The past few months have been tough for Pakistan’s economy. High commodity prices, falling reserves, rising international cost of borrowing, financing repayments of international loans and expensive imports. All these and more had pushed the country, willingly or unwillingly, to revive its stalled loan program with the IMF.
The program had been stalled due to the massive fuel and energy subsidies given by the government in February 2022 which drove the country into a very tight fiscal conundrum.
Good news finally came in late hours on July 13, 2022, as IMF completed the combined seventh and eighth reviews for Pakistan’s Extended Fund Facility (EFF).
Subject to Board approval, Pakistan stands to receive around $1.177 billion (SDR 894 million), bringing total disbursements to about $4.2 billion.
The IMF Board will also consider an extension to the program until end-June 2023 with an augmentation of access by SDR 720 million which will bring the total access to about US$7 billion.
But the question is, will the program really help Pakistan turn this difficult economic corner and what will Pakistan look like at the other end of this tunnel.
Critical measures
The IMF and the Pakistan government have agreed that the immediate priority is to stabilize the economy through:
The steadfast implementation of the recently approved budget for Fiscal Year 2022-23:
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Reduce the government’s large borrowing needs by targeting an underlying primary surplus of 0.4% of GDP;
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Current spending restraint;
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Protecting development spending;
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Creating fiscal space for expanding social support schemes.
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Continued adherence to a market-determined exchange rate;
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The recent monetary policy increase was necessary and appropriate, and monetary policy will need to be geared towards ensuring that inflation is brought steadily down to the medium-term objective of 5–7 percent.
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Expand social safety to protect the most vulnerable. The government has allocated Rs364 billion for BISP (up from Rs250 in FY22) to be able to bring 9 million families under BISP’s safety net, and further extend the SFSD scheme to additional non-BISP, lower-middle class beneficiaries.
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Improve the performance of state-owned enterprises (SOEs).
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Improve governance and mitigate corruption,
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Establishing a robust electronic asset declaration system; and
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Plan to undertake a comprehensive review of the anti-corruption institutions (including the National Accountability Bureau) to enhance their effectiveness in investigating and prosecuting corruption cases.
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Stand ready to take any additional measures necessary to meet program objectives, given the elevated uncertainty in the global economy and financial markets.
Some predictions
On the back of the weak implementation of the previously agreed plan, the power sector circular debt (CD) flow is expected to grow significantly to about Rs850 billion in FY22. The government is committed to resuming reforms including, critically, the timely adjustment of power tariffs including for the delayed annual rebasing and quarterly adjustments, to improve the situation in the power sector and limit load shedding. Rates of the two major refinancing schemes - EFS and LTFF (which have over recent months been raised by 700 bps and 500 bps respectively) will continue to be linked to the policy rate.
The provinces have agreed to support the federal government’s efforts to reach fiscal targets, and Memoranda of Understanding have been signed by each provincial government to this effect.
The revival of the program is expected to bring stability to the financial markets and provide support to falling reserves, besides putting an end to the rumors of default.
These stability and tight austerity measures will each have their respective shocks and impacts on the economy.
But coming out on the other side, a leaner and more stable national economy can be expected- provided disciplines in all fiscal areas of concern are achieved and maintained.
The writer is the CEO of Kifayah Investment Management Limited and can be reached at: faisal.hafeez@kifayah.com
