The technical teams of the government and the International Monetary Fund (IMF) have reached an agreement on a bailout package for Pakistan, Adviser to Prime Minister on Finance, Revenue and Economic Affairs Dr Abdul Hafeez Shaikh announced on Sunday.
"After months of discussions and negotiations, a staff-level agreement has been reached between Pakistan and the IMF," he said while speaking on state-run PTV News.
Dr Shaikh revealed that Pakistan would receive $6 billion worth of assistance under the IMF programme over a period of three years.
In brief: the Pakistan-IMF accord
- Pakistan to receive $6 billion over three years
- Islamabad to also receive $2-3bn from World Bank, ADB, etc.
- Finance adviser hints at raising prices in some areas "to recover costs"
- Decisive policies and reforms necessary for growth: IMF
- IMF says 'market-determined exchange rate' to help the financial sector
He said the staff-level agreement, which must still be approved by the IMF board of directors in Washington, would show that effective reforms were underway in Pakistan.
“The Pakistani authorities and the IMF team have reached a staff level agreement on economic policies that could be supported by a 39-month Extended Fund Arrangement (EFF) for about US $6 billion," an IMF press release quoted IMF Mission Chief for Pakistan Ernesto Ramirez Rigo as saying.
Dr Shaikh said IMF is an international institution whose primary job is to assist member countries who are in an "economic difficulty". He said the government could not have bridged the financing gap of $12 billion on its own that he said was created by a weak economy.
Besides the IMF assistance, Pakistan will also receive additional funds worth nearly $2-3 billion from institutions like the World Bank and Asian Development Bank, the adviser revealed.
Asked to share the conditions that Pakistan has agreed to as part of the agreement, Dr Shaikh said there were many things desired by the Fund that the government already saw as being in the country's interest; they include aligning expenditure with resources, improve the functioning of loss-making state-owned enterprises, curtail the subsidies available to the wealthy classes and tax the rich segments.
"These structural changes are in our interest if we want to take our people in the direction of prosperity and improve their quality of life," the adviser said.
He said because the government wants to send "a signal of financial discipline" and resolve fiscal challenges, the programme would entail raising prices in some areas in order to recover the costs.
"However [...] the government is focused on not putting too much burden on the common man," Dr Shaikh said. Explaining his point, he said that if power tariff is increased under the IMF programme, it will not affect consumers utilising less than 300 units, "and this includes 75pc of electricity consumers". For the same reason, the government is allocating an additional Rs50 billion for an electricity subsidy in the upcoming budget.
Under the programme, the government is also allocating an additional Rs80 billion for social safety programmes like Ehsaas and the Benazir Income Support Programme in order to minimise the burden on the common man, the adviser said.
Asked whether this would be Pakistan's last IMF programme, Dr Shaikh said: "It depends on how successfully we as a country implement this programme and approach it as a reform or structural change programme instead of a mere revenue-earning programme."
Decisive reforms necessary: IMF
The facility aims to support Pakistani authorities’ "strategy for stronger and more inclusive growth by reducing domestic and external imbalances, removing impediments to growth, increasing transparency, and strengthening social spending", the IMF statement said.
It said 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".
Rigo in his statement added: "Pakistan is facing a challenging economic environment, with lacklustre growth, elevated inflation, high indebtedness, and a weak external position. [...] The authorities recognise the need to address these challenges, as well as to tackle the large informality in the economy, the low spending in human capital, and poverty. In this regard, the government has already initiated a difficult, but necessary, adjustment to stabilise the economy, including thorough support from the State Bank of Pakistan. These efforts need to be strengthened.
"Decisive policies and reforms, together with significant external financing are 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."
The IMF mission chief emphasised that in addition to the EFF, "a comprehensive plan for cost-recovery in the energy sectors and state-owned enterprises will help eliminate or reduce the quasi-fiscal deficit that drains scarce government resources".
Rigo said the forthcoming budget for FY2019-20 is "a first critical step" in the fiscal strategy of the PTI government. "The budget will aim for a primary deficit of 0.6 per cent of GDP supported by tax policy revenue mobilisation measures to eliminate exemptions, curtail special treatments, and improve tax administration," he added.
Noting that inflation in Pakistan "disproportionately affects the poor", the IMF official said the State Bank of Pakistan will focus on reducing inflation and safeguarding financial stability.
"A market-determined exchange rate will help the functioning of the financial sector and contribute to a better resource allocation in the economy," he said.
“An ambitious structural reform agenda will supplement economic policies to rekindle economic growth and improve living standards. Priority areas include improving the management of public enterprises, strengthening institutions and governance, continuing anti-money laundering and combating the financing of terrorism efforts, creating a more favourable business environment, and facilitating trade."
A government official told Dawn that in the first year beginning on July 1, Pakistan will have to generate additional tax revenues of about Rs600bn, raise about Rs100bn from higher-end power consumers, privatise at least two power LNG plants worth over Rs280bn ($2b) and stop haemorrhaging of other public sector entities. These three big agenda items would provide about Rs1 trillion fiscal adjustment during the first year, including a one-time recovery of about Rs280bn from sale of two LNG plants in Punjab.
Energy Minister Omar Ayub Khan told Dawn that Rs98bn additional cost of power would be recovered from consumers at a rate of under Re1 per unit increase in tariff for consumers using more than 300 units per month. He said the government took a firm stand to protect low-end consumers using less than 300 units per month for whom an additional subsidy of Rs52bn would be earmarked in the budget, raising the total power sector subsidy to Rs216bn.
He said the flow of circular debt would be brought down to zero by Dec 31, 2020 while the existing stock of about Rs606bn would be reduced through sale of two LNG power plants and issuance of more bonds
Lengthy bailout talks
Islamabad and a visiting IMF mission had kicked off technical level talks on April 29 to sort out details of the proposed bailout package over the next 10 days. The two sides were scheduled to conclude a staff-level agreement on Friday, but the talks were extended into the weekend, with the finance ministry reporting "good progress" in the discussions.
The finance ministry had approached the IMF in August 2018 for a bailout package, whereas last month, the then finance minister Asad Umar announced that the two sides had — more or less — reached an understanding on a package for bailing out the country’s ailing economy.
“In the next step, the IMF will send its mission to Pakistan in the next few weeks to work out technical details. But in principle, we have reached an agreement,” he had said. However, Umar was removed from the post in a dramatic move and was replaced with Dr Shaikh — an internationally renowned economist.
Dr Shaikh served as the finance minister from 2010 to 2013 during the PPP government's rule. During his tenure as federal minister, Dr Shaikh completed 34 sale transactions worth Rs300 billion in banking, telecom, electricity, and manufacturing.
Subsequently, an IMF employee, Dr Reza Baqir, was appointed governor of the State Bank of Pakistan to serve for a three-year term. The chairman of the Federal Board of Revenue was also changed in a sudden move.