The first biannual performance review of the ongoing International Monetary Fund’s (IMF) $7 billion Extended Fund Facility (EFF) was concluded smoothly on a “positive note”, with no signs of any major hiccups during the discussions.
The end of the mission statement issued by the Fund late on March 14 shows that the discussions were successful, as predicted by most analysts, in spite of delays in the implementation of programme goals in certain areas and missed tax revenue targets, with Pakistani authorities hoping to receive the next $1bn tranche early next month.
“The IMF and the Pakistani authorities made significant progress towards reaching a Staff Level Agreement (SLA) on the first review under the 37-month extended arrangement under the EFF,” a statement from the team leader Nathan Porter said.
“Programme implementation has been strong, and the discussions have made considerable progress in several areas, including the planned fiscal consolidation to durably reduce public debt, maintenance of sufficiently tight monetary policy to maintain low inflation, acceleration of cost-reducing reforms to improve energy sector viability, and implementation of Pakistan’s structural reform agenda to accelerate growth, while strengthening social protection and rebuilding health and education spending,” he said.
State Bank displays caution as foreign economic stimuli, domestic political challenges, and the IMF’s budget interventions may impact present stability
The IMF team was here from Feb 24 to March 14 to scrutinise progress on its 25th bailout facility and on a possible new arrangement under the Fund’s Resilience and Sustainability Facility (RSF).
On RSF talks, Mr Porter added that progress has also been made in discussions on the Pakistani authorities’ climate reform agenda, which aims to reduce vulnerabilities from natural disaster-related risks, and accompanying reforms which could be supported under a possible arrangement under the RSF. “The mission and the authorities will continue policy discussions virtually to finalise these discussions over the coming days,” he concluded.
There were things where the IMF appears to have taken what an official described as a “lenient view” and a couple of areas where it “put its foot down”.
That the IMF cut the tax target of Rs12.9 trillion down to Rs12.3tr and didn’t insist on additional revenue measures despite the tax collection shortfall during the first half of the current fiscal year — the period under review — shows that the lender is willing to waive or revise its conditions if convinced the delays and failures in implementation of those goals were due to the changing macro situation, like the sudden and unexpected fall in inflation and downward revision of the size of the economy, and not intentional.
But there were areas, like the suggested grid levy on captive power plants, where it insisted on making domestic and imported gas supplies a lot more expensive than they are in order to save the power sector from collapsing under their weight. The rooftop distributed solar policy has also been revised to reduce its burden on the national grid and the consumers linked to it.
The details of the outcome of the discussions will not be known unless the lender finalises the Memorandum of Economic and Fiscal Policies and SLA. It, however, is certain that the reforms where execution effort is seen by the lender to be lacking — such as taxation on real estate, retail, agriculture, and privatisation — during this year will get a prominent mention in the new loan documents and during the discussions on measures to be taken in the budget for the next fiscal year over the next couple of months.
Indeed, the economy has significantly stabilised in the last year and a half. Macro indicators have improved, with headline prices measured by the Consumer Price Index trending down despite a relatively sticky core inflation and dropping to 1.5 per cent last month.
The current account is running a small surplus of $700 million on rising remittances that are projected to grow to $35bn by the end of this fiscal year, and the exchange rate remains stable while foreign exchange reserves are on a generally upward trend.
Likewise, economic activity continues to gain traction, as reflected in the latest high-frequency economic indicators. Yet the economy is not out of the woods, as noted by the State Bank in its latest monetary policy statement. The central bank has halted its monetary cycle easing for now as it views some pressures building up on the external account due to rising imports amid weak financial inflows.
The current account turned into a deficit of $0.4bn in January after remaining in surplus over the past few months. This, coupled with weak private and official inflows amid ongoing debt repayments, has led to a decline in the bank’s international reserves.
The large-scale manufacturing output has also declined during the first half of the current fiscal year, and the shortfall in tax revenues from the target underlines the need for more structural reforms to broaden the net.
Lastly, the ongoing tariff escalations following the Trump administration to restrict imports from major trading partners, especially China, have created global uncertainty, which the SBP says may have implications for global economic growth, trade and commodity prices. This has already left most central banks in advanced and emerging economies to slow the pace of their monetary easing.
Facing political challenges from the opposition, PTI, led by the incarcerated Imran Khan, the ruling PML-N seems to be increasingly coming under pressure to accelerate growth, which is projected to remain around 3pc this year. There are signs that the government wants to go the same old way to achieve faster growth: announce tax incentives for the real estate.
This is in spite of the realisation among many cabinet members that the hasty return to growth the real estate way would drive the economy back into another and more severe balance of payments crisis.
So far, the government of Prime Minister Shehbaz Sharif seems to be keeping its desire for stronger growth in check because of low reserves and IMF pressure. But it won’t be holding out against the politically powerful rent-seeking real estate lobby for very long.
The same people who are trying to convince the premier that real estate could rescue his government and bring a semblance of prosperity had persuaded the Imran Khan administration back in 2020 to allow tax amnesty for investment in property. What transpired after that is known to all. The common people and the economy are still paying the price for that one wrong decision.
Published in Dawn, The Business and Finance Weekly, March 17th, 2025
