ISLAMABAD:
The board of directors of the International Monetary Fund (IMF) on Monday approved a $1.3 billion loan, granting waivers in case of non-compliance with some basic conditions and securing a fresh commitment from Pakistan to introduce new fiscal measures to offset the impact of a huge revenue shortfall.
To win the IMF board meeting date, Pakistani authorities had agreed to fulfill two previous actions: a guarantee to issue a restructuring order for an undercapitalized bank and publish the Governance and Corruption Diagnostic Assessment report – this latest blow to their political capital.
The global lender approved nearly $1.1 billion under the Extended Fund Facility (SAF) and another $220 million under the Resilience and Sustainability Fund (RSF), under the decision that would keep the $8.4 billion two loan programs going.
The Ministry of Finance had to face internal criticism as it remained stuck to the conditions agreed with the IMF. The Ministry of Finance bureaucracy played a key role in keeping the program on track.
The IMF program has stabilized the economy and the Ministry of Finance showed its first primary budget surplus in years and ended an exponential rise in public debt.
The prime minister praised the performance of the economic team, particularly Finance Secretary Imdad Ullah Bosal.
The $1.1 billion is the third tranche of the $7 billion economic stabilization package, which is approved on the basis of Pakistan’s economic performance during the January-June period of the last fiscal year.
However, in order to pave the way for approval and continuation of the programme, the board accepted Pakistan’s request to grant waivers for failing to meet some of the conditions for the end-June period and relaxed at least three conditions for the next review.
While the IMF program has brought economic stabilization, structural reforms are yet to take root amid the call by the national coordinator of the Special Investment Facilitation Council (SIFC) for a growth plan.
Government sources said the IMF board waived the quantitative performance criterion condition of spending Rs 599 billion under the Benazir Income Support Program (BISP).
Spending remained below the IMF’s target. However, the central bank outperformed under another condition: creating net international reserves after purchasing $8.4 billion in the local market.
Sources said the IMF also relaxed the end-December condition on the primary budget surplus due to the impact of floods, adjusted the target for submission of new tax returns and BISP spending.
The government had also not met the conditions to achieve the fiscal target and provincial spending on health and education. But it met the conditions of restricting the circular debt of the electricity sector and improving the maturity of domestic debt to reduce refinancing risks.
The government had managed to meet eight structural benchmarks related to achieving some improvements in areas that were critical to addressing economic vulnerabilities.
However, it failed to achieve some other structural conditions related to the amendment of state-owned enterprise laws, the imposition of federal excise taxes on fertilizers and pesticides, and the timely publication of the Governance and Corruption Diagnostic Assessment report.
The corruption assessment report was released late, in what the chairman of the National Assembly’s Standing Committee on Finance described as “an indictment of the government and Parliament.”
The IMF board was informed that the publication of the corruption report was delayed due to necessary consultations with government agencies. On Monday, the Board also relaxed the deadline to publish the action plan by the end of this month to address corruption and related governance weaknesses.
The government has assured the IMF that it will amend laws on state-owned enterprises in August next year and is set to impose the federal excise tax on fertilizers and pesticides as part of contingency measures to make up for the revenue shortfall.
The Federal Board of Revenue missed its first five-month tax collection target by a wide margin of 413 billion rupees, and has promised to impose a mini-budget starting in January. However, FBR Chairman Rashid Langrial said last month that although the contingency measures had been agreed with the IMF, there would be no need to activate them.
Sources said the government also breached the condition of not granting any new tax exemption as it gave exemption on import of sugar, which it had exported first and which created a deficit in the local market.
The central bank told the IMF board that it exercised the right under the Banking Companies Ordinance to restructure and liquidate an undercapitalized bank as part of the IMF’s earlier actions.
The board has been assured that to complete the next review of the $7 billion deal, the government would introduce new fiscal policy measures, if necessary to make up for the revenue shortfall. He has also assured that an adequate monetary policy would continue to keep inflation under control.
However, Lt Gen Sarfraz Ahmad, national coordinator of the SIFC, a few days ago urged the central bank to cut interest rates, reflecting the reality of low inflation of around 6%.
The federal government promised the IMF that it would periodically adjust electricity and gas prices and reduce the state’s footprint.
The central bank also assured the IMF board that it would implement the flexible exchange rate.
