Commitment to IMF: Primary surplus of 1pc of GDP for FY25 aimed at

ISLAMABAD: Pakistan has committed to the International Monetary Fund (IMF) that the policy and reform effort started under the SBA must continue and stated that the government’s aim for the fiscal year 2025 will be to reach a general government primary surplus of one percent of GDP.

The Government of Pakistan in the Letter of Intent (LoI) submitted to the IMF with the signatures of Finance Minister Muhammad Aurangzeb and Governor State Bank of Pakistan and attached in the IMF’s staff report prepared by a staff team for the IMF Executive Board’s consideration on April 29, 2024, following discussions that ended on March 19, 2024, with the officials of Pakistan on economic developments and policies underpinning the IMF arrangement under the Stand-By Arrangement.

In the LoI, the final review of the 9-month Stand-By Arrangement (SBA) approved in July 2023 finds Pakistan in a strengthened economic and financial position, with the economy recovering due to the policy efforts of the caretaker government and resumption of official inflows.

While the situation has improved over the course of the SBA, the path forward remains challenging with very high risks, including due to elevated external and domestic financing needs as well as from geopolitical tensions through global commodity prices and financial conditions.

Given this, we recognise the ongoing need to implement sound policies geared toward resolving Pakistan’s macroeconomic and external imbalances and restoring sustainability.

Recovery from the FY23 recession has become increasingly evident in the months since the first review.

Large-scale manufacturing rebounded in fiscal year 24 first six months, growing by 1.8 per cent (YoY) in January 2024, as has agricultural output from flood-affected levels last year. However, both headline (20.7 per cent YoY in March) and core inflation (12.8 and 20.0 per cent YoY in urban and rural areas, respectively) remain very high, despite some recent moderation.

On the external front, the current account posted a US$0.8 billion deficit in FY24H1, as increased exports and remittances helped offset the ongoing unwinding of import compression. The resumption of official inflows has permitted the rebuilding of reserves to around US$8 billion, almost double that before approval of the SBA.

Our performance under the SBA has been strong. Thanks to continued consistent implementation of the FY24 budget, timely energy price adjustments, an appropriate monetary policy stance, and continued efforts to rebuild foreign reserves, all end-December 2023 quantitative performance criteria (QPCs) and all indicative targets (ITs) were met. We have also met the Structural Benchmarks (SBs) on the notification of the semiannual gas tariff adjustment, on inflation adjustment of BISP, and on developing a plan to strengthen internal controls in the SBP’s lending operations, in line with the recommendations of the 2023 Safeguards Assessment.

We have made progress on amending the Acts of four SOEs to make the new SOE lawfully applicable to those SOEs (missed end-November structural benchmark).

Finally, the SBP issued instructions to eliminate (i) the multiple currency practice related to the exchange rate used for SBP-GoP FX transactions, effective January 31; and (ii) the exchange restriction from limitations on advance payments for imports, effective January 30.

We reaffirm our commitment to the policies and objectives of the SBA, as detailed in the Memorandum of Economic and Financial Policies (MEFP) for the first review and recognise that the policy and reform effort started under the SBA must continue.

We are preparing a home-grown medium-term policy agenda geared to addressing Pakistan’s vulnerabilities and moving from stabilisation to recovery and transformation. With this in mind, we want to underline our commitment to pursue the following core goals beyond the SBA and recognise the need to strengthen Pakistan’s fiscal sustainability and continue fiscal consolidation.

These are necessary to address Pakistan’s debt vulnerabilities, as well as reduce crowding out and support monetary policy in bringing inflation lower. To achieve this, Pakistan will take all necessary measures to deliver the FY24 general government primary balance (excluding grants) target of PRs 401 billion (0.4 per cent of GDP).

In this regard, we will reconfirm with each province their commitment to delivering the previously agreed fiscal surplus in support of this goal and will continue fiscal consolidation in the FY25 budget, consulting closely with IMF staff throughout its preparation.

Our aim for fiscal year 25 will be to reach a general government primary surplus of 1.0 per cent of GDP. The consolidation will continue to facilitate the sustainable medium-term adjustment, and will focus on mobilising significant additional revenue through policy reforms to broaden the tax base, especially in undertaxed sectors; enhance revenue administration; and incentivize greater and more balanced fiscal efforts by the provinces. We have supported these efforts by issuing an SRO for implementing a new scheme to register and collect taxes from non-filing supply chain operators and retailers of goods and services in the tax net on March 30, 2024.

Enforcing income tax returns and collecting the due minimum advance income tax will begin from July 1, 2024. This exercise will be launched first in four provincial capitals and Islamabad.

Alongside, we will finalise the FBR reform plans, building on the proposal prepared by the caretaker government, in line with international best practice. Separately, we will pursue digitalization initiatives to enhance transparency, client experience and revenue collection. Furthermore, we will strengthen our budget process to bolster its credibility and transparency, as well as spending efficiency.

In particular, given their role in undermining fiscal discipline, we commit not to make any future use of supplementary grants. Finally, we will (i) limit guarantees to no more than PRs 4,300 billion and 4,900 billion by end-June and end-December 2024, respectively; and (ii) not grant any further tax amnesties or new preferential tax treatments or exemptions in FY24 or FY25 including through Statutory Regulatory Orders without prior NA approval.

Without addressing its energy sector viability, Pakistan’s ongoing sustainability will be at risk. We are committed to reaching the end-June goal of net zero circular debt accumulation and recognize that restoring energy sector viability will entail dramatically reducing the cost-side pressures of the energy sector while maintaining cost-recovery tariffs.

We are thus committed to continuing regular, timely, and automatic notifications of adjustments to natural gas and electricity tariffs in a manner that is consistent with full cost recovery and to reduce natural gas price disparities between regions and industries and within industries.

We will also seek to find cost reductions and will accelerate structural reforms to address the sector’s fundamental issues, including reforming the governance of DISCOs; moving captive power demand to the electricity grid; finalising a proposal on tube well subsidy reform by end-FY24; expanding renewable energy capacity in line with the IGCEP; improving electricity transmission and distribution efficiencies; and continuing to refine anti-theft efforts.

In the post-SBA period, we remaincommitted: (i) to protect low-income consumers through the progressive tariff structure, for both electricity and gas and avoid any subsidized or preferential industrial tariffs; (ii) not to introduce any new fuel subsidy or cross-subsidy schemes in FY24 and beyond; (iii) to refrain from netting out cross-arrears without proper due diligence and ex ante independent auditing;(v) not to use “non-cash” settlements (e.g., payables against the reimbursement of on-lent loans to DISCOs); and (vi) to avoid issuing additional government guarantees to entities in the sector except where a replacement guarantee is required on expiry of a previous guarantee. In FY25 we will seek to reduce or at least maintain the stock of CD through implementation of the above reforms.

However, the report misses a mention of point (iv) and directly moves from point (iii) to (v).

Monetary policy, supported by a flexible exchange rate, will be decisively geared towards returning inflation to target, and we will continue building reserves. While there has been a welcome recent decline in headline and core inflation, we recognize the importance of maintaining an appropriately tight monetary policy stance, and of remaining proactive in case of signs of increased pass-through from recent gas price increases or possible exchange rate pressures from FX market normalisation.

We are also committed to ensuring a flexible exchange rate, both to support external rebalancing and as a buffer for shocks, and intend to advance policies to promote a deeper FX market, which would help Pakistan attract private inflows on a sustained basis.

Given that limited reserve buffers remain our main constraint to entrenching external stability, we will continue to rebuild foreign reserves, with FX sales limited to episodes of disorderly market conditions and not used to prevent a trend depreciation of the rupee driven by fundamentals.

Supporting a rebalancing from state- to private-led activity, through the removal of distortionary protection, subsidies, and concessions and reforms to improve SOE performance. This will include further progress on SOE reform through privatization and restructuring, and seek to limit the role of the state, including in the setting of prices and through the provision of concessions/subsidies for economic activity.

Where privatization is appropriate, as with PIA, we will ensure that these plans are transparent and minimize impacts on the public balance sheet. We will also further advance SOE governance reforms, including bringing the legal frameworks of all SOEs into line with the SOE Act in a phased manner, and further strengthening the operational capacity of the Central Monitoring Unit. In the case of SOEs under the umbrella of the Sovereign Wealth Fund, we will ensure their governance frameworks are at least on par with the principles required by the SOE Act. We remain committed to ensuring the Special Investment Facilitation Council (SIFC) does not (i) create an uneven playing field, (ii) promise (or propose the government provide) incentives of any sort or guaranteed returns, or (iii) distort the investment landscape. We will also establish a set of best transparency and accountability practices for SIFC operations, including to ensure that all investment made under SIFC result from the standard Public Investment Management framework.

Building resilience and making growth inclusive: We will ensure that social protection is strengthened further, including through increasing the generosity and coverage of existing schemes, and increasing its efficiency and transparency.

We will also engage the provinces on sharing the social expenditure burden under BISP. Other priority areas will include increasing our investment in human capital, further developing our governance and anti-corruption frameworks, completing the reforms of the bank resolution and deposit insurance framework while addressing undercapitalized banks, and building climate resilience.

Overall, we believe that the policies set out here are adequate for the successful implementation of our program and we will consult with the IMF on the adoption of any new measures. We will continue to supply the IMF with timely and accurate data as agreed and consent to the IMF’s publication of this letter, the TMU, and accompanying Executive Board documents.

Based on our strong program performance and our commitments for the period ahead, we request approval by the IMF Executive Board of the completion of the second review under the SBA and the related purchase in the amount of SDR 828 million (40.8 percent of quota).

Copyright Business Recorder, 2024