The executive board of the International Monetary Fund (IMF) on Wednesday revived Pakistan’s stalled programme and approved $1 billion tranche after the implementation of tough conditions demanded by the donor agency.
Pakistan gave absolute autonomy to the State Bank (SBP) and took imposed taxes of around Rs800 billion as demanded by the IMF to get the Extended Fund Facility (EFF) revival.
The executive board of the IMF, in its meeting in Washington, also waived off a few conditions to pave the way for the release of the fourth loan tranche under the sixth review of the $6 billion Extended Fund Facility. The government has missed the primary budget deficit reduction target. The programme was suspended since June last year.
“I am pleased to announce that the IMF board has approved sixth loan tranche of its programme for Pakistan,” tweeted Finance Minister Shaukat Tarin on Wednesday.
The tweet suggested that it was the IMF’s programme however, IMF has always said that it is Pakistan’s programme.
After eight months, the government of Prime Minister Imran Khan signed off all the conditions that it tried to resist first in June and then in October last year.
The government agreed to make fiscal adjustments of more than Rs850 billion by taking taxation measures and slashing down development expenditures in the shape of Public Sector Development Programme to execute the IMF conditions during the ongoing fiscal year.
The FBR’s tax collection target was revised upward from Rs5.8 trillion to Rs6.1 trillion for the current fiscal year. The PSDP allocation was slashed down from Rs900 billion to Rs700 billion for 2021-22. The government also raised fuel tax to Rs20 per liter.
The prior actions for the IMF board meeting that Pakistan met were approval of Rs360 billion mini-budget by the National Assembly, increase in the petroleum development levy rates every month (except in February), approval of the SBP Amendment Bill and the audit of Covid-19 expenditures and sharing of details about the beneficial ownership of coronavirus vaccines.
Earlier, the government had decided to keep the Covid-19 expenditures audit report confidential in violation of the IMF agreement. The report has disclosed Rs40 billion irregularities in the PM’s Covid relief package.
In November last year, Tarin had admitted that as a result of the IMF’s condition, “difficulties of the lower income groups will increase marginally but targeted subsidies will be given”.
The inflation rate in January skyrocketed to 13 percent – the highest in two years.
To qualify for the tranche, the Public Sector Development Programme was cut by Rs200 billion or 22 percent and the “contingency grants” were reduced by Rs50 billion, Tarin had said in November.
The revised petroleum development levy target is now Rs356 billion – down from Rs610 billion that the government had set in the budget.
Pakistan will have to ensure a primary budget surplus after paying the cost of debt servicing against the budget target of Rs376 billion deficit, requiring strict fiscal discipline that would have severe implications for the economy.
The government has given absolute autonomy to the SBP. “Price stability, exchange rate of the rupee and the level of the interest rate will be the responsibility of the central bank in which the government will have no role.
With the approval of the $1 billion tranche, the total IMF lending will increase to $3 billion under the programme. Still $3 billion will remain which the IMF will disburse subject to completion of the remaining programme reviews.
THE DEAL: In May 2019, Pakistan and the IMF reached a staff-level agreement on economic policies for a three-year Extended Fund Facility (EFF).
Under the agreement, Pakistan was to receive about US$6 billion in a period of 39 months.
Islamabad had accepted the IMF’s conditions to reduce the primary deficit to 0.6%, granting more operational autonomy to the SBP, placing a flexible exchange rate and further tightening the monetary policy and hiking electricity tariff.
In its official announcement, the IMF had stated that “decisive policies” and reforms together with significant external financing were necessary to reduce vulnerabilities faster, increase confidence, and put the economy back on a sustainable growth path, with stronger private sector activity and job creation.
“Financing support from Pakistan’s international partners will be critical to support the authorities’ adjustment efforts and ensure that the medium-term programme objectives can be achieved,” the IMF had stated.