NationalVOLUME 14 ISSUE # 23

IMF loan windfalls

The rupee’s devaluation has stopped and it has started making gains against the US dollar after the International Monetary Fund (IMF) approved a $6 billion programme for Pakistan. The package is expected to bring stability to the economy and check prices of essentials, which were fluctuating massively on a daily basis.


The IMF executive board has approved a three-year $6 billion loan “to support Pakistan’s economic plan, which aims to return sustainable growth to the country’s economy and improve the standards of living,” spokesperson Gerry Rice tweeted. The IMF board has released $1b to Pakistan immediately. The fund will review Pakistan’s performance quarterly over 39 months, phasing release of the additional aid over time. Pakistan will receive $2b annually under an extended fund facility (EFF).


In a statement, the IMF’s new boss David Lipton hoped that Pakistan’s reforms programme could bring economic stability and catalyse international financial support for the country. “The programme aims to tackle longstanding policy and structural weaknesses, restore macroeconomic stability, catalyse significant international financial support, and promote strong and sustainable growth in Pakistan,” he said.


Noting that the adoption of the FY 2020 budget was “an important initial step” towards reforming the Pakistani economy, he said that a decisive fiscal consolidation was a key to reducing the country’s large public debt and building resilience. “Pakistan is facing significant economic challenges on the back of large fiscal and financial needs and weak and unbalanced growth,” he said while explaining why did the IMF board endorse the bailout package for Pakistan. “Achieving the fiscal objectives will require a multi-year revenue mobilisation strategy to broaden the tax base and raise tax revenue in a well-balanced and equitable manner,” he explained.


Under the package, the IMF requires a strong commitment by the provinces to support the consolidation effort, and effective public financial management to improve the quality and efficiency of public spending. The IMF also released a brief assessment of the current economic situation in Pakistan, along with a summary of the loan programme for the country, noting that the Pakistani economy was at a critical juncture.


The IMF also released a summary of the programme, which includes: A decisive fiscal consolidation to reduce public debt and build resilience, starting with the adoption of an ambitious FY 2020 budget. The adjustment will be supported by comprehensive efforts to drastically increase revenue mobilisation by 4 to 5pc of GDP at the federal and the provincial level over the programme period. The target of expanding social spending is to be achieved through the strengthening and broadening of safety nets to support the most vulnerable. The IMF emphasised that a flexible, market-determined exchange rate was necessary to restore competitiveness, rebuild official reserves, and provide a buffer against external shocks. It will be supported by an appropriate monetary policy to shore up confidence and contain inflation, conducted by an independent central bank.


Energy sector reforms aim to eliminate quasi-fiscal losses and encourage investment, including by depoliticising gas and power tariff setting and over the programme period, gradually bringing the sector to cost recovery. Structural reforms will be implemented through strengthening institutions, increasing governance and transparency, and promoting an investment-friendly environment necessary to improve productivity, entrench lasting reforms, and ensure sustainable growth.


Pakistan also expects inflows of $38b from other lenders in three years after the approval of the IMF package. The loan has improved the country’s standing and other institutions have also started extending their financial support. The Asian Development Bank will disburse about $2.1b out of $3.4b agreed funds to Pakistan this year and the World Bank has also agreed to additional assistance purely for budgetary support. Discussions with the World Bank are in progress for assistance only for the purpose of government expenditure. The IMF programme is a message to the world and other lending agencies that Pakistan is serious and ready to prove its responsibility towards managing expenditures, enhancing revenues and taking difficult decisions while protecting the vulnerable segments.


The IMF has not demanded in the programme about the privatisation of loss-making enterprises. Instead, Pakistan has to develop a comprehensive programme to decide which loss-making entities could be improved and run in the public sector, which can be better run by the private sector and which require liquidation. Pakistan hopes the programme will be completed by September 2020, but there is also a possibility that it finalises the restructuring plan before the target. It is because the entities are a huge burden on the public finance.


The government wants to build a platform on the basis of which the country could return to sustainable growth trajectory. However, it is important for Pakistan to tackle the energy sector bleeding as circular debt has gone beyond Rs1,200b. The build-up of the debt is being addressed and reduced from Rs38b per month to Rs28b and the government hopes to eliminate it by the end of 2020.


Pakistan has entered its 13th IMF programme since 1988. All packages contained the conditionality for structural reforms. They sought deep reform in the tax system as well as privatisation-related conditions, liberalisation of foreign currency transactions and mechanisms for raising government debt, reforms in gas and power pricing and a market-determined exchange rate. However, Pakistan faced the same problems after the completion of every programme.


This time too, Pakistan pledged to make it the last programme. The government has set ambitious tax revenue targets in its first budget. Besides raising taxes for the salaried class, the government has increased taxes on cooking oil, ghee, sugar, soft drinks, liquefied natural gas (LNG) and cement, which will hit the common man hard. The budget envisages no major change in the overall fiscal deficit during 2019-20, which could be record Rs3.15t or 7.2pc of GDP, despite a massive Rs1.405 trillion tax plan. It casts doubt on the government’s plan to make the country self-sufficient.