises; and
(iii) reducing the state’s footprint in the economy, based on the recently completed global inventory.

The IMF said that for Pakistan to achieve sustainable economic growth, it is also important to foster the business environment, governance and corruption control.

“The business climate would benefit from the simplification of procedures for starting a business, approving FDI, preparing business documents and paying taxes; and empowering people and producing more complex goods by investing more in education and human capital, ”he said.