EVEN though Pakistan has completed 11 out of 12 quarterly reviews of the International Monetary Fund’s $6.64bn Extended Fund Facility, it has had to accept two new structural benchmarks to compensate for two missed ones.

As a result, the 36-month programme scheduled to conclude on September 3 would now stand extended almost for a month to Sept 30. The achievement of new structural benchmarks would make Pakistan eligible for a small $103m tranche.

The government had missed the structural benchmark of enacting a deposit protection fund law in line with IMF guidelines by end-March 2016, and the promised notification of electricity tariff for three distribution companies — Faisalabad, Islamabad and Lahore — by end-April 2016. The deposit protection fund law will now be enacted by August 15.


The achievement of new structural benchmarks would make Pakistan eligible for a small $103m tranche


The government did not notify tariffs for these companies nor did it solicit expressions of interest for the divestment of the Kot Addu Power Company by July 15, despite a decision by the Economic Coordination Committee (ECC) of the cabinet.

While also modifying performance criteria targets on net international reserves and net domestic assets, the IMF has, however, warned that downside risks to Pakistan’s economy remain and future growth and stability would hinge on the continuation of a reform programme.

The Fund noted that further appreciation of the real effective exchange rate in the context of an appreciating dollar would continue to erode export competitiveness while lower growth in advanced and emerging market economies, including China and the Gulf Cooperation Council, could weaken exports, remittances, and foreign direct investment. Also, tighter global financial conditions could have an adverse impact on capital inflows and a faster-than-expected rise in oil prices could worsen the external position.

Furthermore, medium- to long-term risks could arise from repayment obligations and profit repatriation related to large-scale investments such as those under China-Pakistan Economic Corridor (CPEC), underscoring the need for careful coordination and monitoring.

Domestically, policy slippages, further delays in restructuring or privatising public sector enterprises (PSEs), ongoing legal challenges to electricity surcharges and revenue measures, political uncertainty, and the still difficult security conditions could affect economic activity and undermine fiscal consolidation.

Generally, the Fund has been satisfied with the progress in achieving the programme’s structural benchmarks (SBs) as seven out of nine were met and the government committed to continue the reform agenda, which continues to face significant multiple challenges.

But despite the shortcomings, the government performance has been strong, with respect to macroeconomic stability and structural reforms, recovery of economic growth, subdued inflation, foreign reserve buffers, the fiscal deficit and social safety.

The Fund is satisfied with the continuing strengthening of the State Bank of Pakistan’s autonomy, increase in tax revenues, improvement in the tax administration and reduction in energy subsidies and new power sector arrears.

In line with the discussions with the IMF, the 2016-17 budget aims at gradual fiscal consolidation and set a deficit target of 3.8pc of GDP excluding foreign grants.

Broadening the tax base by further reducing concessions and exemptions, and improving tax compliance and collection, including at the provincial level, will be key in mobilising additional fiscal revenues. The Fund advised the authorities to continue building international reserves, allow greater exchange rate flexibility and maintain a prudent monetary policy stance, and further strengthen the central bank autonomy.

Not happy with the continuing cut in its policy rate, the IMF cautioned the central bank to prepare for tightening policy stance to sustain low-inflation expectations and support macroeconomic stability if risks intensify.

The latest government-IMF dialogue has confirmed that the plan for divestment of distribution and generation companies has been drastically scaled back. This would mean the strategic sale of loss-making power companies is no more an option in the foreseeable future.

On the contrary, the government would offer minority shareholding of these companies to common investors through initial public offering (IPOs) in order to finance the budget.

The authorities would thus continue to focus on improved revenues in the power sector by including the cost of inefficiencies – losses and non-recoveries – into the power tariff for recovery from honest consumers through fresh surcharges. These steps start with effect from the current month as the National Electric Regulatory Authority) has declined requests to change benchmarks for losses and recoveries to the disadvantage of consumers.

Before the end of the current month, the government would also be resuming the practice of biannual adjustments in natural gas tariffs that was suspended almost a year ago as international oil prices plummeted. This would be crucial for reducing financial losses of gas utilities.

Published in Dawn, Business & Finance weekly, July 18th, 2016

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