IMF’s funding requirements explained

The IMF programme is still in limbo, as the 9th review was supposed to be completed a long time ago but is still pending. It is now likely that the 10th review will have to be combined with the 9th review if there is any hope for the revival of the current programme, which is scheduled to end in June 2023 after being extended last year.

If the 10th review becomes necessary for the resumption of the IMF programme, the numbers will need to be revisited and the targets readjusted. Already, the numbers for the 9th review have been renegotiated and are somewhat relaxed. The technical talks were concluded in February, but the staff level agreement (SLA) is still pending.

Since then, there have been some deteriorations in macroeconomic statistics, especially on the fiscal side. With import compression policy well in place, import numbers have been reduced by half compared to last year. Since federal tax revenues, particularly indirect taxes, are highly dependent on imports, lower imports have resulted in lower tax revenues.

This is currently the case, as revenues are well below targets. Additionally, there has been a significant increase in direct taxes on sectors that already pay disproportionately high taxes, while sectors with negligible contributions to tax revenues remain untouched. This has forced the formal sector to shift towards the informal sector. Perhaps this shift is occurring, as suggested by the abnormal growth in the already substantial cash in circulation, further hampering tax collection.

The issue is not only a decline in FBR taxes but also in non-tax revenues, where the largest contributor is supposed to be the petroleum levy. However, the petroleum levy is falling short of its target despite being at agreed levels, due to declining consumption caused by increased prices and economic slowdown.

The advantage of lower imports is reflected in the form of a current account surplus or a low deficit, reducing need for more financing. The agreement on gross financing requirement for the 9th review is $6 billion. The IMF initially asked for $7 billion, while the government negotiated for $5 billion due to better current account position. The arrangement so far stands at $3.5-4 billion.

However, the growing fiscal deficit and its financing pose a significant challenge. The government cannot borrow from the SBP, and domestic banking liquidity is constrained, as evident from the significant amount of money pumped through open market operations at a whopping Rs 8.4 trillion.

As a result, additional funding must be secured from external sources. If the 10th review is combined with the 9th review, the gross funding requirement may have to be increased from the current $6 billion to $8 billion, making the chances of reviving the current programme even slimmer.

There is a higher likelihood that the current programme will end without any further review in which case the government would have to request another programme. In the event of the existing programme not being completed, this could result in even tougher conditions. The path ahead is not an easy one.