Restructuring the IMF programme

Published February 22, 2021
The package strikes an appropriate balance between supporting the economy, ensuring debt sustainability and advancing structural reforms. — AFP/File
The package strikes an appropriate balance between supporting the economy, ensuring debt sustainability and advancing structural reforms. — AFP/File

Pakistan and the International Monetary Fund (IMF) staff have been able to put the Extended Fund Facility (EFF) of $6 billion back on track after almost a year of virtual freeze.

According to a statement issued by the IMF, 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 EFF. The package strikes an appropriate balance between supporting the economy, ensuring debt sustainability and advancing structural reforms, it said.

The executive board of the Fund is expected to approve before March 31 the staff-level agreement to allow the disbursement of a tranche of about $500 million, bringing the total disbursements close to $1.94bn under the EFF signed in July 2019 — almost a year after the PTI came to power in August 2018. The initially prolonged indecision had a lasting impact on the national economy that was later in a sense dovetailed by the February 2020 Covid-19 outbreak.

After accounting for $1.4bn emergency disbursements under the Rapid Financing Instrument (RFI) in April 2020, Pakistan has received a total of about $3.34bn from the IMF since July 2019. This is just $260m lower than $3.6bn it might have secured by now under the programme schedule and the successful implementation of its structural benchmarks. However, the RFI remains outside the programme.

The understanding is to extend the programme framework closer to the completion of the PTI’s five-year term in August 2023

Therefore, in a typical scenario, Pakistan’s total programme disbursements should have been around $3.6bn, including about a $785m instalment on the completion of the fifth quarterly review in March and previous three quarterly releases of about $460m each. Instead, programme disbursements would reach $1.94bn with four reviews (March 2020 – March 2021) clubbed together. That practically leaves about $4bn of the purchased IMF quota, which could not be covered in three remaining biannual reviews under the previous schedule.

As such, Dr Abdul Hafeez Shaikh’s traditional “staying engaged” strategy with the IMF helped maintain the programme umbrella for other lenders to remain committed with existing resource pipelines and future programmes. More than its own resources for the balance-of-payments support, the Fund programme is important to provide confidence to the markets, bilateral and multilateral lenders and rating agencies.

The understanding is now to extend the programme framework closer to the completion of the PTI’s five-year term in August 2023 instead of the originally planned September 2022. Both sides are keeping secret the finer details of the prior actions, structural benchmarks, schedules of performance reviews and disbursements under the agreement until the board meeting. The revised programme structure may be useful to keep the government fiscally responsible until the last leg of its rule and avoid the traditional pre-poll populist spending mode.

That would allow the authorities to meet prior actions, including the placement of the SBP amendment act before parliament, a legal instrument for the pruning of income tax exemptions, finalisation of the circular debt management plan and progress on the energy sector’s regulatory laws.

The corporate income tax exemptions would become effective from July 1 but a legal instrument has to be put in place within a couple of weeks underwriting its protection through Finance Bill 2021-22 to enable the IMF staff secure the board’s approval. About Rs200bn of additional revenues are being envisaged through that measure alone on top of reverting to the income tax regime that existed before the PML-N’s last budget i.e. income tax applicability to about Rs600,000 per annum.

Other taxation measures in the next year budget, provided some pickup in the economy, would also come in aid so as to increase the revenue target from the current year’s revised base of about Rs4.6 trillion to well over Rs5.9tr in 2021-22 — a cumulative increase of almost Rs1.3tr or about 2.5pc of GDP — through additional revenue measures and an automatic increase on account of inflation and growth rate.

The authorities, however, insist that the current year’s revenue target remains unchanged at Rs4.96tr and with 13pc revenue growth in January (year-on-year), they are confident to get closer to the target as different economic sectors show revival.

The underlying commitment from the government is to achieving the EFF’s medium-term objectives through ambitious policy actions and structural reforms to strengthen economic resilience and advance sustainable growth. This is against this background that the IMF staff talked about a careful recalibration of the macroeconomic policy mix, the reforms calendar and the EFF review schedule.

The Fund said the fiscal strategy remains anchored by the sustainable primary deficit of the 2020-21 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 (read tight control on development spending and subsidies) and revenue measures, including reforms of corporate taxation to make it fairer and more transparent. 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.

On the energy side, the government has been able to convince the IMF staff to retain its right to have a final say, albeit with tough conditions, in base-tariff adjustments instead of automatic notification of tariffs on the determination of Nepra.

While the recent Rs1.95 per unit increase in electricity tariff across the board and throughout the country helped finalise the staff-level agreement, the submission of a circular debt management plan involving subsidy rationalisation and transparent budgeting and future tariff increases would facilitate the board’s approval of the IMF programme revival and the $500m tranche disbursement.

While the recent tariff increase would help reduce the flow of the circular debt, over Rs800bn stock parked in Power Holding Company would be gradually shifted to the public debt of the sovereign. As such, the government would ensure debt servicing through consumer tariffs or other papers. The Fund with the support of other lenders would have six-month reviews of the power sector performance and publication of progress reports to ensure tight compliance. There would be performance criteria in terms of efficiency gains, recoveries, subsidy payments, debt servicing and tariff increases and so on.

Published in Dawn, The Business and Finance Weekly, February 22nd, 2021

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