• Fund says Pakistan remains committed to ambitious policy actions and structural reforms
• Bill drafted for SBP’s autonomy
• 1.5pc economic growth rate projected

ISLAMABAD: With energy tariffs jacked up, Pakistan and the International Monetary Fund (IMF) have reached a staff-level agreement for disbursement of $500 million as they finalised modified ‘ambitious policy actions’ on expenditure cuts and revenue measures for revival of $6 billion fund programme disrupted since February 2020.

A statement issued by the IMF said the two sides completed second to fifth (March 2020 to March 2021) quarterly reviews — a rare phenomenon given the pandemic — and the fund projected an economic growth rate of 1.5 per cent for the current financial year against last year’s negative growth rate of 0.4pc. However, the outlook is subject to a high level of uncertainty and downside risks owing to an unfolding second wave of the pandemic. The virtual talks from the IMF side were led by Ernesto Ramirez Rigo.

The staff-level agreement is expected to be approved by the IMF executive board before March 31 to enable immediate disbursement of $500m. With this tranche, the total IMF disbursements to Pakistan since the beginning of the extended fund facility in July 2019 would reach $3.362bn (including $1.4bn of emergency support) which is reasonably higher than $3.006bn under the original schedule based on quarterly reviews. With three more quarterly reviews by end-June 2022, the 39-month programme will come to an end on September 1, 2022.

The IMF statement said the two sides “have reached an agreement on a package of measures to complete second to fifth reviews of the authorities’ reform programme supported by the IMF Extended Fund Facility (EFF). The package strikes an appropriate balance between supporting the economy, ensuring debt sustainability, and advancing structural reform”.

“Pakistani authorities remain committed to ambitious policy actions and structural reforms to strengthen economic resilience, advance sustainable growth, and achieve the EFF’s medium-term objectives,” the statement added.

An official said the government would within days place before parliament a bill jointly drafted by the authorities and the IMF on independence of State Bank of Pakistan, conclude a National Electric Power Regulatory Authority law and complete the process of pruning the tax exemptions and distortions to become effective from July 1.

The finance ministry remained silent on the development except a tweet by Finance Minister Dr Abdul Hafeez Shaikh to confirm the agreement, adding that “overcoming the challenges created by the pandemic has required concerted effort” besides thanking the prime minister for guidance. An official said the power tariff increases notified by the government and the power regulator were the final prior action for now to conclude a revised agreement.

The IMF said the Covid-19 shock required a careful recalibration of the macroeconomic policy mix, the reforms calendar, and the EFF review schedule. “Against this background, the authorities have formulated a package of measures that strikes an appropriate balance between supporting the economy, ensuring debt sustainability and advancing structural reforms.”

The fiscal strategy remains anchored by the sustainable primary deficit of FY2021 budget and allows for higher-than-expected Covid-related and social spending to minimise the short-term impact on growth and the most vulnerable. “The targets are supported by careful spending management and revenue measures, including reforms of corporate taxation to make it fairer and more transparent,” the IMF said, adding that the “power sector’s strategy aims at financial viability, through management improvements, cost reductions, and adjustments in tariffs and subsidies calibrated to attenuate social and sectoral impacts”.

“The authorities are moving steadfastly on a number of other important reforms, including on strengthening regulatory agencies’ legal frameworks (Nepra and Ogra Acts), consolidating SBP’s autonomy (SBP Act), and improving state-owned enterprises (SOE) management (SOE Law),” the IMF said.

In addition, they have conducted a triage of SOE, and are moving forward with the audits of contracts awarded for Covid-related spending. The authorities also continue to enhance the effectiveness of their anti-monetary laundering/counter financing of terrorism (AML/CFT) framework and progress in completing their action plan with the Financial Action Task Force.

The IMF said the Covid-19 shock temporarily disrupted Pakistan’s progress under its programme and appreciated that the authorities’ policies and allowing higher than expected Covid-related social spending had been critical in supporting the economy and saving lives and households. It also noted that the policies and reforms implemented by the authorities prior to the Covid-19 shock had started to reduce economic imbalances and set the conditions for improving economic performance.

“Most of the targets under the EFF-supported programme were on track to be met” but the pandemic disrupted them. The authorities’ response was enabled largely by the fiscal and monetary policy gains attained in the first nine months of FY2020.

Besides the measures to contain virus, the government policies also included a temporary fiscal stimulus, a large expansion of social safety net, monetary policy support and targeted financial initiatives. They were supported by sizeable emergency financing from the international community including from IMF’s Rapid Financing Instrument.

“As result of the authorities’ actions, the Covid-19 first wave started to abate over the 2020 summer and the impact on the economy was significantly reduced. The external current account improved, due to stronger-than-expected remittances, import compression, and a mild export recovery.”

The banking system remains healthy, but it will be important for the SBP to continue to remain vigilant and prevent possible financial stability stress as the temporary support is phased out. International reserves are set to improve further reflecting current account developments, the EFF resumption and international partners’ support.

Published in Dawn, February 17th, 2021