While official sources claim that a formal agreement has been reached with the IMF it would be safer to call it a broad agreement instead. There are still things to be done before a staff-level pact is signed next month. The IMF mission is yet to finalize monetary targets with the State Bank and share the draft of a Memorandum of Economic and Financial Policy (MEFP). Actions required in the Memorandum and which will have to be implemented before the IMF board takes up Pakistan’s case for approval and the subsequent disbursement of about $1 billion next month. However with the US support available to the coalition government it would be easier for Islamabad to negotiate minor hurdles on the way to securing the IMF deal. The IMF has already yielded some ground by stepping back from the demand that it impose a Rs30 per litre petroleum levy and 10.5% sales tax with effect from July 1st. However Islamabad was required to generate Rs436 billion more through taxes, increase the petroleum levy gradually up to Rs50 per litre, revise upward the annual tax collection target by almost Rs 422 billion for the year 2022-23 by taking additional tax measures, impose poverty tax on firms earning above Rs 150 million, do away with provisions for additional salaries and pensions, cancel the pay and pension raise and bring down the income tax exemption to Rs 600,000 a year instead of the proposed Rs 1.2 million annual income. The measures are needed to put the economy on track but are going to be widely unwelcome.
One expects the broad agreement to have a positive impact on markets. Even a hint from the Finance Minister that an agreement with the IMF was expected in a day or two led stocks to stage a massive recovery on Tuesday. To start with, the agreement will put an end to the prevailing uncertainty. Pakistan needs about $36 billion to $37 billion in financing for the fiscal year starting July. With the country unable to secure funding from the global bond market and commercial banks, IMF becomes the sole resort. An IMF deal would help secure funds from international financial institutions and friendly nations. There are hopes that with sufficient foreign exchange in the State Bank the rupee would strengthen and the inflation would come down. But by the time the economy starts reviving, the PML(N) would have lost enough goodwill due to the tsunami of inflation the measures would bring.