After signing IMF deal, Pakistan intends to gather around $10b in loans

• The IMF blatantly ignored the rising inflation in its statement on the occasion of reaching a staff level agreement with Pakistan.
• The accumulation of circular debt of Rs850 billion has shocked policymakers and set off alarm bells.
• Overall, there are signs that Islamabad may secure $10 billion in dollar loans from multilateral creditors.

The IMF blatantly ignored the rising inflation in its statement on the occasion of reaching a staff level agreement with Pakistani authorities, strengthening the impression that the Washington-based lender is completely oblivious to the suffering being experienced by middle-class salaried workers and pensioners who are suffering from inflation.

Since there is a total electricity billing of Rs1,600 billion, the flow of circular debt reaching Rs850 billion has sparked concern among policymakers. The accumulation of circular debt of Rs850 billion has shocked them and set off alarm bells.

In addition, the IMF statement revealed that the government had allotted only a pittance—Rs68 billion to Rs72 billion—for the supply of Sasta Petrol and Sasta Diesel in the wake of rising inflationary pressures.

Miftah Ismail, the minister of finance, said on Thursday that the IMF’s executive board meeting would be conducted after the second week of August 2022 to approve Pakistan’s request for the release of the $1.17 billion tranche.

Miftah Ismail responded to another question about the return of programme loans from other multilateral creditors by saying that Pakistan was anticipating $9 billion as budgetary/project loans and that there would also be a separate amount from the IMF. Overall, there are signs that Islamabad may secure $10 billion in dollar loans from multilateral creditors during the current fiscal year 2022–2023.

The combined seventh and eighth assessments of Pakistan’s economic programme supported by an IMF Extended Fund Facility have been finished, according to a statement released by the IMF on Thursday morning. The team was led by Nathan Porter (EFF). “The IMF team has reached a staff-level agreement (SLA) with the Pakistan authorities for the conclusion of the combined seventh and eighth evaluations of the EFF-supported programme,” Porter said at the end of the meeting. The Executive Board of the IMF must approve the accord. Approximately $1,177 million (SDR 894 million) will become available, subject to Board approval, bringing the program’s overall disbursements to roughly $4.2 billion. Additionally, the IMF Board will consider extending the EFF until the end of June 2023 and increasing access by SDR720 million, which will bring the total access under the EFF to about US$7 billion, in order to support programme implementation, meet the higher financing needs in FY23, as well as spur additional financing.

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“Pakistan is at a difficult economic crossroads. Procyclical domestic policies coupled with a challenging external environment drove up domestic demand to unsustainable levels. In FY22, the ensuing economic overheating resulted in significant fiscal and external deficits, helped fuel inflation, and reduced reserve buffers.

“Policy goals include firm implementation of the FY2023 budget in order to stabilise the economy and bring policy actions in line with the IMF-supported programme while protecting the vulnerable. The budget targets an underlying primary surplus of 0.4 percent of GDP, supported by ongoing spending restriction and extensive revenue mobilisation initiatives targeted primarily at higher-income taxpayers, in an effort to lessen the government’s significant borrowing needs. Spending on development will be safeguarded, and additional funds will be made available for social support programme expansion. Each provincial administration has signed a Memorandum of Understanding stating that the provinces will support the federal government’s efforts to meet the fiscal targets.

Reforms in the power sector must catch up. The cyclic debt (CD) flow in the power sector is anticipated to increase dramatically to roughly PRs850 billion in FY22 as a result of poor implementation of the previously agreed plan, exceeding programme goals, endangering the viability of the power sector, and causing frequent power outages. To improve the situation in the electricity sector and reduce loadshedding, the authorities are committed to resuming reforms, including—critically—the timely adjustment of the power tariff, including for the delayed annual rebasing and quarterly adjustments.

“Aggressive monetary policy to steer inflation toward more reasonable levels. In June, headline inflation hit 20 percent, impacting the most disadvantaged people the most. The recent monetary policy boost was reasonable and necessary in this regard, and future monetary policy must be designed to ensure that inflation is slowly brought down to the medium-term goal of 5-7 percent. Importantly, the rates of the two main refinancing schemes, EFS and LTFF, which have recently increased by 700 bps and 500 bps respectively, will continue to be linked to the policy rate in order to improve the transmission of monetary policy. More flexible exchange rates will help to moderate activity and restock reserves at more responsible levels.

During FY22, the unconditional cash transfer (UCT) Kafalat scheme reached nearly 8 million households, with a permanent increase in the stipend to PRs14,000 per family, while a one-time cash transfer of PRs2,000 (Sasta Fuel Sasta Diesel, SFSD) was given to approximately 8.6 million families to lessen the impact of rampant inflation. In order to expand the SFSD programme to more non-BISP, lower-middle class beneficiaries and to bring 9 million families within the BISP safety net, the authorities have earmarked PRs364 billion to BISP for FY23 (up from PRs250 in FY22).

“Strengthen governance: To enhance governance and reduce corruption, the authorities are putting in place an effective electronic asset declaration system and have plans to conduct a thorough review of the anti-corruption institutions (including the National Accountability Bureau) to increase their efficiency in identifying and prosecuting corruption cases.

“Steady execution of the defined policies, which serve as the foundation for the SLA for the combined seventh and eighth evaluations, will aid in fostering more equitable and sustainable growth. Given the increased volatility in the global economy and financial markets, the authorities should nevertheless be prepared to take whatever further steps required to achieve programme objectives.

“The IMF team appreciates the collaboration and fruitful discussions during the discussions shown by the Pakistani authorities, business sector, and development partners.” When reached, Dr. Khaqan Najeeb, a former adviser to the Ministry of Finance, stated that seeing Pakistan and the IMF having reached a staff-level agreement was truly reassuring. “This makes it possible to finish the 7th and 8th Reviews. It ought to allay worries about a hard situation in the near future and free up funds from other multilateral lenders and friendly nations. All of this ought to contribute to increasing Pakistan’s foreign exchange reserves, which have dropped below $10 billion. One expects that this will ease the recent market turbulence in the foreign exchange and eurobond markets.

Given the magnitude of the challenges on the domestic and international fronts, he said it would be good to view the upcoming months as a breathing period. The most difficult industry would be the energy one. In a time of global energy constraints, the circular debt of Rs850 billion in the electricity sector achieved in FY22 is significantly more than one would have hoped and critically jeopardises its financial viability.

He stated that in addition to negotiations with IPPs, reforms of DISCOs, a new tariff, and improvement of the policy and regulatory environment are all necessary to establish sustainability.

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