Performance targets in IMF programme

The newly approved IMF Programme in the form of a 37-month Extended Fund Facility can be considered as perhaps the toughest ever for Pakistan.

This conclusion is reached after a careful examination below of the 7 Quantitative Performance Criteria, 2 Continuous Performance Criteria and 7 Indicative Targets in the Program. The focus in this article will be on these criteria and targets.

As expected, the first quantitative performance criterion is a floor on the net international reserves with the SBP. These are expected to be above $12 billion at the end of December 2024. Fortunately, the actual reserves have crossed the $11 billion mark by mid-October.

However, the IMF expects that the pressure on reserves will peak in the second half of 2024-25. As such, the floor for end June 2025 has been brought down to $8.6 billion. Clearly, the performance of the SBP in successfully keeping reserves above the floor level will be tested strongly from March to June 2025.

The second extremely important inclusion in the quantitative performance criteria relates to the size of the primary surplus in public finances. It is expected to reach a peak of Rs2877 billion by the end of December 2024. This is equivalent to 2.3% of the projected nominal GDP in 2024-25. If attained, this will be perhaps the largest-ever primary surplus. Risks are very high as this will hinge on attainment of FBR revenue target in the first six months. There is already a significant shortfall in these revenues.

The size of the primary surplus is expected to come down somewhat to Rs2435 billion by the end of 2024-25. However, it will still be close to 2% of the GDP. Both Federal and Provincial governments will have to exercise strong economy in expenditures, relating especially to debt servicing, subsidies and grants. The Provincial governments will have to ensure that a combined cash surplus of Rs1250 billion is generated in 2024-25.

One of the special features of the new EFF is that the IMF is focusing for the first time on the performance of Provincial governments. There has been pressure on agreement among the five governments on a National Fiscal Pact, which will focus on the mismatch between Provincial and Federal revenues and expenditures.

Another criterion for restraining the generation of deficits by the SOEs is the ceiling placed on the size of government guarantees. These aggregated to Rs4585 billion at the end of June 2024. The increase has been restricted to just over Rs1 trillion, with the expectation that a big part of this facility will be availed by the power sector.

The good news is that a floor has also been placed on the size of targeted cash transfers in the Benazir Income Support Program. Last year the outlay was Rs 472 billion, which is targeted to reach Rs 600 billion in 2024-25. The expectation is that not only will the number of beneficiaries be increased but that the quarterly subvention per poor household will be inflation indexed.

However, the national ‘poverty gap’ is estimated at close to Rs 2200 billion annually. As such, even with the increase in the size of the BISP, it will still cover only 27% of the poverty gap. This is perhaps the first time that a pro-poor subvention target has been included by the IMF in the quantitative performance criteria.

The two continuous performance criteria in the Programme rule out, first, any new flow of credit directly to the government by the SBP. The second is an obvious limitation, relating to the zero accumulation of external payment arrears. Otherwise, this will tantamount to default by Pakistan.

Turning to the indicative targets, there are altogether seven such targets. In terms of importance and difficulty, the key target is the floor on FBR revenues. They are expected to rise by almost 40% in 2024-25.

The big challenge that FBR will face is to show a rising growth rate from quarter to quarter in 2024-25. The required growth rate agreed with the IMF is 30% in the first quarter, 38% in the second quarter, 41% in the third quarter and over 47% in the fourth quarter.

Already, there has been a shortfall in FBR revenues in relation to the first quarter target. The growth rate has been close to 25%, implying a shortfall of 5%. There is no doubt that one of the key determinants of success or failure of the first review of the IMF programme in March 2025 will be in achieving the growth target of 35% in the first six months of 2024-25 by FBR.

As highlighted above, the IMF programme focuses this time more on the performance of Provincial governments. An indicative target has also been included on the level of provincial tax revenues. There is a modest expectation of growth in the first two quarters. However, following the enhancement of the tax rates of the agricultural income tax, the growth rate in the last quarter of 2024-25 is expected to approach 40%.

Another positive surprise is the focus in the indicative targets on the level of budgetary health and education spending. Along with the targeted size of the BISP, there is an attempt here by the IMF to give a ‘human face’ to the Programme. This is a welcome step forward.

The floor on budgetary health and education spending has been placed at Rs2863 billion for 2024-25. This will be equivalent to 2.3% of the GDP. The actual spending in 2022-23, the latest year for which estimate is available from PRSP Progress reports, was Rs2093 billion. This was significantly higher at 2.6% of the GDP.

The implication is that the IMF is also expecting a cutback in education and health spending, by both the Provincial and Federal governments. This is at a time when the literacy rate in the country has shown no increase from 60% since 2017 and the number of out-of-school children has increased to 25.3 million.

The indicative targets also focus on one single tax measure. There is the expectation that the Tajir Dost scheme will yield Rs50 billion. By now, it is clear that this attempt at taxing traders has failed miserably.

An important indicative target is the ceiling on power sector payment arrears. It reached Rs457 billion in 2023-24 and is expected to be 12% lower at Rs417 billion in 2024-25. This will hinge on timely and adequate enhancement in the electricity tariff, timely payment of subsidies and hopefully success in negotiations with the IPPs.

Overall, the list of quantitative performance criteria, continuous performance criteria and indicative targets is very extensive in character with generally very ambitious targets. This leads to the conclusion that the present IMF Programme is the toughest programme that Pakistan has sought and agreed to implement with the IMF.

We will wait for the first review in March 2025, which will look at the performance up to the end of December 2024.

There are also 22 Structural Benchmarks in the IMF Programme. These will be examined in a subsequent article.

Copyright Business Recorder, 2024