The International Monetary Fund (IMF), in a country report released on Friday after the completion of the seventh and eighth reviews of a $6.5 billion Extended Fund Facility (EFF), detailed eight new structural benchmarks (SBs) for Pakistan, as well as resetting four that had remained unmet by the ousted Pakistan Tehreek-e-Insaf (PTI) government.
According to the report, there are four SBs that remain outstanding and have been reset. The first is parliamentary approval for a new state-owned enterprises law that would result in four—a bank, a development finance institution and two LNG-based power plants—being privatized. The second is a plan to phase out refinance facilities of the State Bank of Pakistan; the third is the first-stage recapitalization of two private sector banks; and the fourth is the establishment of an asset declaration system.
Additionally, eight new benchmarks have been set for, and agreed by, the government:
- a targeted increase of the Benazir Income Support Program Kafalat beneficiary base to 9 million families by June 2023
- finalization of the combined annual rebasings for fiscal years 2022 and 2023 to take effect on Oct 1, 2022
- submission to NEPRA of petitions for fuel price adjustments to ensure full recovery of the revenue requirement—including lost revenue from the delayed first-stage annual rebasing in July 2022
- adoption of a comprehensive strategy to address high levels of non-performing loans in some banks, including by requiring bank-specific plans for reducing these and writing off of fully provisioned non-performing loans
- initiation of orderly liquidation of either or both of the two currently undercapitalized private sector banks by end-May 2023 if they remain undercapitalized by that point
- submission to the federal cabinet of amendments to align Pakistan’s early intervention, bank resolution, and crisis management arrangements with international good practices, in line with IMF staff recommendations
- operationalization of a Central Monitoring Unit within the Ministry of Finance to control the financial management of state-owned enterprises to improve their performance
- publication of a comprehensive review of the anti-corruption institutional framework (including the National Accountability Bureau) by a task force with participation and inputs from reputable independent experts with international experience and civil society organizations.
The deal committed to by the incumbent government would assuredly boost inflation, as it calls for a hefty rise of gas prices—over 53 percent—as well as the withdrawal of more subsidies and restoration of general sales tax on petroleum products that has been stalled due to already record-high fuel prices. According to the report, the government has committed to recover around Rs. 786 billion from gas consumers during the current year against the Oil and Gas Regulatory Authority’s estimated revenue of Rs 666 billion.
The government has also committed to ensure electronically filed tax and asset details of grade 17-22 officers and members of the cabinet and Parliament and make them available to “authorized entities.” It has assured the global lender it would not interfere with the power tariff determinations of NEPRA, and allow uninterrupted implementation of all revisions in annual base tariff, quarterly adjustments and fuel price adjustments—a key cause of the massive increase to fuel prices reported nationwide in the past month. In a bid to clear the circular debt for the power sector, the government has agreed to stagger capacity payments, either through renegotiated power-purchase agreements or lengthening the debt repayment.
While praising the incumbent government’s implementation of petroleum development levy increases and power tariff adjustments, the global lender warned of “significant” risks to the program, including the required revenue generation; the provincial commitment to return surpluses to the center; and the containment of current spending relative to GDP in a pre-election year.
It said the government had committed to triggering contingency measures at the sign of any underperformance to mitigate this concern. These include immediately increasing GST on fuel, further streamlining GST exemptions, and cutting development expenditures by both the federal and provincial governments. The government has also committed to a “subsidy rationalization” for tube wells of large agricultural users to pursuing other reforms by increasing private participation in power distribution companies to improve their governance and efficiency.
The IMF said, going forward, Pakistan would need to enact reforms to achieve an equitable tax system, as well as undertake measures to reduce poverty, enhance social programs, and protect the most vulnerable by building fiscal space and improving coordination.