Critical next steps for ongoing reforms: IMF rearranges structural benchmarks

ISLAMABAD: The International Monetary Fund (IMF) has reset three delayed structural benchmarks (SBs), dropped two, and set six new including the preparation of draft Personal Income Tax (PIT) legislation for ongoing reforms under the Extended Fund Facility (EFF) programme.

The IMF in its report titled article IV consultation, sixth review under the extended arrangement under the extended fund facility, and requests for waivers of applicability and nonobservance of performance criteria and rephasing of access noted that the Fund has reset three delayed SBs, dropped two SBs, and set six new SBs on critical next steps for already ongoing reforms.

The new SBs include: (i) preparation of draft personal income tax (PIT) legislation (end-February 2022); (ii) preparation of a plan by the Ministry of Finance and State Bank of Pakistan, in consultation with other stakeholders, to establish an appropriate Development Finance Institution to support the eventual phasing out of SBP refinance facilities (end-April 2022); (iii) completion of the first stage recapitalization of the two private sector banks that are undercapitalized (end-May 2022); (iv) cabinet decision on the second step of the energy subsidy reform for residential consumers (end-Jan 2022); (v) parliamentary approval of new SOE law in line with staff recommendations (end-Jun 2022); and (vi) issuance of regulations by the Public Procurement Regulatory Authority to require collection for publication of beneficial ownership information from companies which are awarded public procurement contracts for Rs 50 million and above.

New PCs for end-December 2021, end-March 2022, and end-June 2022 will support fiscal deficit reduction, limit public debt built-up through public guarantees, contain inflationary pressures through a deceleration of base money growth and a cap on government borrowing from the SBP, and support adequate reserve coverage. Three additional adjusters are proposed for the accommodation of: (i) expenditures on Covid-19 vaccines, which affect the PCs on NIR and the general government primary budget deficit; (ii) allowing part of the SDR allocation to be used for budget support, which affects the PC on net government budgetary borrowing from the SBP; and (iii) changes in the average cash reserve ratio, which affects the PC on NDA.

The report noted that since the April 2021 reviews, program implementation has been uneven: fiscal policy became increasingly expansionary and several key EFF commitments were reversed.

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The end-June performance criterion (PC) on the general government primary budget deficit and three continuous PCs on the non-intensification of exchange restrictions, non-modification of multiple currency practices (MCP), and zero new flow of SBP credit to the government were missed. Moreover, several structural benchmarks (SBs) were not met. More recently, however, the authorities have taken decisive action to bring the EFF back on track, including through a supplementary budget (to lock in key tax reforms), tighter monetary policy, and electricity tariff adjustments. In addition, they plan to pass amendments to the central bank act to consolidate its operational independence.

Four out of six Indicative Targets (Its) were observed at the end-June 2021: budgetary health and education spending, net FBR tax revenues, the net accumulation of tax refund arrears, and the flow of new power sector payment arrears. However, two ITs fell short: (i) the targeted cash transfer spending (BISP) by a small margin because of the reallocation of some spending (Rs 5billion) to a different government authority (ie, the Pakistan Poverty Alleviation and Social Safety Fund); and (ii) the gross issuance of longer-term debt instruments (ie, PIBs, Sukuks, and Eurobonds) mainly because of low investor appetite for longer-term instruments and bottlenecks in the issuance of Sukuks.

The report noted that the authorities met one SB on time and implemented five SBs with delay. Specifically, the authorities made the Treasury Single Account (TSA-1) operational in September (end-May 2021 SB) and finalized the update of the National Socio-Economic Registry (NSER) in October (end-June 2021 SB).

They also reduced CPPA-G payables to independent power producers (IPPs) in June (end-May 2021 SB) and increased tariffs toward cost recovery through the notification of the fiscal year 2021 annual rebasing on November 5 (June 1, 2021 SB) and all pending adjustments up to fiscal year 2021-Q3, including the one for fiscal year 2020-Q4 effective on October 1 (end-September 2021 SB). While the authorities did not grant further tax amnesties (continuous SB), they granted new preferential tax treatments (continuous SB), most of which will be reversed through the upcoming supplementary finance bill.

Another two SBs—publishing key information on all Covid-related awarded procurement contracts (end-April 2021 SB) and an ex-post audit of the procurement of Covid-related medical supplies (end-April 2021 SB)—will be implemented through two of the five prior actions (PAs) for the sixth review. Three outstanding SBs, some of which saw significant progress but faced capacity constraints, will be reset, whereas two missed SBs will be dropped without corrective action: (i) the audit of the Utility Stores Corporation (end-April 2021 SB) as crucial information inputs for an audit assessment were not recorded at the end-fiscal year 2020; and (ii) the track-and-trace system for tobacco products (end-June 2021 SB) as capacity constraints make a full reintroduction unlikely within the remaining program period.

Copyright Business Recorder, 2022