ISLAMABAD:
The International Monetary Fund (IMF) board approved a $1.3 billion loan on Monday, granting waivers against missing a few key conditions and securing a new pledge from Pakistan to introduce new tax measures to offset the impact of a huge revenue shortfall.
To win the IMF board meeting, the Pakistani authorities had agreed to fulfill two prior actions, a guarantee to issue an order to restructure an undercapitalized bank and to publish the Governance and Corruption Diagnostic Assessment report – the latter hitting its political capital.
The global lender approved nearly $1.1 billion under the Extended Fund Facility (EFF) and another $220 million under the Resilience and Sustainability Facility (RSF), according to the decision, which would keep two loan programs worth $8.4 billion on track.
The Ministry of Finance had to face criticism from within as it remained stuck to the conditions agreed with the IMF. The Treasury bureaucracy played a key role in keeping the program on track.
The IMF’s program has stabilized the economy, and the Treasury posted its first primary budget surplus in years, ending an exponential rise in public debt.
The Prime Minister has praised the performance of the economic team, especially Finance Minister Imdad Ullah Bosal.
The $1.1 billion is the third tranche under the $7 billion economic stabilization package approved on the basis of Pakistan’s economic performance for the January-June period of the last financial year.
But to pave the way for the approval and continuation of the program, the board accepted Pakistan’s request to grant waivers for missing 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 have yet to take root amid the National Coordinator of the Special Investment Facilitation Council’s (SIFC) call for a growth plan.
The government sources said the IMF board waived the condition on the quantitative performance criterion to spend Rs599 billion under the Benazir Income Support Program (BISP).
Spending remained below the IMF target. However, the central bank outperformed on another condition of building net international reserves after it bought $8.4 billion from the local market.
The sources said the IMF also eased the condition at the end of December on primary budget surplus due to the impact of the floods, adjusted the target for filing new tax returns and the BISP expenditure.
The government had also missed the conditions for reaching the tax target and provincial spending on health and education. But it met the conditions to limit the circular debt of the electricity sector and improve the maturity of the domestic debt to reduce refinancing risks.
The government had managed to meet eight structural benchmarks that were related to bringing some improvements in areas critical to addressing the economic vulnerabilities.
However, it failed to achieve a few other structural conditions related to amending state-owned enterprise laws, imposing federal excise duty on fertilizers and pesticides, and timely publication of the Governance and Corruption Diagnostic Assessment report.
The corruption assessment report was published with delay, which the chairman of the National Assembly’s Standing Finance Committee described as “an indictment of the government and parliament”.
The IMF board was told that the publication of the corruption report was delayed due to necessary consultations with the government agencies. The board on Monday also relaxed the deadline to publish the action plan by the end of this month to address corruption and governance-related weaknesses.
The government has assured the IMF that it would now amend SOE laws by August next year, and was poised to impose the federal excise tax on fertilizers and pesticides as part of contingency measures to offset the revenue shortfall.
The Federal Board of Revenue missed its first five-month tax collection target by a wide margin of Rs413 billion and it has promised to introduce a mini-budget from January. However, Chairman FBR Rashid Langrial said last month that even if the contingency measures had been agreed with the IMF, there would be no need to trigger them.
The sources said the government also missed the condition of not giving any new tax exemption as it gave the exemption on import of sugar which it had first exported, creating a shortage in the local market.
The central bank told the IMF board that it was exercising the right under the Banking Companies Ordinance to restructure and wind up an undercapitalized bank as part of the IMF’s previous actions.
The board has been assured that for the completion of the next review of the $7 billion deal, the government will introduce new fiscal policy measures if necessary to offset revenue shortfalls. It has also assured that the appropriate monetary policy will continue to keep inflation under control.
However, Lt Gen Sarfraz Ahmad, the national coordinator of SIFC, a few days ago urged the central bank to cut interest rates, reflecting the ground realities of low inflation around 6%.
The federal government promised the IMF that it would regularly adjust electricity and gas prices and reduce the government’s footprint.
The central bank also assured the IMF board that it would implement the flexible exchange rate.
