All targets met, IMF okays issuance of fresh tranche

ISLAMABAD: Pakistan and the International Monetary Fund (IMF) reached a staff-level agreement on the first review under the Extended Fund Facility on Friday, according to which Islamabad will receive another installment of US$450 million.

On July 3, the IMF’s Executive Board approved a 39-month arrangement under its Extended Fund Facility for Pakistan, in order to support the government’s economic reform programme. Pakistan received the first IMF tranche of $991.4 million on July 10.

Pakistan and the IMFmission, however, decided to keep macroeconomic targets unchanged except lowering inflationary projection from 13 percent to 11.8 percent for the current financial year 2019- 20.

“All performance criteria for end-September were met with comfortable margins and progress continues towards meeting all structural benchmarks,” the IMF stated in a statement issued after the completion of first review talks here on Friday.

Adviser to Prime Minister on Finance Dr Abdul Hafeez Shaikh in his tweet on Friday stated that it was positive for Pakistan that the IMF mission concludes successfully. “IMF confirms that Pakistan met all first quarter performance criteria by good margins and economy is continuing to get better. Thank you, PM and the entire team,” he added.

The FBR’s annual collection target of Rs5,503 billion will remain unchanged for time being mainly because the Fund mission does not allow FBR authorities to feel relaxed at the starting stage of IMF programme, said the official sources. Secondly, the IMF mission is satisfied with the overall performance on fiscal front so there is no urgent need to bring changes in macro and fiscal targets of the country.

It is fact that the IMF’s own model showed that with import compression that the FBR revenue would be decreased by Rs233 billion but finally the IMF mission took decision to keep the annual collection target unchanged at this stage by keeping this trend in mind that the lenient attitude might result in further lackluster performance on part of tax collection machinery.

The contraction of economy, receding inflation and less impact of devaluation has not been made part of impact on revenue projection so far. When Finance Ministry officials were contacted, they were of the view that the issue of revising downward had never come under discussion during the review talks between the two sides.

The government’s policies, according to the IMF statement, have started to bear fruit, helping to reverse the buildup of vulnerabilities and restore economic stability. “The external and fiscal deficits are narrowing, inflation is expected to decline, and growth, although slow, remains positive,” said the IMF.

An IMF mission led by Ernesto Ramirez Rigo visited Islamabad from October 28 to November 8, 2019 to conduct discussions on the first review under the EEF. At the end of the visit, Ramirez Rigo made the following statement:

“The Pakistani authorities and IMF staff have reached a staff-level agreement on policies and reforms needed to complete the first review under the EFF. The agreement is subject to approval by IMF management and the Executive Board of Directors. Completion of the review will enable disbursement of SDR 328 million (or around $450 million) and will help unlock significant funding from bilateral and multilateral partners.”

“Despite a difficult environment, programme implementation has been good, and all performance criteria for end-September were met with comfortable margins. Work continues towards completing the remaining structural benchmarks for end-September. Significant progress has been made in improving the AML/ CFT [Anti-Money Laundering/ Combating Financing of Terrorism] framework, although additional work is needed before March 2020. International partners remain committed to supporting the authorities’ reform efforts, providing the necessary financing assurances.”

“On the macroeconomic front, signs that economic stability is gradually taking hold are steadily emerging. The external position is strengthening, underpinned by an orderly transition to a flexible, market-determined exchange rate by the State Bank of Pakistan (SBP) and a higher-than-expected increase in SBP’s net international reserves. Budgetary revenue collections are growing on the back of efforts on tax administration and policy changes, and despite the ongoing compression in import-related taxes. Inflation pressures are expected to recede soon, reflecting an appropriate monetary stance. Importantly, measures to strengthen the social safety net are being implemented, and development spending is being prioritised,” the statement said.

“The near-term macroeconomic outlook is broadly unchanged from the time of the programme approval, with gradually strengthening activity and average inflation expected to decelerate to 11.8 percent in FY2020. However, domestic and international risks remain, and structural economic challenges persist.

“Discussions focused on policies to support Pakistan achieve strong and balanced growth. Fiscal prudence needs to be maintained to reduce fiscal vulnerabilities, including by carefully executing the FY20 budget, implementing the new public finance management legislation, and continuing to broaden the tax base by removing preferential tax treatments and exemptions, while protecting critical social and development spending. Advancing the strategy for electricity sector reforms, agreed with international partners, is important to put the sector on a sound footing, and remove recurrent arrears and accumulation of debt. Further efforts to strengthen SOE [state-owned enterprises] governance and operations, advance anti-corruption reform, and improve the business environment are key to mobilise investment and support growth and job creation. The authorities recognise that decisive implementation of these policies is indispensable for entrenching macroeconomic stability and restoring robust and balanced growth.”

“The IMF team is grateful to the Pakistani authorities for open and constructive discussions and their hospitality,” the statement concluded.