• Staff-level agreement signed as Pakistan ‘met most targets’
• Fund asks govt to return to floating exchange rate
• Expects inflation to fall in coming months, says nation remains susceptible to significant external risks

ISLAMABAD: The International Monetary Fund (IMF) on Wednesday reached a staff-level agreement with Pakistan on the first review of a short-term loan deal, which will unlock about $700 million next month.

The funds to be issued are a second tranche of the nine-month bailout package and are subject to approval from the IMF’s executive board, the lender said in a statement. This will bring total disbursements under the $3 billion package, approved in July, to almost $1.9bn.

The IMF called upon the authorities to restore full return to the market-determined exchange rate and highlighted risks that may arise because of geopolitical tensions, rise in commodity prices and difficult global financial conditions, and advised the authorities to continue efforts to build resilience.

It also pointed out that the timely disbursement of committed external support remains critical to support the authorities’ policy and reform efforts as the government was accelerating engagement with multilateral and official bilateral partners.

This is after a long time that a quarterly review with the IMF has remained smooth and culminated in the immediate announcement of a staff-level agreement, as most of the quantitative targets had been complied with. The talks spanned over two weeks, from Nov 2 to 15, in Islamabad.

Earlier in the morning, the successful completion of talks was hinted at by IMF Managing Director Kristalina Georgieva in an interview with Bloomberg News and then in a statement by the Prime Minister’s Office (PMO) after the visiting IMF mission chief, Nathan Porter, had a farewell meeting with Caretaker Prime Minister Anwaarul Haq Kakar.

The PMO statement, however, left an element of confusion by saying the “efforts have resulted in the positive conclusion of the technical-level talks”.

The Ministry of Finance added to the confusion when its secretary, Imdadullah Bosal, replied in the affirmative to a question that the PMO statement had not confirmed the positive conclusion of the policy-level talks. And even after the successful conclusion of talks, Caretaker Finance Minister Dr Shamshad Akhtar remained evasive to the media.

The IMF statement said the agreement supported Pakistan’s commitment to advance the planned fiscal consolidation, accelerate cost-reducing reforms in the energy sector, complete the return to a market-determined exchange rate, and pursue state-owned enterprise and governance reforms to attract investment and support job creation while continuing to strengthen social assistance.

It noted that anchored by the stabilisation policies under the bailout package, a nascent recovery was underway, buoyed by international partners’ support and signs of improved confidence. The steadfast execution of the current fiscal year’s budget, continued adjustment of energy prices, and renewed flows into the foreign exchange market have lessened fiscal and external pressures.

The lender said inflation was expected to decline over the coming months amid receding supply constraints and modest demand. “However, Pakistan remains susceptible to significant external risks, including the intensification of geopolitical tensions, resurgent commodity prices, and the further tightening in global financial conditions,” it said.

The IMF reiterated that strengthening macroeconomic sustainability and laying the conditions for balanced growth were key priorities under the current bailout package. It also insisted on continued fiscal consolidation to reduce public debt while protecting development needs.

It appreciated that authorities in Pakistan were determined to achieve a primary surplus of at least 0.4pc of GDP during this fiscal year, underpinned by federal and provincial government spending restraints and improved revenue performance supported, if necessary, by contingent measures.

Informed sources said these backup measures related to expanding revenue collection in retail and real estate sectors. The IMF pointed out that the authorities were building capacity to expand the tax base and raise revenue mobilisation and stood committed to improving the quality of public investment and spending.

The two sides also agreed to strengthen the social safety net to better protect the vulnerable. In this regard, the government will continue timely disbursements for social protection under BISP’s budget allocation — which is about a third higher than in the previous fiscal year.

This will allow for the expansion of the unconditional cash transfers (UCT) under the Kafalat programme to 9.3m families this fiscal year, with an annual inflation adjustment of the stipend.

“Looking forward, the authorities are seeking to improve the UCT Kafalat generosity level and to increase enrolment into the Conditional Cash Transfers programmes supporting children’s education and health,” the IMF said.

The two sides also agreed on further reforms to reduce costs in the energy sector and restore its viability. With the combined circular debt (CD) across power and gas sectors exceeding 4pc of GDP, immediate action was critical that included power tariff adjustments pending since July this year and increased gas prices after a long time, effective Nov 1.

The IMF conceded that these tariff increases were “substantial” but were necessary to avoid further arrears that threatened the viability of these sectors and the provision of critical energy supplies.

The authorities are also moving to tackle cost-side pressures, including bringing private sector participation to power distribution companies (Discos), institutionalising recovery and anti-theft actions, improving the terms of power purchase agreements, and reducing the incentives for captive power.

Officials said the negotiations with Chinese investors for improving power purchase agreement terms were reinforced by the IMF at the earliest.

The lender insisted on returning to a market-determined exchange rate at the earliest and rebuilding foreign exchange reserves.

It noted that while inflows following increased regulatory and law enforcement helped normalise import and foreign exchange payments and rebuild reserves, the authorities recognise that the rupee must remain market-determined to sustainably alleviate external pressures and rebuild reserves.

“To support this, they plan to strengthen the transparency and efficiency of the FX (foreign exchange) market and to refrain from administrative actions to influence the rupee,” it said.

The government and the IMF also agreed that while inflation was on the decline with appropriately tight monetary policy, there would be no delay in responding resolutely if near-term price pressures emerged again, including due to second-round effects on core inflation or renewed exchange rate depreciation.

The IMF also noted that the government was determined to implement a triage plan for state-owned enterprises, including privatising some of them.

High governance and transparency standards will apply to the management of assets under the ownership of the newly created sovereign wealth fund and the operations of the Special Investment Facilitation Council (SIFC).

To further strengthen governance, the authorities will ensure public access to asset declarations from cabinet members and a task force, with participation from independent experts, will comprehensively review the anti-corruption framework.

Published in Dawn, November 16th, 2023

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