The government has assured the IMF of raising additional revenue by targeting undertaxed sectors such as agriculture and construction and broadening of the tax base.

The government in its letter of intent to the IMF stated that it will restrain non-priority spending including energy sector subsidies, public wage bills and pensions.

However, it will make fiscal room to protect the “generosity level” of the Benazir Income Support Programme (BISP) Kafalat programme, the 120-page IMF country report on Pakistan showed.

The coalition government has also assured the IMF of withdrawing the circular on prioritisation in providing foreign exchange (FX) for certain types of imports introduced in December 2022.

“Going forward, we will refrain from formal and informal guidance on the exchange rates of FX intermediaries and will maintain a framework free of restrictions on payments and transfers for current international transactions and MCPs,” the letter stated.

The government has also vowed to ensure no abnormal premium emerges between the rate of interbank, open, and informal markets.

“The average premium between the interbank and open market rate will be no more than 1.25% during any consecutive five business day period,” the government stated.

The government said that it is also working with the provinces to sign Memoranda of Understanding with the federal governments on their provincial fiscal targets consistent with the fiscal year 2024 budget.

The IMF urged Pakistan to continue the monetary tightening cycle.

“The recent policy rate hike is welcome, but the tightening cycle should continue if needed to reduce inflation and facilitate external rebalancing,” the report said.

In the short term, the forward-looking real policy rate should return to positive territory to re-anchor expectations and achieve the State Bank of Pakistan’s inflation objective over the medium term, it added.

Policy slippages could ‘undermine’ IMF programme

The International Monetary Fund said that Pakistan’s tense political environment and policy slippages could undermine programme implementation, jeopardising the macro-financial and external stability of the country.

“External financing risks are exceptionally high and delays in the disbursement of planned external financing from IFIs and bilateral creditors pose major risks to a very fragile external balance given the extremely limited buffers,” said the country report.

The report comes almost a week after the IMF approved the agreement between Pakistan and the IMF for the $3 billion Stand-by Arrangement for nine months, following a staff-level pact with Pakistan last month.

The global lending institution went on to add that in the past, the authorities deviated from the Extended Fund Facility (EFF) path with the passage of the expansionary fiscal year 2022 budget amid the robust recovery from the pandemic and an incipient commodity price boom.

“The EFF remained off track throughout 2021 (the end-June fiscal target had been missed) before the authorities corrected course with the passage of a mini-budget in January 2022. However, external imbalances had started to build up amid the mistimed fiscal expansion and a delayed monetary policy response to rising inflationary pressures,” the IMF stated.

The stop-and-go phase in the programme began only weeks after the completion of the 6th review under the EFF programme.

“Amid the spike of commodity prices following the Russian invasion of Ukraine the government proceeded with large, unbudgeted fuel subsidies, and continued efforts to stem depreciation pressures through large foreign exchange intervention,” it added.

Following political volatility and a change in government, the new authorities kept subsidies in place for months before deciding to bring the EFF back on track in June 2022.

Measures included the passage of an agreed fiscal year 2023 budget, significantly increasing the policy rate, eliminating post-tax fuel subsidies, and increasing fuel taxation and electricity tariffs, the global financial institution said.

The IMF viewed Pakistan’s economic challenges as complex and multifaceted, saying that risks are exceptionally high.

“Addressing them requires steadfast implementation of agreed policies, as well as continued financial support from external partners. Consistent and decisive implementation of programme agreements will be essential to reduce risks and maintain macroeconomic stability,” it stated.

“Policies under the new programme aim to support the authorities’ immediate efforts to stabilise the economy and rebuild buffers. Key policy pillars include the appropriate fiscal year 2024 budget to support needed fiscal adjustment; a return to a market-determined exchange rate and proper functioning of the foreign exchange market to absorb the balance of payment pressures and eliminate forex shortages; adequately tight monetary policy to support disinflation and anchor expectations.”

Resolving Pakistan’s structural challenges, including long-term balance of payment pressures, will require continued adjustment and creditor support beyond the programme period.

A possible successor arrangement could help anchor the policy adjustment needed to restore Pakistan’s medium-term viability and capacity to repay.

Microeconomic outlook

The GDP growth will likely pick up moderately reaching about 2.5 percent in the fiscal year 2024.

“Assuming sustained policy and reform implementation and adequate financial support from multilateral and bilateral partners, growth is expected to gradually return to its potential, 5%, over the medium term,” he added.

The IMF expected the average headline inflation to remain above 25% in the fiscal year 2024, with end-of-period inflation falling below 20% only in the fourth quarter of fiscal year 2024.

Following the sharp correction in the trade balance during the first half, the IMF projects a current account deficit of around $4 billion in the fiscal year 2023 and increasing to around $6.5 billion in the fiscal year 2024, with a recovery both in exports and imports.

“The CAD will need to remain moderate at around 2% of the GDP over the medium term,” the IMF stated.

The defence budget of Pakistan came to Rs1.8 trillion during the current fiscal year, which is expected to increase to Rs2.09 trillion in the upcoming year.

The Public Sector Development Programme expenditure clock-in at Rs2.28 trillion, projected to reach 2.54 trillion in the fiscal year 2024-25.