By Syed Hussain Haider, CFA, CIPM & Ahmed Lakhani
IMF Package: The wait is finally over!
At last, the wait is over as the IMF has confirmed via a press release yesterday that it has reached a staff-level agreement on economic policies with Pakistan for an Extended Fund Facility (EFF). At the same time, the Finance Minister of Pakistan, Dr. Abdul Hafeez Shaikh also gave an interview on national television and shared some thoughts regarding the IMF loan agreement. One thing that was ascertained is that the new program will span 39 months and the total loan amount will be around US$6bn (as per the press release).
The EFF arrangement is nothing new for Pakistan as most of the previous IMF programs with Pakistan (this being the 22nd instance) have been mostly under either an EFF framework or a Standby Arrangement (SBA). The previous IMF program in 2013 was under EFF, which is generally longer term in nature and comes with associated conditions, whereas in the preceding one in 2008, it was
the SBA arrangement.
The next step is to wait for the final approval from the IMF Executive Board, which
has been merely a formality in most previous cases. However, it is interesting to
note that the time period between the initial staff level agreement and approval
was two months in 2013, whereas it took around ten days to obtain board
approval in 2008. Considering our current situation, it is hoped that the approval
will be granted sooner rather than later.
Another important point to note is that in 2013, the payments were more or less
evenly spread out (initial payment was ~US$550mn out of a total package of
US$6.6bn), whereas in 2008, ~40% (US$3.1bn out of US$7.6bn) was transmitted
at the initial stage. It remains to be seen whether there is a front loaded
payment, which is normally more typical of an SBA. However, it is quite firmly the
need of the hour for Pakistan.
Excerpts from the IMF Press Release (May 12, 2019)
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 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”
“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”
“An ambitious structural reform agenda will supplement economic policies”
“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”
“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”
• As compared to the recent news flows suggesting cumulative US$6-8bn loans
from World Bank, Asian Development Bank and other multilateral agencies, the
Finance Minister suggested in his televised appearance yesterday that the total
funding from these agencies is expected at around US$2-3bn.
• By the looks of it, it seems this program will in most likelihood not deviate
much from the media grapevine regarding the specifics (e.g. stabilization
measures). To name a few, news flows in past few weeks have been suggesting
a 200bps increase in interest rates and 20-30% devaluation in the local currency.
Whether these turn out to be true is anybody’s guess. However, judging by rather
ominous excerpts (presented on the previous page) from the IMF’s press release,
we would not be surprised if they do.
• Hearteningly, the IMF has expressed an inclination towards increasing the social
protection cover for the economically vulnerable segments of our society. At the
same time, reducing the primary deficit (fiscal deficit ex-debt servicing) to 0.6% of
GDP (expected 2.2% in FY19) would require a sizeable adjustment (~Rs600bn)
and carries a risk of stagflation for the local economy.
• On a positive note, the Finance Minister has clearly expressed that the subsidy
amount under the social safety nets (like BISP and Ehsas program) will be
almost doubled to Rs180bn. Moreover, he also mentioned although electricity
tariffs will be increased, there will be no negative impact on domestic consumers
of less than 300 units monthly usage, which is 75% of domestic consumption. A
subsidy of Rs216bn on electricity will be provided, effectively an increase of
Rs50bn from current levels.
• Finally, the FM’s brief interview concluded with an inevitable question on
whether this would be the last IMF program for Pakistan. Rather than what
was seen in the recent past, the new FM’s response was more measured, while
he also added that this IMF program should not be viewed merely from the lens of
obtaining credit and generating revenue, and rather as one of reforms, which will
ultimately benefit the country in the longer term.
Breakdown of Fiscal deficit
Source: Ministry of Finance
Courtesy: JS Global