A thumping vote

Khaleeq Kiani – November 12, 2019

AS anticipated, Pakistan has successfully completed its first-quarterly review with the International Monetary Fund (IMF) under the $6 billion Extended Fund Facility (EFF) finalised in May this year, and reached a staff-level agreement last weekend.

The staff agreement is subject to approval by the IMF management and executive board of directors, a formality provided a couple of minor inadequacies are addressed over the next couple of weeks.

The approval will lead to the disbursement of a second tranche amounting $450 million (equivalent to around 328m IMF special drawing rights) in early December. The IMF expects this to unlock significant funding from bilateral and multilateral partners.

A positive note from the IMF is expected to help Pakistan when it goes to the international capital market, which is currently offering lucratively lower interest rates. Pakistan has set a target of generating about $3bn bonds from the global market during the current fiscal year ending June 2020. The first launch could be as early as December.

IMF directors and senior officials have appreciated the robust take-off on the programme commitments by the authorities led by Dr Abdul Hafeez Shaikh as part of tough prior actions and their ownership by Prime Minister Imran Khan.

That stance was reinforced by the staff mission: “The Pakistani authorities and IMF staff have reached a staff-level agreement on policies and reforms needed to complete the first review under the EFF,” said a concluding statement of the fund mission indicating some quick actions required before a meeting of IMF executive board of directors is arranged for approving the disbursement.

IMF directors and senior officials have appreciated the robust take-off on the programme commitments by the government

Both sides chose not to hold a joint news conference, which is customary at the end of successful completion of a review under the IMF culture of engagements with member countries.

In another departure from the past practice, the government’s side decided not to issue a formal statement at the conclusion of the review by the staff mission or engage with the media. Open question-and-answer sessions sometimes create dicey situations and both sides opted to go with the written word by one party — the IMF.

The mission, on the other hand, issued a carefully drafted statement with half-yes, half-no description of the overall situation.

For example, it began by saying: “Despite a difficult environment, program implementation has been good, and all performance criteria for end-September were met with comfortable margins. Work continues towards completing the remaining structural benchmarks for end-September.”

This is manifestation of the IMF’s willingness not to go public with adverse commentary at the early stage of the programme, but it is tough enough to put on record that “work continues” to bridge end-September slippage on structural benchmarks before the management takes the case to the executive board.

These “structural benchmarks” include the issuance of licences for a track-and-trace system for excises on cigarettes and a set of measures on the electricity front.

Despite successive power tariff increases, the latest being the 85 paise per unit in the first week of October on account the 2018-19 fiscal year, similar more increases are also needed for the 2019-20 fiscal year besides some steps relating to a circular-debt capping and reduction plan that was only agreed to almost at the fag end of the review mission visit. This has to be approved by the cabinet at the earliest.

Without mincing words, the IMF highlighted that “advancing the strategy for electricity sector reforms, agreed with international partners, is important to put the sector on a sound footing, and remove recurrent arrears and accumulation of debt”.

The outstanding task against the end-September deadline involved developing a strategy to address circular debt in the power sector in consultation with lending agencies as structural benchmark with quarterly targets for losses, collection and accumulation of arrears (flow) by the distribution companies.

Elements of this plan will include: a monitoring and incentive framework for strengthening the sector’s performance, including bill collection and distribution losses; improving distribution companies’ governance; reducing or eliminating implicit government subsidies to particular economic sectors; assessing investment needs in the sector and designing an investment plan; and addressing the stock of circular debt to service the interest on accumulated power sector debt.

This will in fact be used as a blueprint for future reforms in the power sector. Also, the government must ensure regular and timely notifications for end-consumer tariffs in the electricity sector. More importantly, the government is required to introduce automaticity of quarterly tariff adjustments. The next IMF review will be held in the first week of January.

In the latest review, the IMF expects government’s policies to bear fruit soon and help “reverse the build-up of vulnerabilities and restore economic stability”.

“The external and fiscal deficits are narrowing, inflation is expected to decline, and growth, although slow, remains positive,” the IMF statement said. But this came with a disclaimer: “Sustaining sound policies and advancing structural reforms remain key priorities to enhance resilience and pave the way for stronger and sustainable growth.”

On the macroeconomic front, the IMF said that “signs that economic stability is gradually taking hold are steadily emerging. The external position is strengthening, underpinned by an orderly transition to a flexible, market-determined exchange rate by the State Bank of Pakistan (SBP) and a higher-than-expected increase in SBP’s net international reserves.

“The near-term macroeconomic outlook is broadly unchanged from the time of the program approval, with gradually strengthening activity and average inflation expected to decelerate to 11.8 per cent in FY2020. However, domestic and international risks remain, and structural economic challenges persist.”

The Fund warned that “fiscal prudence needs to be maintained to reduce fiscal vulnerabilities, including by carefully executing the FY20 budget, implementing the new Public Finance Management legislation, and continuing to broaden the tax base by removing preferential tax treatments and exemptions”

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