Pakistan, IMF reach agreement on $6 billion bailout package

Finance Minister Abdul Hafeez Shaikh told state television he hoped it would be Pakistan's last.

ISLAMABAD (Dunya News) – Pakistan has reached an accord with the International Monetary Fund for a three-year, $6 billion bailout package aimed at shoring up fragile public finances and strengthening a slowing economy, officials said on Sunday.

The deal, which still needs approval by the IMF board in Washington, would be the 13th such bailout since the late 1980s.

“Pakistan is facing a challenging economic environment, with lacklustre growth, elevated inflation, high indebtedness, and a weak external position,” the IMF said in a statement outlining the framework deal.

The IMF forecasts Pakistan’s economic growth slowing to 2.9% this fiscal year from 5.2% in 2018, while the central bank has cut its estimate to between 3.5-4%.

As the bailout talks neared culmination, Khan shook up his top economic team, replacing Asad Umar with Hafeez Shaikh as finance minister and making IMF economist Reza Baqir central bank governor instead of Tariq Bajwa.

Advisor to Prime Minister on Finance Abdul Hafeez Sheikh said Pakistan will get six billion dollars in three years, while an additional amount of two to three billion dollars may likely come from World Bank and Asian Development Bank on less interest rate.

Dr Abdul Hafeez Shaikh said the IMF programme will be implemented after its formal approval from fund’s board. He said the agreement will improve debt situation and sent a positive signal to the world to attract foreign investment.

The Advisor said that the IMF programme will provide an opportunity to bring structural changes to handle issues pertaining to loss making state owned enterprises, exports, and to enhance revenue.

Details of the agreement

Under the agreement, Pakistan will receive about US$6 billion for a period of 39 months .

Below are details of the agreement provided on the IMF’s website.

The Extended Fund Facility arrangement aims to support the authorities’ strategy for stronger and more inclusive growth by reducing domestic and external imbalances, removing impediments to growth, increasing transparency, and strengthening social spending.

An ambitious structural reform agenda will supplement economic policies to rekindle economic growth and improve living standards.

Financing support from Pakistan’s international partners will be critical to support the authorities’ adjustment efforts and ensure that the medium-term program objectives can be achieved.

In response to a request by the Pakistani authorities, an International Monetary Fund (IMF) mission led by Mr. Ernesto Ramirez Rigo visited Islamabad, Pakistan from April 29 to May 11 to discuss IMF support for the authorities’ economic reform program. At the end of the visit, Mr. Ramirez Rigo made the following statement:

“The Pakistani authorities and the IMF team have reached a staff level agreement on economic policies that could be supported by a 39-month Extended Fund Arrangement (EFF) for about US$6 billion. This agreement is subject to IMF management approval and to approval by the Executive Board, subject to the timely implementation of prior actions and confirmation of international partners’ financial commitments. The program aims to support the authorities’ strategy for stronger and more balanced growth by reducing domestic and external imbalances, improving the business environment, strengthening institutions, increasing transparency, and protecting social spending.

“Pakistan is facing a challenging economic environment, with lackluster growth, elevated inflation, high indebtedness, and a weak external position. This reflects the legacy of uneven and procyclical economic policies in recent years aiming to boost growth, but at the expense of rising vulnerabilities and lingering structural and institutional weaknesses. The authorities recognize the need to address these challenges, as well as to tackle the large informality in the economy, the low spending in human capital, and poverty. In this regard, the government has already initiated a difficult, but necessary, adjustment to stabilize the economy, including thorough support from the State Bank of Pakistan. These efforts need to be strengthened. Decisive policies and reforms, together with significant external financing are necessary to reduce vulnerabilities faster, increase confidence, and put the economy back on a sustainable growth path, with stronger private sector activity and job creation.

“The EFF aims to support the authorities’ ambitious macroeconomic and structural reform agenda during the next three years. This includes improving public finances and reducing public debt through tax policy and administrative reforms to strengthen revenue mobilization and ensure a more equal and transparent distribution of the tax burden. At the same time, a comprehensive plan for cost-recovery in the energy sectors and state-owned enterprises will help eliminate or reduce the quasi-fiscal deficit that drains scarce government resources. These efforts will create fiscal space for a substantial increase in social spending to strengthen social protection as well as in infrastructure and human capital development. The modernization of the public finance management framework will increase transparency and spending efficiency. Provinces are committed to contribute to these efforts by better aligning their fiscal objectives with those of the federal government.

“The forthcoming budget for FY2019/20 is a first critical step in the authorities’ fiscal strategy. The budget will aim for a primary deficit of 0.6 percent of GDP supported by tax policy revenue mobilization measures to eliminate exemptions, curtail special treatments, and improve tax administration. This will be accompanied by prudent spending growth aimed at preserving essential development spending, scaling up the Benazir Income Support Program and improve targeted subsidies, with the goal of protecting the most vulnerable segments of society.

“The State Bank of Pakistan will focus on reducing inflation, which disproportionately affects the poor, and safeguarding financial stability. A market-determined exchange rate will help the functioning of the financial sector and contribute to a better resource allocation in the economy. The authorities are committed to strengthening the State Bank of Pakistan’s operational independence and mandate.

“An ambitious structural reform agenda will supplement economic policies to rekindle economic growth and improve living standards. Priority areas include improving the management of public enterprises, strengthening institutions and governance, continuing anti-money laundering and combating the financing of terrorism efforts, creating a more favorable business environment, and facilitating trade. To improve fiscal management the authorities will engage provincial governments on exploring options to rebalance current arrangements in the context of the forthcoming National Financial Commission.

“The IMF team is grateful to the Pakistani authorities for open and constructive discussions and their hospitality.”

Finance Minister Abdul Hafeez Shaikh told state television he hoped it would be Pakistan’s last.

Prime Minister Imran Khan’s government came to power last year determined to avoid another bailout and initially sought billions of dollars in funding from friendly countries including China, Saudi Arabia and the United Arab Emirates.

But with inflation climbing to over 8 percent, the rupee losing a third of its value over the past year, and foreign exchange reserves barely enough to cover two months of exports, it was forced to turn to the IMF.

CURRENCY FLEXIBILITY

For decades, Pakistan has had chronic problems collecting tax and the programme envisages reforms to improve public finances and cut public debt, including “revenue mobilization measures to eliminate exemptions, curtail special treatments, and improve tax administration,” the IMF statement said.

In addition, it foresees a “comprehensive plan for cost-recovery” in the creaking energy sector, where mounting debt backlogs have acted as a growing drain on government resources.

The budget for the coming 2019/20 fiscal year, expected later this month, will aim for a primary deficit, not including debt servicing costs, of 0.6 percent of gross domestic product.

The savings should allow room for a “substantial increase” in social spending to strengthen welfare protection and boost infrastructure and human capital development, the IMF added.

It said the independence of the State Bank of Pakistan would be protected and the central bank would focus on reducing inflation and safeguarding stability.

A “market-determined” exchange rate for the rupee would help the financial sector, it added in comments reflecting the IMF’s longstanding push for Pakistan to adopt a more flexible currency policy to end repeated boom-and-bust cycles.

One of the key sticking points during the IMF bailout discussions had been how to manage the currency, whose exchange rate the central bank underpins in a de facto managed float system and which many analysts see as overvalued.

The package will include “an ambitious structural reform agenda” to boost growth, the IMF said. “Priority areas include improving the management of public enterprises, strengthening institutions and governance, continuing anti-money laundering and combating the financing of terrorism efforts.”

But it made no explicit mention of privatising notoriously sensitive and high-employing state-controlled companies like Pakistan International Airlines of Pakistan Steel Mills.

PM Khan rejects draft agreement

Earlier, over strict terms and conditions posed by the International Monetary Fund (IMF) on Pakistan for a bailout package, Prime Minister (PM) Imran Khan has rejected the draft of a staff-level reached between the Ministry of Finance and the IMF representatives.

In this regard, the PM had summoned an important meeting on Monday to examine financial affairs, the tax amnesty scheme and the IMF deal. Several members of the federal cabinet will also attend the meeting.

According to sources, the premier seeks soft terms and conditions from the IMF regarding inflation, particularly relaxation in a larger tax rebates and exemptions.

Moreover, PM Khan had directed concerned officials to persuade the IMF for a reduced tax collection target.

Previously, the prime minister had held two meetings with Adviser on Finance and Economic Affairs Dr Abdul Hafiz Sheikh, in which the latter briefed the former about the IMF deal.

Contrarily, the government has accepted several demands of the IMF, including the increase in electricity and gas prices in the country.

As per details, the consumers would pay Rs340 billion in three years on account of electricity and gas. The government has also agreed to make the National Electric Power Regulatory Authority (NEPRA) and the Oil and Gas Regulatory Authority (OGRA) autonomous in setting the prices of electricity and gas.

New taxes amounting to Rs700 billion would also be revealed in the budget for the next fiscal year, to be announced on June 11.

Besides, Pakistan’s talks with the IMF, which were to be wrapped up by May 10, will continue over the weekend, rejecting earlier speculations that Pakistan was ready to sign the deal.

In a late-night message, the finance ministry said only that “we have made good progress in our discussions with the visiting IMF mission. Consultations will continue over the weekend.”

Finance ministry spokesperson told the media that more time was required [for the bailout], and expressed hope that the situation would be clearer on Monday.

It is pertinent to mention that the prime minister had last month asked Asad Umar to resign from the finance minister’s post.

Following the ouster of Asad Umar from the federal cabinet, the government appointed Abdul Hafeez Shaikh, a finance expert known for connections in the IMF and other international institutions, as the prime minister’s adviser on finance.

Meanwhile, in a recent reshuffle, the government removed the State Bank governor and the Federal Board of Revenue (FBR) chairman primarily for “failing to produce to the desired results”.

On Sunday, Special Assistant to Prime Minister on Information and Broadcasting Dr Firdous Ashiq Awan had said Dr Reza Baqir, an IMF staffer, had resigned from the international money lending institution for serving Pakistan.

“We welcome Reza Baqir as Governor State Bank of Pakistan. He has come to support Prime Minister Imran Khan on the economic front,” Dr Firdous Ashiq Awan had said while talking to media in Islamabad. “In Naya Pakistan of Imran Khan, talent is valued.”