Pakistan reaches staff-level Extended Fund Facility Arrangement (EFF) with IMF for $7 billion

Pakistan reaches staff-level Extended Fund Facility Arrangement (EFF) with IMF for $7 billion

By: Communicators - Business Team (July 13, 2024)

The new $7 billion loan deal with the International Monetary Fund (IMF) is significant for Pakistan, as it is aimed at addressing the country's economic challenges and promoting sustainable growth. The program includes several key measures:

1. Fiscal and Monetary Policy: Strengthening these policies to ensure economic stability and control inflation.

2. Tax Reforms: Broadening the tax base to increase government revenues.

3. State-Owned Enterprises (SOEs): Improving management to make them more efficient and reduce their financial burden on the government.

4. Competition and Investment: Strengthening competition and creating a level playing field to attract more investment.

5. Human Capital: Enhancing education and health systems to improve the workforce's skills and productivity.

6. Social Protection: Expanding the Benazir Income Support Program (BISP) to provide better social safety nets for the most vulnerable populations.

These steps are designed to help Pakistan achieve economic stability, reduce fiscal deficits, and create a more conducive environment for sustainable development and growth.

IMF approved the release of the final $1.1 billion tranche of a $3 billion bailout to Pakistan, aimed at helping the country stabilize its economy and achieve sustainable growth. Key policy goals of Pakistan's program include:

1. Sustainable Public Finances:

   • Gradual Fiscal Consolidation: This involves reforms to broaden the tax base and remove exemptions.
   • Increase Resources for Development and Social Spending: Ensuring that more funds are available for critical development projects and social programs.

2. Increasing Tax Revenues:

   • Measures to Increase Tax Revenues: Targeting an increase of 1.5 percent of GDP in FY25 and 3 percent of GDP over the program period.
   • General Government Primary Surplus: The FY25 budget targets a primary surplus of 1 percent of GDP (2 percent in headline terms).

3. Simpler and Fairer Taxation:

   • Direct and Indirect Taxation Reforms: Simplifying the tax system and making it fairer, including properly taxing net income from the retail, export, and agriculture sectors.

4. Expanding Social Protection:

• Increased Social Spending: The FY25 budget allocates additional resources to expand social protection programs, including the Benazir Income Support Programme (BISP), as well as education and health spending. This includes increasing both the generosity and coverage of these programs.

The deal also signifies key elements of fiscal strategy involving both the Federal and Provincial governments in Pakistan, in line with the 18th constitutional amendment. Here's a summary and breakdown:

1. National Fiscal Pact:

   • Objective: Rebalance spending activities between Federal and Provincial governments.
   • Focus: Devolve higher spending responsibilities to provinces in education, health, social protection, and regional public infrastructure investment.
   • Expected Outcome: Improved public service provision at the provincial level.

2. Provincial Tax-Collection Efforts:

   • Sales Tax on Services: Provinces will enhance efforts to collect this tax.
   • Agricultural Income Tax:
     • Harmonization: All provinces will harmonize their agricultural income tax regimes with the federal personal and corporate income tax regimes.
     • Effective Date: This change will be effective from January 1, 2025.

3. Economic Objectives:

   • Reducing Inflation: Monetary policy will aim to support disinflation to protect real incomes, especially for the most vulnerable.
   • Access to Financing: Efforts will be made to deepen access to financing.
   • Building External Buffers: Strong external buffers will be built for development and resilience.

4. Role of the State Bank of Pakistan (SBP):

   • Flexible Exchange Rate: The SBP will maintain a flexible exchange rate.
   • Foreign Exchange Market: Improvements will be made in the functioning and transparency of the foreign exchange market and FX operations.

The strategy is designed to enhance fiscal responsibility at the provincial level, improve public service delivery, and strengthen the overall economic framework by maintaining macroeconomic stability and resilience.

The deal also elaborates several key measures and commitments made by the authorities to enhance financial stability, energy sector viability, private sector growth, and governance reforms. Here's a summary of the main points:

1. Financial Stability:

   • Deepen access to financing.
   • Strengthen financial institutions.
   • Address undercapitalized banks.
   • Upgrade the crisis management framework.

2. Energy Sector Viability:

   • Adjust energy tariffs timely.
   • Implement cost-reducing reforms.
   • Avoid unnecessary expansion of generation capacity.
   • Undertake targeted subsidy reforms.
   • Replace cross-subsidies with direct and targeted support through the Benazir Income Support Program (BISP).

3. Private Sector and Export Dynamism:

   • Improve the business environment.
   • Create a level playing field for all businesses.
   • Remove state distortions.
   • Improve State-Owned Enterprises (SOE) operations and management.
   • Prioritize privatization of profitable SOEs.
   • Strengthen transparency and governance around the Pakistan Sovereign Wealth Fund.

4. Economic Reforms:

   • Phase out incentives to Special Economic Zones.
   • Phase out agricultural support prices and associated subsidies.
   • Avoid new regulatory or tax-based incentives that could distort investment.
   • Advance anti-corruption, governance, and transparency reforms.
   • Gradually liberalize trade policy.

An expression of gratitude from the IMF team was shown at the end for the hospitality and productive discussions during their visit to Islamabad