Negotiations with IMF: No room for complacency

The IMF Staff report, following the second and final review of the SBA program, broadly commends Pakistan’s’ efforts to stabilize the economy.

Pakistan completed the nine-month program in April 2024 having met all key objectives and structural benchmarks of the program.

The IMF welcomed the authorities trying to engage the Fund for another program. Nonetheless, the Fund has cautioned that there are ‘exceptionally high’ risks to the current macro stability – emanating from volatile geopolitics, delayed reforms, still high inflation and high government debt.

The IMF considers SBP’s stance of holding the policy rate as appropriate, until there are greater signs of disinflation and risks of upside from PKR weakness and external shocks have been minimized – through buildup of greater foreign exchange reserves. Reserves held by SBP stood at US$9.1 billion by May 03, 2024, equivalent to about two months’ imports.

Future Energy sector reforms include: 1) rebasing of power tariff (likely by July 2024), 2) implementing WACOG in the gas chain (for better recovery as it spreads out the cost of expensive imported LNG to all gas consumers) and 3) re-negotiation of power tariffs with IPPs that came online after 2015.

The first two measures are inflationary, but the third measure might be the hardest to deliver for the authorities.

Many of the remaining IPPs which have not had a tariff revision are CPEC plants and will entail negotiations with the Chinese government, who has not been flexible on this front since the time of the PTI government.

The IMF has also stressed on discontinuing gas supply to industries for captive power, so that they move to the national grid for their power needs; this will ensure recovery of capacity payments from a larger pool of consumers, in turn reducing the weighted average power tariff.

Pakistan is expected to increase FBR’s tax revenues by 18% in FY25 to PKR11 trillion from estimated PKR9.4 trillion in FY24 (estimated nominal GDP growth of 13% for FY25). The growth in collection is expected to come mostly from direct taxes (expected to rise 15%YoY which include income tax) and sales taxes (up 21%YoY).

Pakistan’s gross external debt payments for FY25 are projected at US$21.0 billion, compared to US$22.6 billion for FY24 and an earlier projection for FY25 of US$22.2 billion.

As per the SBP, Pakistan has improved its external debt maturity profile during FY24, reducing the stock of ST borrowings (from foreign commercial banks).