IMF says Pakistan met all quantitative performance criteria for the end of June, except one, with a wide margin
The International Monetary Fund (IMF) has agreed to restart its $6 billion Expanded Funds Facilitation Program for Pakistan, as the two sides finally reached an employee-level agreement.
In a statement issued by the international moneylender on Monday, it said, "The agreement is subject to approval by the Executive Board, in particular after the implementation of prior works on fiscal and institutional reforms."
"Completion of the review will make available SDR 750 million (approximately US$1,059 million), bringing the total disbursements under the EFF to approximately US$3,027 million and helping to unlock significant funding from bilateral and multilateral partners."
The IMF recognized that "despite the difficult environment", Pakistan is making progress on implementing the Extended Funds Facility Programme.
"All quantitative performance criteria (PCs) for the end of June were met with a wide margin, except for the primary budget deficit," the IMF said.
It listed the finalization of the National Socio-Economic Registry (NSER) update, the parliamentary adoption of the National Electric Power Regulatory Authority (NEPRA) Act amendments as "notable achievements" by Pakistani authorities.
The IMF also acknowledged Pakistan's efforts in improving anti-money laundering and countering the financing of terrorism infrastructure.
It also approved Pakistan's decision to pay the first tranche of outstanding dues to independent power producers (IPPs) to unlock the payment of reduced capacity as stipulated in renegotiated power purchase agreements (PPAs).
IMF on the macroeconomic front
The IMF has praised Pakistan's response to the coronavirus pandemic, saying it has helped in controlling the impact of the coronavirus pandemic. It also said the Federal Board of Revenue's (FBR) tax revenue collection has been "strong".
The IMF said that Pakistan is bearing the brunt of external pressures in the form of a growing current account deficit and depreciation of the exchange rate.
However, the international moneylender said these were "reflecting the mixed effects of strong economic activity, an expansionary macroeconomic policy mix, and high international commodity prices."
"The State Bank of Pakistan (SBP) has also taken the right steps by reversing the accommodative monetary policy stance, consolidating certain macroprudential measures to contain consumer credit growth and providing further guidance."
The IMF said that Pakistan shared its plans to introduce a number of fiscal measures to target a small reduction of the primary deficit in relation to the previous fiscal year, with:
(i) High quality revenue measures to make the tax system simple and fair (including adoption of reforms in the GST system)
(ii) Prudential spending restraint, completely protecting social spending.
The IMF said that if Pakistan continues with these fiscal policies, it will help the country to grow at 4% in FY2022 and reach 4.5% in FY2023.
"Although inflation remains high, it should begin to see a declining trend after absorbing the pass-through of the rupee's depreciation and after temporary supply-side constraints and demand-side pressures are eliminated," the IMF said. needed."
The IMF warned that despite some growth in Pakistan's exports, the current account is expected to grow this year. It said this widening of the deficit reflects rising commodity prices across the globe and rising import demand in the country.
IMF on Tax Reforms, Monetary Policy and Power Sector
The IMF said Pakistan would have to continue its efforts to eliminate preferential tax treatment and exemptions, which would ultimately help the country allocate enough resources to spend.
The international moneylender called on Pakistan to ensure that its monetary policy remains focused on curbing inflation, maintaining exchange rate flexibility and strengthening international reserves.
“As economic stability strengthens and the independence of the SBP is strengthened with the ratification of the SBP Act amendments, preliminary work should be done by the central bank to formally adopt an inflation targeting (IT) regime in the medium term.” should pursue, underlined by a forward-looking and interest-rate-focused operational framework," it said.
The IMF said that Pakistan needs additional efforts to strengthen monetary transmission and communication along with modernizing the operational structure of the State Bank.
The IMF said that it is important to bring the power sector to viability and deal with its adverse impact on the budget, financial sector and the real economy.
“In this regard, firm implementation of the Circular Debt Management Plan (CDMP) will help guide planned management reforms, cost reduction, timely alignment.
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