Finance Minister Ishaq Dar said on Friday that the government had received the Memorandum of Economic and Financial Policies (MEFP) from the International Monetary Fund (IMF) related to the completion of the ninth review of a $7 billion loan programme, indicating that a staff-level agreement with the lender was still pending.
The MEFP is a key document that describes all the conditions, steps and policy measures on the basis of which the two sides declare the staff-level agreement.
Once the draft MEFP has been shared, the two sides discuss the policy measures outlined in the document. Once these are finalised, a staff-level agreement is signed, which is then forwarded to the Fund’s Executive Board for approval.
The minister made these remarks in an early morning press conference after an IMF delegation, which left Pakistan last night after holding talks with the government for 10 days, issued a statement that virtual talks would continue.
The IMF and the government held talks between January 31 and February 9. As the visiting delegation left without a concluding statement, there was some confusion about the outcome of the talks and whether a draft MEFP had been shared.
However, Dar insisted in his press conference today that there was no confusion. “We insisted that they (the Fund delegation) give us the MEFP before leaving so we could look at it over the weekend,” he said, adding that the government and Fund officials would hold a virtual meeting in this regard on Monday.
“I am confirming that the MEFP draft has been received by us at 9am today,” he added. “We will completely go through the [MEFP] over the weekend and will hold a virtual meeting with [Fund officials]. It will obviously take a few days.”
During his presser today, the finance minister acknowledged that reforms in certain sectors required by the IMF were in Pakistan’s interest. He criticised the previous PTI-led government for “economic destruction and misgovernance”.
“It is necessary to fix those things,” he said. “These reforms are painful but necessary.”
He vowed to keep making efforts to ensure Pakistan completed the IMF programme.
“Once the MEFP has been finalised, they (IMF) have their own internal process and then a Board meeting is held. And then finally, when approval is given, the [tranche] is disbursed.
“It is a standard process which can neither be shortened, and hopefully they won’t extend it unnecessarily,” Dar added.
The finance minister shared that the country would receive a $1.2bn disbursement in the form of Special Drawing Rights after the review’s completion.
SDRs are international reserve assets created by the IMF in 1969 and are allocated to member states to supplement existing official reserves.
What Pakistan has agreed to with the IMF
- Imposing taxes amounting to Rs170 billion
- Minimising untargeted subsidies in the gas and energy sectors
- Ensuring that there is zero addition to gas sector’s circular debt
- Raising the petroleum development levy on diesel to Rs50 through two Rs5 hikes on March 1 and April 1
- Increasing allocation of BISP to Rs400bn
Outlining the policy measures agreed upon between the government and the IMF, Dar said taxes amounting to Rs170bn would be imposed. He added, however, that the government would try to ensure that the taxes did not directly burden the common man.
To impose the taxes, the government would introduce a finance bill or ordinance, depending on the situation at the time, he said. Preparations for the bill or ordinance would begin once matters were finalised. If both houses of parliament were in session at the time, then a bill would be presented, otherwise, an ordinance would be promulgated, he said.
“Secondly, we will implement the agreed-upon energy reforms through the federal cabinet,” he said, adding that the primary focus would be on minimising untargeted subsidies and reducing the “flow” in the gas sector to zero so there was no addition to the circular debt.
The minister noted that the government had already fulfilled the commitment to raise the petroleum development levy (PDL) on petrol to Rs50 per litre whereas the PDL on diesel would also be raised to Rs50 in the coming months.
He said the government and IMF had agreed that there would be no sales tax on petroleum products. However, the general sales tax would be “tinkered” with in the upcoming finance bill.
“We have agreed to increase the allocation to the Benazir Income Support Programme (BISP) to Rs400bn from Rs360bn currently to [help] the most vulnerable people hit by inflation.”
Talking about electricity prices, Dar said the country’s generation cost was around Rs2-3 trillion while only Rs1.8tr was recovered, which resulted in an increase in either the circular debt or fiscal deficit. However, the entire difference in amount would not be recovered by increasing the tariff, he said.
The IMF was working out everything in accordance with a plan, he said. “Our numbers have been agreed upon. The process will obviously be followed and the cabinet, ECC, etc [will be involved].”
In response to a question, he said the finance team was “satisfied” with the negotiations with the IMF related to the power tariff.
Talking about the precarious foreign exchange reserves situation, the minister said commitments with friendly countries would be fulfilled and inflows would be received. “There is nothing to worry about. This country has also survived on $414m in foreign reserves.
“The State Bank is managing,” he assured.
Dar said there was a credibility gap as the IMF did not trust the government because of the PTI government’s actions. “They say not only did the previous government not implement the agreement but also reversed when the vote of no-confidence was brought [against Prime Minister Imran Khan].
“The negotiations were hard but we agreed only to what was doable,” he said.
The concluding statement issued by IMF Mission Chief Nathan Porter stated, “The IMF team welcomes the prime minister’s commitment to implement policies needed to safeguard macroeconomic stability and thanks the authorities for the constructive discussions.”
“Considerable progress was made during the mission on policy measures to address domestic and external imbalances,” the statement said.
The statement underlined key priorities that include strengthening the fiscal position with permanent revenue measures and reduction in untargeted subsidies, while scaling up social protection to help the most vulnerable and those affected by the floods; allowing the exchange rate to be market determined to gradually eliminate the foreign exchange shortage; and enhancing energy provision by preventing further accumulation of circular debt and ensuring the viability of the energy sector.
“The timely and decisive implementation of these policies along with resolute financial support from official partners are critical for Pakistan to successfully regain macroeconomic stability and advance its sustainable development,” the statement added.
It further said that virtual discussions would be held in the coming days to finalise the implementation of these policies.
Pakistan’s foreign exchange reserves fell to $2.916bn during the week ending on Feb 3. Experts believe that the country’s reserves are enough for only 16 or 17 days of imports.
In such a situation, the country urgently needs to complete the ninth review to unlock the disbursement of $1.2bn from the IMF and inflows from friendly countries and other multilateral lenders.