The Pakistani authorities and IMF staff have reached a
staff-level agreement on policies and reforms needed to complete the sixth
review under the EFF. The agreement is subject to approval by the Executive
Board, following the implementation of prior actions, notably on fiscal and
institutional reforms.
Completion of the review would make available SDR 750
million (about US$1,059 million), bringing total disbursements under the EFF to
about US$3,027 million and helping unlock significant funding from bilateral
and multilateral partners. An additional SDR 1,015.5 million (about US$1,386
million) was disbursed in April 2020 to help Pakistan address the economic
impact of the COVID-19 shock.
Despite a difficult environment, progress continues to be
made in the implementation of the EFF-supported program. All quantitative
performance criteria (PCs) for end-June were met with wide margins, except for
that on the primary budget deficit.
Notable achievements on the structural front include the
finalization of the National Socio-Economic Registry (NSER) update, parliamentary
adoption of the National Electric Power Regulatory Authority (NEPRA) Act
Amendments, notification of all pending quarterly power tariff adjustments, and
payment of the first tranche of outstanding arrears to independent power
producers (IPPs) to unlock lower capacity payments fixed in renegotiated power
purchase agreements (PPAs).
The authorities have also made progress in improving the
anti-money laundering and combating the financing of terrorism (AML/CFT)
framework, although some additional time is needed to strengthen its
effectiveness.
On the macroeconomic front, available data suggests that a
strong economic recovery has gained hold, benefiting from the authorities’
multifaceted policy response to the COVID-19 pandemic that has helped contain its
human and macroeconomic ramifications.
The Federal Board of Revenue’s (FBR) tax revenue collection
has been strong. At the same time, external pressures have started to emerge: a
widening of the current account deficit and depreciation pressures on the
exchange rate—mainly reflecting the compound effects of the stronger economic
activity, an expansionary macroeconomic policy mix, and higher international
commodity prices.
In response, the authorities have started to adjust
policies, including by gradually unwinding COVID-related stimulus measures. The
State Bank of Pakistan (SBP) has also taken the right steps by starting to
reverse the accommodative monetary policy stance, strengthening some macro-prudential
measures to contain consumer credit growth, and providing forward guidance.
In addition, the government plans to introduce a package of
fiscal measures targeting a small reduction of the primary deficit with respect
to last fiscal year based on: 1) high-quality revenue measures to make the tax
system simpler and fairer (including through the adoption of reforms to the GST
system) and 2) prudent spending restraint, while fully protecting social
spending.
These policies will help safeguard the positive near-term
outlook, with growth projected to reach, or exceed, 4% in FY22 and 4.5% the
fiscal year after that. However, inflation remains high, although it should
start to see a declining trend once the pass-through of rupee depreciation is
absorbed, and temporary supply-side constraints and demand-side pressures
dissipate.
However, the current account is expected to widen this
fiscal year despite some export growth, reflecting the rising import demand and
international commodity prices. This economic outlook continues to face elevated
domestic and external risks, while structural economic challenges persist.
In this regard, and looking beyond the near term,
discussions also focused on policies to help Pakistan achieve sustainable and
resilient growth to the benefit of all Pakistanis.
On the fiscal policy front, staying on course on achieving
small primary surpluses remains critical to reduce high public debt and fiscal
vulnerabilities. Continued efforts to broaden the tax base by removing
remaining preferential tax treatments and exemptions will help generate
much-needed resources to scale up critical social and development spending.
Monetary policy needs to remain focused on curbing
inflation, preserving exchange rate flexibility, and strengthening
international reserves. As economic stability becomes entrenched and the
independence of the State Bank of Pakistan (SBP) is strengthened with the
approval of the SBP Act Amendments, the central bank should gradually advance
the preparatory work to formally adopt an inflation targeting (IT) regime in
the medium term, underpinned by a forward-looking and interest-rate-focused
operational framework. While some key elements of IT are already in place,
including a medium-term inflation objective and prohibition of monetary
financing, additional efforts are needed, to modernize the SBP’s operational
framework as well as to strengthen monetary transmission and communication.
Advancing the strategy for the electricity sector reforms,
agreed with international partners, is important to bring the sector to
financial viability, and tackle its adverse spillovers on the budget, financial
sector, and real economy. In this regard, steadfast implementation of the
Circular Debt Management Plan (CDMP) will help guide the planned management
improvements, cost reductions, timely alignment of tariffs with cost recovery
levels, and better targeting of subsidies to the most vulnerable. Substantially
lowering supply costs. However, this will require a modern electricity policy
that: 1) ensures that PPAs do not impose a heavy burden on end-consumers; 2)
tackles the poor and expensive generation mix, including a wider use of
renewables; and 3) introduces more competition over the medium term.
Strengthening the medium-term outlook, including by
unlocking sustainable and resilient growth, creating jobs, and improving social
outcomes, hinges on ambitious efforts to remove structural impediments and
facilitate the structural transformation of the economy. To this end, increased
focus is needed on measures to strengthen economic productivity, investment,
and private sector development, as well as to address the challenges posed by
climate change:
Improving the governance, transparency and efficiency
of the state-owned enterprise (SOE) sector
Putting Pakistan’s public finances on a sustainable
path—while leveling the playing field of firms across the economy and improving
the provision of services—requires following through with the current reform
agenda, especially with the: 1) creation of a modern legal framework; 2) better
sectoral oversight by the state, supported by regular audits, especially of the
largest SOEs; and 3) reduction of the footprint of the state in the economy,
based on the recently completed comprehensive stocktaking.
Fostering the business environment, governance, and
the control of corruption
The business climate would benefit from simplifying
procedures for starting a business, approving FDI, preparing trade
documentation, and paying taxes; and the empowerment of people and production
of more complex goods from investing more in education and human capital.
Ensuring a level playing field and the rule of law also remains essential,
mainly by bolstering the effectiveness of existing anti-corruption institutions
and accountability of high-level public officials and by completing the
much-advanced action plan on AML/CFT.
Boosting competitiveness and exports
To this end, key objectives include: 1) implementing the
approved national tariff policy, based on time-bound strategic protection; 2)
negotiating new free trade agreements; and 3) facilitating the integration in
global supply chains by improving firms’ reliability and product quality, and
registering firms with all necessary entities for tax and business purposes.
Promoting financial deepening and inclusion
To better channel savings toward productive investment,
improve the allocation of resources, and diversify risks, key policies remain:
1) entrenching macroeconomic stability; 2) strengthening institutional and
regulatory frameworks; 3) creating conditions that allow for a greater role of
private credit; and 4) boosting financial coverage of underserved segments of
the population and SMEs.
Stepping up to climate change
Worldwide, Pakistan ranks both among the top 10 countries
with the largest damages from climate-related disasters and top 20 countries
with the largest greenhouse gas (GHG) emissions. Critical next climate policy
steps are: 1) accelerating the finalization of the authorities’ National
Adaptation Plan (NAP); and 2) implementing an adequate set of measures to meet
the COP26 Nationally Determined Contribution (NDC) targets and securing
sufficient financing, including from international partners.
