IMF, Pakistan likely to resume talks on 6th review next month, analyst

KARACHI: The International Monetary Fund (IMF) is expected to start staff-level discussions with Pakistan on the sixth review of its $6 billion loan programme next month to reach a consensus on energy prices and revenue measures, and pave the way for approximate $1 billion in fund if approved, a brokerage report said on Monday.

Pakistan entered a three-year IMF bailout programme in 2019 but is yet to have its sixth review approved, which has been pending since June this year. The IMF Board completed the second, third, fourth, and fifth reviews in March.

“We believe Pakistan authorities are likely to successfully complete the sixth review of the IMF programme in September/October 2021. We believe Pakistan authorities and the IMF are likely to reach a middle ground with respect to increase in energy prices and revenue measures,” said Syed Atif Zafar, the chief economist, and director research at Topline Securities in a report.

“As per our understanding, technical level talks are underway with staff level discussions expected to begin next month – on the insistence of Finance Minister Shaukat Tarin. The size of the tranche is also bigger than the previous release, with $1.0 billion likely to be released if approved compared to the previous tranche of $0.5 billion,” Zafar said.

“These talks also coincide with an earlier agreed timeline for the seventh review (based on June 2021 performance criteria), which were scheduled to begin in September 2021. The tranche under the seventh review amounts to $0.7 billion, if approved.” It is, however, unclear if the pending two reviews would be combined together like in the past because of Covid-19.

“The finance minister has been quoted as saying that Pakistan does not plan to merge the sixth and the seventh reviews of the programme, which we believe is because the government does not want to change the Schedule of Reviews and Purchases given the size of the next couple of tranches.”

The IMF is likely to be encouraged by tax collection in July, which clocked in 22 percent higher than the target for the month and 36 percent year-on-year higher at Rs410 billion. The government has also shared plans to reduce power subsidy on lifeline consumers, and move more towards providing direct cash subsidy – which can potentially reduce the future accumulation of circular debt.

Zafar believes the government may agree to increase power and gas prices by an average 5-10 percent, and partly pass on petroleum levy on domestic petroleum products. He also expects an increase in taxes on the import of luxury products, which will serve the dual purpose of higher revenues and discouragement of non-essential imports.

“The above measure will increase inflation expectations, and as a result the central bank may increase the policy rate,” he said. The SBP is expected to increase the policy rate by up to 50 basis points (bps) towards the end of 2021 and by another 50bps in the first half of 2022, he added.

The rupee might depreciate by around six percent in FY2022 against the dollar, closing in the range of 168-170, he expects.

Highlighting the three scenarios that are likely with respect to the IMF programme and their likely key outcomes, the report said extended talks between Pakistan authorities and the IMF seem to be the most desirable outcome for the government. However, the overhang of ambiguity might continue to dampen market sentiments.

The government would be able to continue it pro-growth expansionary policy. It would also be able to dole out subsidies and keep petroleum levy on domestic petroleum products at minimal levels. The energy prices (power and gas) during this period would also unlikely see any major increase. The increase, if any, in the policy rate would be muted, where the central bank would continue with negative real interest rates, it noted.

Successful sixth review and resumption of the IMF programme would be a desirable outcome for the market, as it would provide clarity on the matter and abate concerns over potential fiscal and external accounts slippages, according to the report.

The termination of the IMF programme seems to be the most undesirable outcome for the government and the market. The government might be able to continue with its pro-growth expansionary policy, but termination of the programme would push away financing from multilateral agencies like the World Bank and Asian Development Bank, etc.

In turn, the government might resort to enhanced domestic borrowing (possibly from SBP) to meet its growth targets, which would fuel inflation expectations. Pakistan looks to contend with prolonging the talks with the IMF, as it allows the government to continue with its pro-growth expansionary policy, while having no immediate need for the IMF financing because of the healthy foreign exchange reserves position. If required, the government can tap Eurobonds (as done in July), and/or secure financing from China, commercial banks etc, it said.