ISLAMABAD:
As the International Monetary Fund (IMF) began talks from Karachi, Pakistan managed to show progress on fiscal and monetary numbers, which would lead to the release of loan tranches, but it failed to meet a few conditions related to an increase in spending on education and healthcare and improving governance.
In addition to reviewing the implementation of programme conditions till June this year, the IMF mission on Wednesday also simultaneously began Article-IV consultations – a comprehensive and deeper dive to gauge the health of Pakistan’s economy.
On the opening day, the IMF had a bird’s-eye view of Pakistan’s macroeconomic outlook and the external sector situation in the light of the Middle East conflict and its implications for Pakistan’s economy, according to officials privy to the discussions. They said that the IMF would seek the federal government’s perspective on the macroeconomic outlook during its visit to Islamabad, which is expected to begin on September 28, provided the capital city remains open.
The successful culmination of IMF talks will result in a recommendation to the board for the release of $1.2 billion worth of two tranches and publication of a comprehensive Article-IV report, which will become the base for any future engagement with Pakistan.
However, sources said that the IMF’s concerns remain about the lack of implementation of structural reforms aimed at improving the governance of state-owned enterprises, continued market interventions and the lack of transparency in the budget with reference to large statistical discrepancies. The government surpassed the IMF’s condition to produce a primary budget surplus – calculated after excluding interest payments. But the IMF has concerns about Rs853 billion in statistical discrepancies, the sources added. The global lender is expected to hold detailed meetings on the discrepancy in accounts of the last fiscal year, they added.
Pakistan has missed the condition that the five governments will cumulatively spend Rs3.47 trillion on health and education. The condition has been missed by a wide margin of Rs370 billion. This could prove one of the difficult points for Pakistani authorities.
The condition on health and educational spending has been missed despite the IMF having imposed a limit to keep primary current spending at the projected inflation rate, while fiscal space is explicitly reallocated to social protection, health and education.
The government has also not fully implemented the condition to table bills in parliament to amend laws of 10 SOEs to improve their governance and inculcate corporate culture. The IMF had also set a condition that by June 2026, the government should publish a plan outlining the post-2027 financial sector strategy and the institutional and regulatory environment from 2028 onwards. The condition has been imposed in light of the constitutional provision to end the interest-based economy.
By March this year, there was an IMF requirement to amend the Sovereign Wealth Fund (SWF) Act and other legislation to adopt appropriate governance mechanisms and safeguards following international standards and good practices to ensure that SOEs under the SWF ownership revert to the SOE Act’s governance structures, and appropriate fiscal safeguards were in place for the SWF operations. The government has tabled the bill in parliament, but it could not be approved. The condition that the federal and provincial governments will agree and the federal cabinet will adopt a national policy for sugar market liberalisation containing key recommendations on licensing, price controls, import and export permissions, zoning and clear timelines for implementation has also been missed.
However, the condition to timely adjust gas and electricity prices has been met. Officials said that the FBR’s performance would also come under scrutiny in addition to reviewing the taxation matters related to provinces.
The IMF on Wednesday held a virtual meeting on the tax matters, including reviewing the agricultural taxation regime with the Balochistan Revenue Authority. The IMF acknowledged the FBR’s role in data-sharing arrangements with provinces.
Sources said that one of the outstanding issues with the IMF could be the property sector taxation, particularly the fake withholding tax payments that were unearthed in the Multan region. On the external side, the IMF’s focus is expected to be the external financing requirement, higher import bill due to regional tensions and the interbank exchange rate movement.
The central bank’s view was that the external financing conditions and reserve adequacy remained broadly supportive, aided by multilateral and bilateral official inflows and continued central bank foreign exchange purchases. The SBP was targeting gross international reserves at over $21 billion by end-June 2027 on a permanent basis, as the current hike is temporary and will be reversed once $3 billion is paid to Saudi Arabia.
The monetary policy committee of the SBP noted in the last meeting that the external sector outlook remained susceptible to elevated global commodity prices and supply constraints amidst the unfolding developments in the Middle East. The central bank’s macroeconomic assessment was that economic activity was expected to pick up in the current fiscal year but at a slower pace than anticipated earlier due to elevated energy costs and supply disruptions.
The central bank sees the current account deficit widening in the current fiscal year in line with the expected pickup in economic activity and higher global commodity prices. But it still expects the deficit to stay below 1% of GDP.
