- Sunday, December 10, 2023
Lender wants Islamabad to resist unbudgeted spending and tax exemptions
By: Chandrashekar Bhat
THE International Monetary Fund (IMF) has reached a staff-level pact with Pakistan on a $3 billion stand-by arrangement, the lender said.
Subject to approval by the IMF board in July, the deal comes after an eight-month delay and offers some respite to Pakistan, which is battling an acute balance of payments crisis and falling foreign exchange reserves.
“Praise be to God,” tweeted Finance Minister Ishaq Dar after the deal was announced early on Friday (30).
Pakistan’s sovereign dollar bonds rallied sharply across the curve in early European trade, with the 2025 issue enjoying the biggest gains, up 4.7 cents to trade at 52 cents in the dollar, according to Tradeweb data. The country’s domestic stock and currency markets were closed on Friday.
With sky-high inflation and foreign exchange reserves barely enough to cover one month of controlled imports, analysts say Pakistan’s economic crisis could have spiralled into a debt default in the absence of an IMF deal.
The $3 billion funding, spread over nine months, is higher than expected. The country was awaiting the release of the remaining $2.5 billion from a $6.5 billion bailout package agreed in 2019, which expired on Friday.
The new stand-by arrangement builds on the 2019 programme, IMF official Nathan Porter said on Thursday (29), adding that Pakistan’s economy had faced several challenges in recent times, including devastating floods last year and commodity price hikes following the war in Ukraine.
“Despite the authorities’ efforts to reduce imports and the trade deficit, reserves have declined to very low levels. Liquidity conditions in the power sector also remain acute,” Porter said in a statement.
“Given these challenges, the new arrangement would provide a policy anchor and a framework for financial support from multilateral and bilateral partners in the period ahead.”
Porter also pointed out that liquidity conditions in the power sector remained acute, with a buildup of arrears and frequent power outages.
Reforms in the energy sector, which has accumulated nearly Rs 3.6 trillion ($12.58 billion) in debt, has been a cornerstone of the discussions with the IMF.
Painful reforms
Islamabad has taken a slew of policy measures since an IMF team arrived in Pakistan earlier this year, including a revised 2023-24 budget last week to meet the lender’s demands.
Other adjustments demanded by the IMF before clinching the deal included reversing subsidies in power and export sectors, hikes in energy and fuel prices, jacking up the key policy rate to 22 per cent, a market-based currency exchange rate and arranging for external financing.
It also got Pakistan to raise over Rs 385 bn ($1.34 billion) in new taxation through a supplementary budget for the 2022-23 fiscal year and the revised budget for 2023-24.
The painful adjustments have already fuelled all time high inflation of 38 per cent year-on-year in May.
“The FY24 budget advances a primary surplus of around 0.4 per cent of GDP by taking some steps to broaden the tax base and increase tax collection from under-taxed sectors,” Porter said, adding it also ensured space to strengthen support for the vulnerable through a cash handout programme.
He said it will be important that the budget is executed as planned, and authorities resist pressures for unbudgeted spending or tax exemptions in the period ahead.
“This new programme is far better than our expectations,” said Mohammed Sohail of Topline Securities, adding, there were a lot of uncertainties on what will happen after June 2023 as there will be a new government coming to power.
“This funding of $3 bn and for nine months will definitely help restore some investor confidence,” he said.
(Reuers)
