IMF deal is done

Pakistan has reached an accord with the International Monetary Fund (IMF) over a three-year $6 billion bailout package aimed at shoring up fragile public finances and strengthening the slowing economy, officials said on Sunday. Adviser to Prime Minister on Finance Hafeez Shaikh told the state-run television that he hopes the accord, which must still be approved by the IMF board in Washington, will be the last for Pakistan, which has had repeated bailouts for the past three decades. “Pakistan is facing a challenging economic environment, with lackluster growth, elevated inflation, high indebtedness, and a weak external position,” the IMF said in a statement outlining the framework of a deal reached after months of negotiations. The package will include ‘an ambitious structural reform agenda’ to boost growth, which the IMF sees slowing to 2.9 percent this year from 5.2 percent last year. It also envisages tax reforms to improve public finances and cut public debt as well as a ‘comprehensive plan for cost-recovery’ in the creaking energy sectors, where mounting debt backlogs have acted as a growing drain on government resources. “The IMF team 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,” the IMF announced in a press release. The international lender said it aims to support the federal government’s 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,” it said. “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,” it added. The IMF said the State Bank of Pakistan will focus on reducing inflation and safeguarding financial stability. “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,” the IMF press release said. Speaking on the state TV, the financial adviser said that Pakistan has reached a staff-level agreement with the financial body, and further working on it will continue after the IMF executive board’s approval. “The country is waiting for final nod from the board of directors from Washington,” he said. According to the agreement the authorities from both sides committed to give operational independence and mandate to the State Bank of Pakistan. The central bank is expected to focus on reducing inflation, which disproportionately affects the poor, and safeguarding financial stability. The IMF has also listed its priority areas for improvement in the Pakistani economy: 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. The financial body has said that 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,” the IMF statement concluded. Speaking to the PTV, the adviser said IMF is an international institution whose primary job is to assist member countries who are in an ‘economic difficulty’, adding that the government could not have bridged the financing gap of $12 billion on its own that he said was created by a weak economy. Besides the IMF assistance, Pakistan will also receive additional funds worth nearly $2-3 billion from institutions like the World Bank and the Asian Development Bank, the adviser revealed. Asked whether this would be Pakistan’s last IMF programme, he said, “It depends on how successfully we as a country implement this programme and approach it as a reform or structural change programme instead of a mere revenue-earning programme.” Islamabad and a visiting IMF mission had kicked off technical level talks on April 29 to sort out details of the proposed bailout package over the next 10 days. The two sides were scheduled to conclude a staff-level agreement on Friday, but the talks were extended into the weekend, with the finance ministry reporting ‘good progress’ in the discussions. The finance ministry had approached the IMF in August 2018 for a bailout package, whereas last month, the then finance minister Asad Umar announced that the two sides had – more or less – reached an understanding on a package for bailing out the country’s ailing economy. Prime Minister Imran Khan’s government came to power last year reluctant to seek what is now expected to be its 13th IMF bailout since the late 1980s. Inheriting an economy with yawning budget and current account deficits, his government 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 Pakistani rupee losing a third of its value over the past year, and foreign exchange reserves barely enough to cover more than two months of exports, it was forced to turn to the Fund.