By Bilal Memon

Uncertainty around the announcement ended on Monday as Pakistani authorities and the International Monetary Fund (IMF) reached a staff-level agreement on policies and reforms needed to complete the sixth review under the $6-billion Extended Fund Facility (EFF) that started in 2019, but had been put on hold last year.

The IMF confirmed the development in an early-Monday morning statement, saying that "the agreement is subject to approval by the Executive Board, following the implementation of prior actions, notably on fiscal and institutional reforms".

"Completion of the review would make available Special Drawing Rights (SDR) 750 million (about US$1,059 million), bringing total disbursements under the EFF to about US$3,027 million and helping unlock significant funding from bilateral and multilateral partners," added the IMF in its statement.

"An additional SDR 1,015.5 million (about US$1,386 million) was disbursed in April 2020 to help Pakistan address the economic impact of the Covid-19 shock."

The development comes just after the State Bank of Pakistan (SBP) raised the key interest rate by 150 basis points, taking it to 8.75%, the highest level since April 2020. On Friday, the SBP announced in a preponed meeting of the Monetary Policy Committee (MPC) that risks related to inflation and the balance of payments have increased while the outlook for growth has continued to improve.

"The MPC was of the view that there is now a need to proceed faster to normalise monetary policy to counter inflationary pressures and preserve stability with growth,” read the MPC statement, adding that the latest rate hike is a material move in this direction.

The programme, widely seen as an important one for Pakistan, was engulfed by uncertainty over the last few weeks as the review went on longer than expected.

"A big part of the uncertainty around the announcement has been cleared," Tahir Abbas, head of research at Arif Habib Limited, told Business Recorder. "This will ease pressure on the currency."

Pakistan's rupee closed near its record low after it depreciated to 175.24 against the US dollar in the inter-bank market on Friday. It all-time low is 175.73, which it hit earlier in November.

"This is a positive for the equity-side of the market, but some of the impact would be diluted due to the monetary policy announcement on Friday (increase in interest rate)," Samiullah Tariq, head of research at Pak-Kuwait Investment Company, told Business Recorder.

"But the currency market should see a greater impact, and this would definitely ease off pressure on Pakistan's rupee."

IMF statement on sixth review

An IMF mission led by Ernesto Ramirez Rigo held virtual discussions during October 4–November 18, 2021 in the context of the 2021 Article IV consultations and the sixth review of the authorities’ reform programme supported by the IMF’s EFF.

"Despite a difficult environment, progress continues to be made in the implementation of the EFF-supported programme," said the IMF.

"All quantitative performance criteria (PCs) for end-June were met with wide margins, except for that on the primary budget deficit. Notable achievements on the structural front include the finalisation of the National Socio-Economic Registry (NSER) update, parliamentary adoption of the National Electric Power Regulatory Authority (NEPRA) Act Amendments, notification of all pending quarterly power tariff adjustments, and payment of the first tranche of outstanding arrears to independent power producers (IPPs) to unlock lower capacity payments fixed in renegotiated power purchase agreements (PPAs).

"The authorities have also made progress in improving the anti-money laundering and combating the financing of terrorism (AML/CFT) framework, although some additional time is needed to strengthen its effectiveness."

The IMF said that on the macroeconomic front, available data suggests that a strong economic recovery has gained hold, benefiting from the authorities’ multifaceted policy response to the Covid-19 pandemic that has helped contain its human and macroeconomic ramifications.

"The Federal Board of Revenue’s (FBR) tax revenue collection has been strong."

However, the IMF warned that external pressures have started to emerge: a widening of the current account deficit and depreciation pressures on the exchange rate—mainly reflecting the compound effects of the stronger economic activity, an expansionary macroeconomic policy mix, and higher international commodity prices.

"In response, the authorities have started to adjust policies, including by gradually unwinding Covid-related stimulus measures. The SBP has also taken the right steps by starting to reverse the accommodative monetary policy stance, strengthening some macroprudential measures to contain consumer credit growth, and providing forward guidance.

"In addition, the government plans to introduce a package of fiscal measures targeting a small reduction of the primary deficit with respect to last fiscal year based on: (i) high-quality revenue measures to make the tax system simpler and fairer (including through the adoption of reforms to the GST system); and (ii) prudent spending restraint, while fully protecting social spending.

These policies will help safeguard the positive near-term outlook, with growth projected to reach, or exceed, 4 percent in FY 2022 and 4.5 percent the fiscal year after that.

"However, inflation remains high, although it should start to see a declining trend once the pass-through of rupee depreciation is absorbed, and temporary supply-side constraints and demand-side pressures dissipate. However, the current account is expected to widen this fiscal year despite some export growth, reflecting the rising import demand and international commodity prices. However, this economic outlook continues to face elevated domestic and external risks, while structural economic challenges persist.

In this regard, and looking beyond the near term, discussions also focused on policies to help Pakistan achieve sustainable and resilient growth to the benefit of all Pakistanis."

The IMF added that on the fiscal policy front, staying on course on achieving small primary surpluses remains critical to reduce high public debt and fiscal vulnerabilities.

"Continued efforts to broaden the tax base by removing remaining preferential tax treatments and exemptions will help generate much-needed resources to scale up critical social and development spending."

Monetary policy

It said that monetary policy needs to remain focused on curbing inflation, preserving exchange rate flexibility, and strengthening international reserves.

"As economic stability becomes entrenched and the independence of the SBP is strengthened with the approval of the SBP Act Amendments, the central bank should gradually advance the preparatory work to formally adopt an inflation targeting (IT) regime in the medium term, underpinned by a forward-looking and interest-rate-focused operational framework.

"While some key elements of IT are already in place, including a medium-term inflation objective and prohibition of monetary financing, additional efforts are needed, to modernise the SBP’s operational framework as well as to strengthen monetary transmission and communication.

"Advancing the strategy for the electricity sector reforms, agreed with international partners, is important to bring the sector to financial viability, and tackle its adverse spillovers on the budget, financial sector, and real economy. In this regard, steadfast implementation of the Circular Debt Management Plan (CDMP) will help guide the planned management improvements, cost reductions, timely alignment of tariffs with cost recovery levels, and better targeting of subsidies to the most vulnerable."

This article was first published in Business Recorder on Nov 22, 2021