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Photo Source: The Nation

Pakistan Reader# 295, 12 February 2022

IMF's latest report on Pakistan: Five major takeaways



IMF seeks less financial ambiguity and financial stability in Pakistan, which is conducive to private sector-led innovation and competition led growth

Ankit Singh

On 2 February, the International Monetary Fund (IMF) concluded its discussions and approved the continuation of the fund facility; the program Extended Fund Facility (EFF) under effect was agreed upon in July 2019. Pakistan is to access 4268 million worth of self-drawing rights (SDR), equivalent to approximately USD 6 billion, and this consultation is the third tranche of EFF. Like every time, there are mishits and delayed implementations in structural benchmark and performance criteria under the commitments from Pakistan. 

The executive report records macro-economic decisions taken by Pakistan that enabled in successful consultation of Article IV with IMF. However, there are important updates in conditionalities and oversight from the SBP transforming into an autonomous body to gradual price levelling in power tariffs. 

Following are the five takeaways from the report which might take the economic sovereignty of Pakistan into an exogenous terrain of market forces and reduced government interference in price stability and inflation. 

First, the SBP amendment act 2021 and the mini-budget were two critical legislative developments that concluded in much delayed IMF continuous article IV discussions for the same tranche of money. Now the SBP is empowered with new powers and has a better negotiating ground vis a vis government. The reduced government spending on subsidies and enlarged umbrella on personal income tax is the most immediate demand to be completed ideally by February 2022. The 27 January action by SBP against Habib Metropolitan Bank and the subsequent penalty was a symbolic assertive moment by the SBP Governor. The SBP amendment mandates a governing board, which will now take autonomous calls for monetary support and regulation. It is an important change in the aligned yet problematic relationship between the IMF and Pakistan. 

Second, the new structural benchmark (SB) regarding an appropriate development finance institution by the end of April 2022. The executive and SBP need to jointly design an institution that will act as a common pillar for government‘s refinance facilities. The veiled criticism by the IMF experts in the report on current government schemes about spending efficiency and hence a requirement of a streamlined institution integrating the various refinance schemes of the government. If the new regulatory framework comes into existence, it will be a new executive tool in harmony with the SBP. It is likely to constraint the options for the government as the latter would not want to deal with a tag team of executives and SBP. The new SB is may not see the light of the day yet, but the demand will be persistent from IMF and will ripe in due time. 

Third, according to the report, the banking sector is highly exposed to loans from the energy sector, 15 per cent of the outstanding loans, and more than half of banking credits in assets of the power sector. The requirement for the financial viability of the power sector has been a persistent demand from the IMF. The government has successfully requested the IMF in constant structural reforms. From the continued energy price adjustments to the realistic circular debt management plan of the power sector, some of the immediate demands are to be updated to rationalize subsidy expenditures and develop a sustainable stock of arrears. The presidential ordinance on NEPRA Act related amendments has empowered the NEPRA over quarterly tariff adjustments that were a prequel to improve power sector financial viability. 

Fourth, state-owned enterprises (SOE) have assets worth equal to 60 per cent of the GDP and yet provides less than 1 per cent of the total formal employment. One-third of the SOEs are generating losses, and there have been new SB from IMF over privatization and effective revival of such enterprises, which can be used to advance strategic interests, address market inefficiencies, and meet social objectives. The report recommends decentralized SOE needs a corporate governance rework; the report adds that the objectives and ownership policy of various SOEs in Pakistan is laid out in a document, but it is not publicly available. The IMF seeks and expects more information and transparency in arbitrary information practices associated with SOEs. The expectations are not just from IMF but the public as well,  as a substantial amount of what the country produces does not end up profitable. 

Fifth, gradual ceding of economic sovereignty in monetary stance. Last year SBP raised the cash reserve ratio requirement limit to contain monetary expansion and hence clipping the financial accessibility of scheduled banks to private lending. The decision to let SBP hold sway over market-led exchange rate management and periodical intervention through forex reserves would take the needle of structural constraint to improve exports and hence trade deficit. The way around forex reserve and exchange rate movement without an improved export basket is going to put more pressure on the government, due to the structural problem of stagnant manufacturing and industrial sectors. 

What is the idea behind the report?
The report and completion of the much-negotiated consultation process reflect mismatching objectives. The government and IMF have historically varied in the prioritization of constraints and objectives from ideological to regional perspectives. For Pakistan, it is not critical from a debt perspective but rather a validation and seeking a seal of economic confidence from IMF, which rejuvenates the confidence of other multilateral institutions and partners about promising returns and contributions to innovation from Pakistan. The IMF, on the other hand, has a diverse portfolio of partner countries like Pakistan in the world, and the IMF symbolizes the front of market-led investment forces. IMF seeks less financial ambiguity and financial stability in Pakistan, which is conducive to private sector-led innovation and competition led growth. However, growth is not synonymous with development, and the onus remains with the government to efficiently implement the welfare schemes under a tighter financial and monetary oversight and transparent framework.

The continuous effort by Pakistan to keep IMF backed finance instruments close to itself is rational on its part to leverage the enormous capital associated with IMF confidence in a country. The deeper issue, however, remains unaddressed. The debate and negotiation mentioned in the report are more inclined to gloss and smoothen the credit flow for consumption-led demand in Pakistan rather than credit relations based on indigenous commodity production. 

References
IMF Executive Board Concludes 2021 Article IV Consultation for Pakistan and Completes the Sixth Review of the Extended Fund Facility,” IMF, 4 February 2022
Zaheer Abbasi, “Commitment to IMF: Sell-off of 2 RLNG plants, two banks by June,” Business Recorder, 6 February 2022
IMF and politics,” Business Recorder, 10 February 2022
Tahir Amin, “Critical next steps for ongoing reforms: IMF rearranges structural benchmarks,” Business Recorder, 6 February 2022\
Ali Ahmed, “Enforcement Action: State Bank imposes over Rs 59mn penalties on one bank,” Business Recorder, 27 January 2022
Amendments in Nepra Act through ordinance to hit economy hard: ICCI,” The Nation, 30 March 2021

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