LoI to IMF: govt pledges fiscal discipline

ISLAMABAD: The government has committed to the International Monetary Fund (IMF) that it would restrain non-priority spending including through energy sector measures aimed at credibly containing energy sector subsidies, the public wage bill, and pensions.

In a Letter of Intent (LoI) jointly signed by Finance Minister Ishaq and State Bank of Pakistan (SBP) Governor Jameel Ahmed, it was stated that since the completion of the combined seventh and eighth reviews under the 2019–23 Extended Fund Facility (EFF) in August 2022, the economy has faced a series of exogenous shocks - most notably the catastrophic floods during the 2022 monsoon season and the international commodity price hike in the wake of the Russian war in Ukraine. Critical infrastructure and crop production have been damaged and livelihoods have been upended. Economic activity has stalled and inflation, including for food items, is very high.

Despite our efforts to reduce imports and the trade deficit, reserves have declined substantially due to scheduled debt service and scarcity of market financing against elevated sovereign spreads. At the same time, the Kerb rate diverged considerably from the interbank rate, against strong foreign exchange (FX) demand.

Govt’s LoI to IMF contains 9 major assurances

Conditions in the power sector became acute, with a significant build-up of arrears (circular debt) and frequent load-shedding, requiring an immediate liquidity injection through additional budgetary subsidies. We are firmly committed to resolving these macroeconomic and external imbalances, restoring macroeconomic stability, and laying the conditions for sustained and balanced growth.

To this end, crucial priorities of our new economic program will be based on: (i) advancing gradual fiscal consolidation to bring down debt, while creating fiscal space for much-needed social and development spending; (ii) reducing quasi-fiscal deficits in the energy sector; (iii) removing all exchange restrictions; (iv) continuing strengthening of the banking sector; (v) improving state-owned enterprise (SOE) governance; and (v) boosting efforts to address challenges from climate change.

To support our efforts, we request a 9-month Stand-By Arrangement (SBA) with a cumulative amount of SDR 2,250 million (111 percent of quota).

The SBA will build on progress made under the EFF arrangement that expired at end June 2023. It will provide a valuable anchor for our macroeconomic policies and structural reforms during the remainder of the year, which is a challenging period with parliamentary elections due in the Fall.

The SBA will also continue to play a catalytic role in mobilizing international support from multilateral and bilateral partners, and providing confidence to entice the return of some private inflows, which will help ensure that the proposed programme is fully financed.

Parliamentary approval of fiscal year 2024 budget in line with the IMF staff agreement to meet programme targets (Prior Action (PA) for program approval).

Passed by the National Assembly on June 25, 2023, and signed into law by the president on June 26, 2023, our fiscal year 24 budget advances fiscal consolidation through a primary surplus of Rs401 billion (0.4 percent of GDP)-built on a set of credible measures that help: (i) sustainably raise additional revenue by targeting under-taxed sectors (such as agriculture and construction), broaden the tax base, and improve progressivity; and (ii) restrain non-priority spending (including through energy sector measures aimed at credibly containing energy sector subsidies, the public wage bill, and pensions) while making fiscal room to protect the generosity level of the Benazir Income Support Programme (BISP) Kafalat program.

As in previous years, we are also working with the provinces to sign memoranda of understanding (MoUs) with the federal governments on their provincial fiscal targets consistent with the fiscal year budget, FX market functioning, withdrawal of the circular on prioritization in providing foreign exchange (FX) for certain types of imports introduced in December 2022, with the purpose of ensuring full market determination of the exchange rate (PA for program approval).

Going forward, we will refrain from formal and informal guidance on the exchange rates of foreign exchange (FX) intermediaries and, after eliminating existing exchange restrictions and the multiple currency practice (MCP), will maintain a framework free of restrictions on payments and transfers for current international transactions and MCPs, and, by allowing no hindrance to the market determination of the exchange rate, ensure that no abnormal premium emerges in between the rate in any of the three FX markets- interbank, open, and informal.

The average premium between the interbank and open market rate will be no more than 1.25 percent during any consecutive 5 business day period (continuous SB).

We have also continued our efforts to mobilize financial support from multilateral institutions and bilateral partners. During the January 2023 Conference on Climate Resilient Pakistan held in Geneva, co-chaired by the United Nations (UN) and Pakistan, donors’ pledges exceeded US$10 billion for humanitarian assistance and projects to rehabilitate the damage caused by the floods. Since then, our efforts have focused on obtaining new financing and securing the rollover of debt falling due, which is critical to support our near-term policy efforts and replenish our gross reserves to more comfortable levels.

Based on these efforts and our commitments for the period ahead, we request approval by the IMF Executive Board of the proposed SBA. We also request that the Executive Board approves to make available SDR 894 million upon approval of the arrangement.

Copyright Business Recorder, 2023