Pakistan missed two end-June and three end-September performance criteria under the $6.4 billion Extended Fund Facility (EFF), according to the fourth and fifth staff review by International Monetary Fund (IMF) released on its website early Tuesday.
The two end-June targets that were missed and resulted in inconclusive fourth review were (i) government over-borrowed by Rs 88 billion, and (ii) net domestic assets (NDA) exceeded the target by Rs 151 billion. The three end-September targets that were missed were: (i) government over-borrowed by Rs 219 billion; (ii) net domestic assets exceeded the target by Rs 25 billion; and (iii) net international reserves (NIR) target was missed by US $630 million while the end-June target was comfortably met by over $1.6 billion.
The review maintained that the end-September NIR target was missed due to the delays in privatisation emerging from political uncertainty and in spite of purchases of State Bank of Pakistan (SBP) of US $429 million in the foreign exchange spot market.
However, the review adds that corrective measures have been taken through prior actions on government borrowing and NDA, and other policy steps to put the authorities on track to meet end December targets. Of the seven structural benchmarks pending since the completion of the third review, three were met - elimination of the exemptions and concessions granted through SROs; improving the internal operations of the SBP; and offering minority shares of UBL and PPL. The remaining four remain pending - amending the relevant tax laws on antimony laundering (AML); consolidating the responsibilities of the public debt management office; filling the vacancies in the Nepra Board; and enacting the amendments to SBP's law to give SBP more independence.
On central bank independence the staff review notes that legislation has been delayed to end-June 2015. The authorities submitted amendments to the SBP Act to the Assembly, but the legislation is still pending in committee. The IMF staff noted that while the draft addresses some weaknesses identified in the safeguards report others remain, including constraints to the SBP's autonomy in the pursuit of its price objective, and weaknesses in the SBP's governance and internal control framework. The authorities will continue working with the IMF and the parliamentary committee to ensure that the final law incorporates the recommendations of the IMF safeguards assessment mission and Fund staff comments by end March 2015.
Five new structural benchmarks that were agreed include (i) draft legislation that will permanently prohibit the practice of issuing SROs that grant exemptions and loopholes; (ii) announce a time-bound plan to improve the SBP's interest rate corridor by setting the policy rate between the floor and ceiling rates of the corridor; (iii) improve the internal operations of the SBP by the following measures: (a) the Investment Committee of the SBP Board will begin regular (at least four times per year) oversight and approval of the reserves management strategy and risk practices; and (b) the authorities will provide confirmation that in line with standard IMF safeguard procedures, the Internal Audit Department will conduct reviews of the programme monetary data reported to the IMF, within two months after each test date, for accuracy and compliance with the Technical Memorandum of Understanding (TMU) and share the findings with the IMF staff; (iv) reorganise the Debt Policy Co-ordination Office as a middle office responsible for updating the MTDS and monitoring its implementation, co-ordinating the credit risk management functions; and (v) conduct a review to reduce the number of existing processes and forms for paying sales and income taxes.
The review further states that growth is expected to rise to around 5 percent in the medium-term due to easing fiscal adjustment and improvements in structural bottlenecks in the energy sector, public enterprises, and the investment climate. Economic activity has faced some headwinds, but growth should remain around 4 percent in fiscal year 2014-15 (the budget projected a growth of 5.1 percent).
Average inflation is expected to ease to below 8 percent in fiscal year 2014-15 and fall further thereafter, as inflation expectations will be anchored by tight monetary and sustainable fiscal policies. Recent floods and political uncertainties pose downside risk to growth and inflation outlook this year, but their impact is assessed to be small and should be offset by declining oil prices. Crisis risks have eased as programme policies reduce macroeconomic imbalances, but downside risks to the growth outlook have grown since the last review. Political and security conditions remain challenging. Recent political unrest, terrorist threats with attendant military operations in the border region with Afghanistan, sectarian violence, and urban criminal activity all pose significant risks.
The review further states the authorities remain committed to lowering the budget deficit to 4.8 percent of GDP in FY2014/15, and the review reached understandings about how to keep the fiscal programme on track, but there are significant fiscal risks.
Sukuk proceeds will help the government to achieve programme targets. Furthermore, the authorities will provide staff a monthly calendar of fiscal financing sources, including Treasury Bills (T-bill) and Pakistan Investment Bonds (PIB) auctions, consistent with curtailing government borrowing from the SBP. The stock of government borrowing has already been reduced to Rs 2,150 billion by end-November, bringing NDA to Rs 2,549 billion (meeting the prior actions). The SBP will develop and announce a time-bound plan to gradually improve its interest rate corridor by setting the policy rate between the floor and ceiling rates of the corridor to enhance the effectiveness of monetary policy, better manage liquidity in the interbank market, and conduct open market operations. The improved interest rate corridor will be made operational by end-September 2015.
The Staff noted progress in the privatisation programme, despite recent setbacks. While the recent offering of Oil and Gas Development Company Limited (OGDCL) was postponed in the wake of weak investor demand in an environment of sharply lower oil prices, the government is moving forward with the calendar starting with the National Power Construction Corporation (NPCC) which is due for end-March 2015. The programme aims at offering and/or marketing at least one transaction in each quarter during the upcoming year.
Pakistan Steel Mills (PSM), Pakistan International Airlines (PIA), and Pakistan Railways (PR) are the major budgetary drains among PSEs. Privatisation of 26 percent of PIA's shares to strategic investors was targeted by end-December 2014; however, now sale has been rescheduled to end December, 2015.
A significant progress has been made in the government's first 18 months to achieve macroeconomic stability. Foreign exchange reserves are recovering, and the net foreign exchange swap/forward position is declining. Fiscal consolidation is on track, and the government has begun to improve its debt financing by diversifying sources and lengthening maturities, maintained the review report. The review projects growth rate for Pakistan at 4 percent and average inflation below 8 percent for the current fiscal year 2014-15.
The Executive Board of the IMF completed the fourth and fifth reviews on December 17, 2014 and approved the release of $1.05 billion, bringing total disbursements under the arrangement to about $3.2 billion. The Fund released the tranche amounting to $1.05 billion on December 22 and the same day released the staff report.
Comments
Comments are closed.