Economy under an IMF programme

September 11, 2022

The government should realise that the measures it is taking will affect the lives of people suffering from the highest inflation in the region

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akistan’s economy is going through a turbulent phase. Fiscal imbalances and global challenges have adversely impacted key economic indicators. The Extended Fund Facility (EFF) programme of the International Monetary Fund (IMF) approved in 2019 was halted earlier this year when the Pakistan Tehreek-i-Insaf (PTI) government deviated from written commitments and announced populist measures to gain political mileage against the opposition parties planning to submit a no-confidence motion against the premier.

This violation of the IMF agreement by the PTI and the announcement of a non-funded subsidy on petroleum products cost the treasury heavily, exposing the country to the risk of default. Most experts criticised the PTI leadership for the unwise move to gain political mileage at the cost of an economic meltdown. On the other hand, situation on the external front was fast deteriorating. The cash-stripped economy was heading towards a default.

The current government assumed office when alarm bells were ringing globally vis-à-vis Pakistan’s economic prospects. The situation took an unfortunate turn when an SOS call made to the IMF in May this year failed to yield desired results for Pakistan. The communication shared by the IMF stated, “The team emphasised the urgency of concrete policy actions, including in the context of removing fuel and energy subsidies and the FY2023 budget, to achieve programme objectives”.

Left with few options, the government had to swallow the bitter pill and revoke the unsustainable subsidies at the cost of political capital. The impact on economy was immediate and abysmal. Inflation skyrocketed to an unprecedented level, and the policy rate rose to 15 percent. Besides other factors, these tough decisions paved the way for resumption of the EFF for Pakistan. The Executive Board of the IMF completed combined Seventh and Eighth Reviews of the EFF and allowed an immediate disbursement of SDR 894 million (about $1.1 billion), bringing total purchases for budget support under the arrangement to about $3.9 billion.

The staff report issued by the IMF indicts the previous government for its failure to implement the IMF programme shortly after the completion of the Sixth Review. The committed fiscal adjustments were undone and several key EFF commitments were reversed to respond to the domestic political landscape.

The report has acknowledged and appreciated the fact that the current government has taken several actions to bring the EFF back on track. These steps include increasing the policy rate, revoking post-tax fuel subsidies and implementing the outstanding/ earlier-committed fuel taxation and electricity tariffs. It is estimated that the impact of these measures and other slippages in Q3 and Q4 of fiscal year (FY) 22 has widened the fiscal deficit by more than 1.5 percent of GDP.

As of June-end the performance criteria (PC) on net international reserves and the primary budget deficit and seven structural benchmarks (SBs) were unmet. The worsened external situation, too, is a legacy of the ousted PTI government, where in 11 months of FY22, the trade deficit widened to a record $40.1 billion (10.7 percent of GDP). The current account deficit widened to about $15 billion (4.5 percent of GDP) in FY22, which is a five-time increase compared to FY21.

The staff report issued by the IMF indicts the previous government for its failure to implement the IMF’s programme shortly after completion of the Sixth Review. The committed fiscal adjustments were undone, and several key EFF commitments were reversed.

The gross reserves slipped to $9.8 billion in end-June 2022 compared to $17.6 billion at the end of December 2021, sufficient only for 1.5 months of import coverage. Consequent to measures adopted by the new government, the current account deficit is expected to shrink to 2.5 percent of GDP in FY23, compared to 4.7 percent of GDP in FY2022. The positive trend in the current account will uplift the reserve coverage to over 2 months of imports.

The IMF report highlighted concerns over the possible effects related to ongoing geo-political tensions. The war in Ukraine, high food and fuel prices and global financial conditions have the potential to directly impact the external position and the exchange rate, thus taking a toll on Pakistan’s economy. Moreover, moving into election year amid the domestic political situation and increasing public pressure can force the government to deviate from policy and reform measures and misalign with the fiscal adjustment strategy.

The IMF report further states: “... the authorities will seek to expand the Personal Income Tax base by another 300,000 persons through the use of data on the withholding tax of businesses, third-party data and physical surveys to book new individuals. They will also seek to bring the service sector, notably retailers, into the tax net by making better use of data (e.g., from tax collected through electricity bills on commercial connections). Continued progress on the roll-out of track-and-trace will create a solid basis for further revenue collection, notably from tobacco sales. The authorities have also committed to clear the large stock of income tax refund arrears to Rs 225 billion by end-July 2022, down from the Rs 377 billion accumulated by mid-June (a 70 percent increase over the fiscal year due to slow processing)”.

The PTI government left a huge power sector circular debt for the new government and added a gross amount of Rs 536 billion which was much higher than the target envisaged under the updated and IFI-supported circular debt management plan (CDMP). The gas sector, at end-March 2022, has been engulfed with a circular debt of about Rs 720 billion (1.1 percent of GDP). The driving forces being unaccounted for gas losses (UFG) are delayed sales price adjustments (since September 2020), uncovered subsidies (especially for export and zero-rated industries), and collection shortfalls. These challenges are haunting the current government which is finding it difficult to bridge the fiscal gaps left by its predecessors.

The IMF wants it to ensure transparency, showing its concerns over the audit report for Covid-related spending and social payments in FY2020 and FY2021. The IMF wants the audit report made publicly available as soon as possible. Moreover, the IMF team has emphasised the establishment of an asset declaration system with a focus on high-level public officials, including members of the federal cabinet.

The benchmark was to be complied with by end of March 2022. It has now been reset to September 2022. It requires a comprehensive review of the anti-graft institutional framework (i.e., National Accountability Bureau) by a task force of independent experts with international experience and civil society organisations, the proposed compliance timeline is January 2023. The monetary watchdog also wants Pakistan to discontinue mandatory house-building loan targets for banks and recall the reduction in capital adequacy risk weights applied to real estate investment trusts to promote financial sector soundness.

Despite the strict conditions imposed by the IMF, the government is still facing the issue of the balance of payment. Since the current floods affected a major part of the country and destroyed major crops as well as infrastructure and livestock, the country suffered a huge loss and required immediate financial support from the international community. In this situation, it will be hard for the government to achieve the agreed targets. Though the government has been working hard on the diplomatic front to arrange financing commitments through bilateral and multilateral partners to help bridge the gross external financing needs in FY 2023.

In addition to consent and commitment to fully pass on international oil prices to consumers to contain fiscal spending and risks, the government has submitted its commitment to raise the fuel levy rates and crude oil custom duties, in a way that they reach Rs 50 per liter on petrol and diesel by January 2023 and April 2023, respectively. Furthermore, the government has agreed to increase customs duty on crude oil from the current 2.5 percent to 5 percent. The crucial point is that the government has agreed that if monthly revenue data show signs of underperforming against the Q1 FY 2023, immediate action will be taken to impose general sales tax (GST) on fuel products in addition to streamlining GST exemptions on sugary drinks as well as other exemptions available to exporters.

The government should keep in mind that these measures will severely affect the lives of ordinary citizens suffering from the highest inflation in the region. It appears that the public is not seeing any visible relief in the price of petroleum products anytime soon. Since the period of EFF programme has been extended to June 2023, the government needs to comply with the terms of the agreement. The only way forward is to reduce reliance on IMF by improving foreign relations. Moreover, the government should control wase of revenues by improving governance of state-owned enterprises.

The finance minister needs to realise that burdening the poor through petroleum prices and heavy taxes is not actually related to streamlining the performance of these white elephants.


Dr Ikramul Haq, an advocate of Supreme Court and writer, is adjunct faculty at Lahore University of Management Sciences (LUMS).

Abdul Rauf Shakoori is a corporate lawyer based in the USA



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