–$6 billion bailout package will be given over a period of 3 years
–The agreement is subject to approval by IMF management, Executive Board
–Hafeez Sheikh hopeful IMF programme will improve country’s financial situation
ISLAMABAD: Pakistan and International Monetary Fund (IMF) on Sunday finalised the bailout package after months-long talks pertaining to the size of the bailout package as well as conditions attached to it.
Speaking to the media, Prime Minister’s Advisor on Finance Hafeez Sheikh said that Pakistan and IMF have reached an agreement for a $6 billion bailout package under extended fund facility for a period of three years.
He said that the agreement will improve the debt situation and sent a positive signal to the world to attract foreign investment. He added 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.
Meanwhile, the IMF has also announced that it has 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, but the agreement is subject to approval by IMF management and Executive Board.
“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,” the international lender said in a statement.
“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,” the statement added.
IMF also said that the forthcoming budget for FY2019/20 is the first critical step in the authorities’ fiscal strategy. “The budget will aim for a primary deficit of 0.6 per cent 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,” IMF stated.
IMF further said that the State Bank of Pakistan (SBP) will focus on reducing inflation, which disproportionately affects the poor, and safeguarding financial stability. It added that an ambitious structural reform agenda will supplement economic policies to rekindle economic growth and improve living standards.
“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 (NFC),” IMF concluded.
It is worth mentioning here that back in 2013, soon after coming to power, the Pakistan Muslim League-Nawaz (PML-N) government signed a $6.6 billion bailout programme with IMF under the extended fund facility for a period of three years.
During their discussions on Wednesday, the two sides worked out a financing gap of around $11 billion for the next fiscal year, 2019-20. Under the understanding, the government will start withdrawing exemptions offered in various taxes amounting to around Rs350bn in the budget for 2019-20.
The two sides also agreed that Pakistan would increase the costs of electricity and gas for the consumers in the next budget. However, reforms in the tax and energy sectors have been outlined in the list of top priorities. According to sources, the government will have to reduce subsidies and take Rs340bn from consumers in the energy sector only.
It has been agreed that the power sector regulator, the National Electric Power Regulatory Authority (NEPRA), would be made autonomous and the government interference to take popular decisions would be minimised.
Moreover, SBP would be able to regulate exchange rates independently, and the rate of the US dollar would be set without any pressure from the government. This implies that the government is expected to allow a significant rupee depreciation and a key interest rate hike in 2019.
An official of the Finance Ministry confirmed that the financing gap for the next fiscal year had been projected at $10-$11bn. He added that the demand of the IMF for an increase in the policy rate by 100-200 basis points was also agreed upon. The policy rate is the interest rate announced by the SBP and is seen as a monetary policy instrument to regulate the availability, cost and use of money and credit.
Various measures aimed to build up foreign exchange reserves too have been agreed upon.
The official added that the IMF team pitched the GDP growth and current account deficit (CAD) on the lower side during the negotiations, however, a middle path was agreed upon.
The IMF was earlier stressing that CAD should be in the range of $4-$6 billion, said the official. However, it was agreed that the deficit would be $8 billion for the next fiscal year under the IMF programme.
The IMF team asked the government to take additional tax measures in the upcoming budget to make massive fiscal adjustments for moving towards surplus primary balance. The budget-making process would start only after the staff-level agreement is finalised.