It is indeed a welcome surprise that not only the IMF has resumed its programme with Pakistan but is also considering to increase the level of its financial tranche. Pakistan is facing an uphill task of restoring productivity to its economy that is badly mauled by COVID-19 pandemic and convoluted economic policies devised and implemented by the incumbent regime. As is wont with an IMF programme, it brought in its wake a raging inflation followed by considerable unemployment. The IMF however justifies its belt-tightening policies on the grounds that such policies bring stability to an economy and it consequently becomes productive. Pakistan’s difficult economic conditions required financial assistance of the IMF to restore its fiscal and monetary balance.
It is accordingly reported that both sides have agreed for exploring options either to jack up the size of remaining three reviews of tranches or extend the time frame beyond September 2022 under the existing $6 billion Extended Fund Facility (EFF). Currently, the size of IMF programme under EFF for Pakistan is at 4,268 million Special Drawing Rights (SDRs), equivalent to over $6 billion, with a quota share of 210 per cent. Ruling out possibility for any reduction in size of IMF programme from existing over $6 billion both sides have decided to place fresh macroeconomic framework after agreeing to combine second to fifth reviews and releasing only $500 million tranche subject to the approval of IMF’s Executive Board probably by end- March 2021. Instead of releasing $2 billion through a combination of second to fifth reviews, the IMF staff is recommending its Executive Board for approving only $500 million.
Under the original plan of EFF, the IMF was supposed to provide over $6 billion under the 39-month period programme with completion of eighth review and the last one was scheduled to be accomplished on 2 September, 2022. The fifth review was initially scheduled to be accomplished on 5 March, 2021 but now it is expected to be approved by end March 2021. When queried about the matter, it was mentioned that combining second to fifth reviews why the IMF was releasing only one tranche of $500 million instead of $2 billion it was replied that under the IMF programme the size of loan does not matter but remaining within the fold of the IMF demonstrates about good housekeeping in eyes of the international community. Being the best international financial institution such as the IMF, it possesses credibility and trust on the basis of which other multilateral creditors provide all kinds of concessionary financial support to loan recipient countries.
Moreover, it was also mentioned that Pakistan could not fulfill its certain benchmarks due to the eruption of COVID-19 pandemic so the IMF did not release the required amount under the EFF loan programme. However, it was reminded that it was the IMF that provided $1.4 billion soon after COVID-19 outbreak to support Pakistan under Rapid Financing Instrument (RFI) that was over and above the EFF arrangement. For all practical purposes, the IMF provided the needed support close to $2 billion for the period under reviews till March 2021. The logic behind this action is very clear as the amount given to Pakistan ultimately evened out.
Pakistan and the IMF have also agreed to re-adjustments on macroeconomic and fiscal framework under which the GDP growth target was revised at 1.5 per cent of GDP for the current fiscal against negative 0.4 per cent for the last fiscal year. The FBR’s target has also been revised downwards from Rs.4.967 trillion to Rs.4.75 trillion for the current fiscal year so the budget deficit is all set to exceed more than the envisaged target of 7 per cent of GDP. The IMF has asked for raising FBR’s tax collection target to close to Rs.5.9 trillion for next budget through elimination of income and sales tax exemptions. On the expenditure side, the government has convinced the IMF for granting raise in salaries and pension on the recommendations of the Pay and Pension Commission that is diligently working on it.
The IMF has specifically indicated that the COVID-19 shock required a careful recalibration of the macroeconomic policy mix, the reforms calendar and the EFF review schedule. Against this background, the authorities have formulated a package of measures that strikes an appropriate balance between supporting the economy, ensuring debt sustainability, and advancing structural reforms. The fiscal strategy remains anchored by the sustainable primary deficit of FY2021 budget and allows for higher-than-expected COVID-related and social spending to minimise the short-term impact on growth and the most vulnerable.
Both sides point out that the targets are supported by careful spending management and revenue measures, including reforms of corporate taxation to make it fairer and more transparent. The power sector’s strategy aims at financial viability, through management improvements, cost reductions, and adjustments in tariffs and subsidies calibrated to attenuate social and sectoral impacts and these measures will soon be able to place Pakistan’s economy on sure footings. TW