Optimism about the IMF review

The government must exercise strict fiscal discipline and curtail waste

Optimism about the IMF review


akistan eagerly awaits the first review by an International Monetary Fund team of the 9-month $3 billion Stand-By Arrangement, concluded on July 12. Upon the commencement of this arrangement, Pakistan received the first tranche $1.2 billion; following a successful first review, it will gain access to the next $700 million tranche. Recent developments and the progress made by Pakistani authorities have generated optimism regarding the upcoming review.

During the first quarter of the current fiscal year, there was a remarkable 24 percent year-on-year increase in tax revenue which reached Rs 2.217 trillion. This increase has resulted in a surplus of Rs 417 billion or 0.4 percent in the primary balance. Importantly, Pakistan has not only surpassed tax collection floor agreed upon with the IMF for the end of September 2023 but is also in compliance with the condition of refraining from granting further tax amnesties and avoiding the practice of issuing new preferential tax treatments or exemptions.

As for the current account balance, significant improvement has been noted. The deficit has seen a substantial reduction of over 58 percent, amounting to $947 million, following a near break-even situation in September 2023. This improvement can be attributed to a range of factors. Exports and workers’ remittances have played a pivotal role. Administrative reforms targeting exchange companies as well as efforts to combat illicit market activities have helped. Stern action against operators in the parallel market has redirected the inflow of dollars from grey and black-market channels to formal banking channels.

Pakistan has been aware of the concerns raised by the IMF authorities regarding the practice of maintaining multiple exchange rates. Upon entering into SBA in July 2023, Pakistan made a commitment to work diligently toward reinstating a market-determined exchange rate. Under this agreement, Pakistani authorities have pledged to refrain from providing formal or informal guidance on exchange rates. They are committed to eliminating the practice of multiple currency rates and ensuring the existence of a framework free from constraints on payments and transfers related to current international transactions.

Pakistan has undertaken to adopt a market-based exchange rate system designed to prevent significant variation between rates in the three primary markets: interbank, open market and informal. To achieve this, they have committed to ensure that over any consecutive 5-day period, the average difference between the interbank and open market rates will not exceed 1.25 percent.

Despite the agreement reached on the exchange rate, the initial months of the ongoing financial year experienced some volatility. The gap between interbank rate and the informal market rate widened to 10 percent. However, government intervention disrupted the cycle where the informal market repeatedly drove up the dollar value, diverting funds in that direction and adversely affecting official inflows. Consequently, the rupee’s interbank rate depreciated to align with the open market rate.

Coordinated efforts by various government agencies helped curtail the informal market, resulting in convergence of rates between interbank and open markets as outlined in the SBA. The rupee enjoyed a period of sustained strength in the interbank market, lasting for 28 consecutive days. Since the initiation of this intervention, the rupee has made a notable recovery of nearly 8 percent in the interbank market.

The measures introduced by the government to address IMF’s concerns pertain to actionable items. Most crucial among these is the privatisation of ailing and unprofitable state-owned enterprises.

The authorities are confident that they have fulfilled the requirements for a functional and adaptable exchange rate market, aligning with the agreed-upon limits. In a similar vein, the central bank has lifted restrictions and streamlined import payment processes involving letters of credit and repatriation of funds. During the first two months of the current fiscal year, repatriation of profits and dividends by foreign investors surged by an impressive 74 percent.

According to the State Bank of Pakistan, foreign investors remitted profits and dividends totaling $49.2 million in July and August, compared to $28.2 million in the corresponding period last year. The noteworthy increase in repatriated funds addresses critical challenges pertaining to import payments and fund repatriation, significantly contributing to an improved business environment in Pakistan.

Pakistan has also been passing on the effects of global fuel price fluctuations to consumers. It has also enforced a petroleum levy of Rs 60 per litre. The government has also introduced a revised pricing framework for gas, which is expected to sort out issues related to circular debt for long-term sustainability. Despite some favourable developments and indications of reduced inflation, Pakistan has kept its policy rate at 22 percent. This demonstrates Pakistan’s adherence to financial discipline agreements with the IMF.

The measures introduced by the government to address IMF’s concerns pertain to actionable items. The most crucial among these is the privatisation of ailing and unprofitable state-owned enterprises. The caretaker minister for privatisation has conveyed a strong sense of optimism while outlining his plans at several press conferences.

However, the government may not be prepared to overhaul its privatisation laws and regulations. Without these necessary reforms, the privatisation process is likely to remain slow and may raise concerns regarding transparency. This could potentially involve scrutiny of all transactions by the National Accountability Bureau and the judiciary.

Strict fiscal discipline and curtail of waste is of utmost importance. Pakistan must divest itself of these unprofitable enterprises, allowing the government to focus on its primary functions, instead of running these commercial entities.

The Pakistan Democratic Movement government and the caretaker administration have demonstrated an awareness of the significance of the ongoing SBA with the IMF. It is imperative for Pakistan to achieve a successful conclusion of this programme by consistently meeting the scheduled targets. Doing so will enable Pakistan to maintain financial discipline in its operations and create a favourable path for a subsequent IMF programme immediately following the completion of the ongoing SBA.

The government should further strengthen its tax collection apparatus. The current impromptu method for managing these critical functions is ineffective. It is high time for the government to collaborate with experts and business stakeholders to formulate a unified approach for broadening the tax base so that the tax-to-GDP ratio can rise from the current 9.2 percent to a respectable level of 15-18 percent.

Dr Ikramul Haq, an advocate of Supreme Court, is adjunct faculty at Lahore University of Management Sciences

Abdul Rauf Shakoori is a corporate lawyer based in the USA

Optimism about the IMF review