The IMF report

The International Monetary Fund (IMF) in its fourth and fifth review maintained that the 6.64 billion dollar Extended Fund Facility (EFF) was broadly on track. The review report was uploaded on its website after the IMF Board approved the two tranches (one previously stalled) on 17th December, 2014.
The Federal Finance Minister Ishaq Dar's claim that the release of the two tranches is indicative of the confidence of the Fund staff in his economic strategy/policies is therefore justified; however, only to a limited extent. If the government fails to meet the quantitative time bound conditions and structural benchmarks (as it did in the June review) the Fund would declare the sixth review inconclusive and give the government some time to implement what it may stipulate as prior to release conditions; sustained failure would lead to programme suspension as it did with respect to the November 2008 Stand-By Arrangement (SBA), which was stalled and later suspended with two tranches remaining. The reason: the PPP-led government refused to implement two critical conditions namely tax and power sector reforms exclusively for political considerations.
Thus the IMF can be convinced up to a time that the government intends to implement the agreed reform agenda (and in the case of the SBA the time expired within a year and a half). That time, economists fear, would end for the Dar-led finance ministry by the first half of calendar year 2015. However, political economists argue that with the ongoing Zarb-e-Azb the government may get international support for delays in meeting the EFF conditions.
So what is Dar unlikely to deliver on? Five additional benchmarks, three relating to bodies/departments operating under the Ministry of Finance, include: (i) draft legislation that will permanently prohibit issuance of Statutory Regulatory Orders (SROs) that grant exemptions and loopholes by end-March (a condition that would be easily met though its implementation in months to come would remain a challenge as influential groups exert pressure; (ii) re-energise the debt policy co-ordination office as a middle office responsible for updating the Medium Term Development Strategy (which at present is merely a wish list) and monitoring its implementation, co-ordinating risk management functions by end March 2015 - a doable target as it would not interfere with the powers of the Finance Ministry; and (iii) conduct a review to reduce the number of forms and processes for paying sales tax and income tax doable as forms can be printed though its success would be determined after implementation.
The IMF Board prior to approving the loan maintained that "legislation to enhance central bank independence is crucial and should conform to international best practices. It should be complemented by enhanced communication of the central bank price stability objective, improved functioning of the interest rate corridor and effective open market operations." It is highly unlikely that Dar would ever agree to an independent SBP though that would allow a greater focus on reducing inflation and a refusal to extend untenable loans to the federal government or allowing the finance ministry to use the SBP profits as its income. It is critical to recall that during the five-year tenure of the PPP-led government the relevant National Assembly committee under the deceased Fauzia Wahab approved the SBP Act (as part of the IMF approved SBA) allowing an independent monetary policy committee to make binding recommendations - a board that included representation from independent economists including Dr Hafiz Pasha. Senator Dar at the time roundly opposed the move - a stance that reflected his opposition to granting autonomy in letter, leave alone spirit, to the SBP. The PPP government allowed Dar to rule the day. This unmet SBA condition was likely to resurface as and when the country went on another IMF programme, however, Dar has diluted the 2008 condition by getting the Fund to agree to a Monetary Fiscal Board, without binding powers, thereby keeping it merely as an administrative tool rather than a policy making body independent of the finance ministry with the overarching objective of reducing inflation. One would assume that the Fund staff may have argued that the Board would be a step in the right direction and its composition and binding powers may be added at some future date.
Be that as it may, two SBP-specific new benchmarks include: (i) announcing a time bound plan to improve the SBP interest rate corridor by setting the policy rate between the floor and ceiling rates of the corridor by end February (a benchmark that may be difficult to implement if NIRs remain a challenge); (ii) improve the internal operations of SBP by implementing two conditions that have been partially met namely (a) while establishment of an investment committee has been implemented yet it has to begin regular meetings (four times a year) and undertake oversight and approval of reserve management strategy and risk practices, and (b) establishment of an internal audit department has been implemented but it has yet to conduct reviews of programme monetary data reported to the IMF within two months after each test date for accuracy and compliance with the Technical Memorandum of Understanding and share findings with Fund staff (again unlikely as the Federal Finance Minister has in private conversations shown a reluctance to grant any meaningful autonomy to the SBP).
The staff review also notes that the government did not comply with two end-June targets and three end-September targets. The two end-June targets that were not complied with even by end September are: (i) borrowing 88 billion rupees from the State Bank of Pakistan by end June - an amount that escalated to 219 billion rupees by end September and resultantly (ii) net domestic assets (NDA) ceiling target was crossed by 151 billion rupees end June and by 25 billion rupees end September due to government over borrowing from SBP and insufficient open market operations to sterilise spot foreign exchange purchases. The staff review notes that "corrective measures have been taken through prior actions on government borrowing and NDA and other policy steps (one would assume this includes the 60 paisa raise in surcharge on electricity tariffs) to put the authorities on track to meet end-December targets."
However, by end September an additional target was missed: net international reserves (NIR) by 630 million dollars no doubt mainly attributable to the non-release of the IMF fourth and fifth tranche. Missing this target reflects the government's need to stay on the IMF programme. To date the government has relied heavily on borrowing from abroad at cheaper rates - be it through issuance of Eurobonds and sukuk at rates well above that of even heavily-indebted countries like Greece but below those procured domestically and intervention in the market to keep the exchange rate at around 100 rupees to the dollar to contain the foreign debt servicing charges (leading to the IMF Board urging Pakistan to allow greater exchange rate flexibility). But reforms remain stalled particularly with respect to revenue generation (with ever increasing reliance on withholding taxes with no role of the FBR) and power sector (with no appreciable difference in receivables, transmission and distribution losses) and as in the past heavy reliance on raising rates to meet the sector shortfall.