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Mettis Global News

MPS Preview: High for Longer

Pakistan checks all boxes, ready to face IMF with no apprehensions

IMF reports economic stabilization in Pakistan
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November 02, 2023 (MLN): Since almost all the boxes have been checked in terms of the conditions put forth by the International Monetary Fund (IMF), Pakistan is ready to face the delegation of the IMF today without the looming apprehension of reprimand from the fund.

The South Asian nation was on the brink of default due to depleting foreign exchange reserves with no foreign inflows, high import bill, and political noise which pushed the foreign investors far away.

At that time, the IMF, being a last resort reached a Staff-Level Agreement with the Pakistani authorities on a nine-month Stand-by Arrangement (SBA) in the amount of around $3 billion.

The first instalment of $1.2bn has already been released while the second instalment of $700 million is scheduled to be released on December 01, 2023, subject to the satisfactory completion of the first review which has started today.

The caretaker government has fulfilled almost all the conditions of the IMF prior to the meeting.

During this review, the delegation under the leadership of Nathan Porter IMF Chief will review the targets set for September 2023, including indicative targets, quantitative performance criteria, and structural benchmarks.

The Governor of the State Bank of Pakistan (SBP) Jameel Ahmed in his post-MPC briefing on September 14, 2023, categorically informed that all quantitative performance targets including Net Domestic Assets (NDA), Swaps and Net International Reserves have been met.

On the fiscal front, the country recorded a primary surplus of 0.4% of GDP (Rs416.81bn) in 1QFY24, surpassing the IMF target of Rs87bn. This improvement reflects both better revenue collection and restrained spending.

Another target pertaining to revenue collection was also met as the Federal Bureau of Revenue (FBR) collected Rs2,041bn, up 24% YoY in 1QFY23, surpassing the target of Rs1,977bn.

During 1QFY24, the non-tax revenues stood at Rs469bn against the annual budgeted amount of Rs2,963bn.

Likewise, the Petroleum Development Levy (PDL) clocked in Rs222bn in 1QFY24 compared to its annual target of Rs869bn.

Accordingly, the country's overall fiscal deficit in the first quarter of FY24 stood at 0.9% of GDP (Rs962.8bn) against 1% of GDP (Rs819.31bn) in the same period of last year against IMF full-year FY24 projections of 7.5% of GDP.

On the energy side, there were concerns due to the delay in the increase in gas tariffs but the government also checked off this target and the Economic Coordination Committee (ECC) on Monday approved the revised natural gas sale pricing for different categories of consumers for the FY24, w.e.f. November 01, 2023.

However, on the external side, the financing requirements of $28.4bn including a Current Account Deficit (CAD) of $6.5bn for FY24 will pose a challenge for the government.

On the policy front, taking a smart move, the SBP kept the policy rate unchanged at 22% on October 30, 2023, as the IMF explicitly recommended adopting a contractionary policy.

The fund highlighted in its Staff Report that the SBP stopped policy rate hikes prematurely, hoping that inflation had reached its peak and would soon decline, this inconsistent monetary policy also had a negative impact on the economy.

Rising dollar demand, driven by illegal practices across the country to hoard dollars, has significantly affected the local unit and created chaos in both the open market and interbank. In response to this issue, the IMF suggested that the average premium between the interbank and open market rates should not exceed 1.25%.

To comply with this condition, the government implemented effective measures, resulting in the average premium between the interbank and open market rates falling below the suggested threshold. As of the last closing, the premium had shrunk to 0.6465 or 0.23%.

Safe to say that the caretaker government carefully handled the precarious financial condition of Pakistan during the quarter for the attainment of these performance criteria and indicative targets.

The second and last review will commence on March 01, 2024. Successful completion by meeting the end-December performance criteria will pave the way for the disbursement of the final instalment of almost $1.1bn.

Pakistan: Quantitative Performance Criteria and Indicative Targets, FY23-24
  Sep 2023 Dec 2023 Comment
I. Quantitative Performance Criteria      
Floor on net international reserves of the SBP (USD mn) (14,550) (13,800)  Expected to be achieved (As per SBP Governor)
Ceiling on NDA of the SBP (stock, PKR bn) 15,048 14,888  Achieved – (As per SBP Governor)
Ceiling on SBP's stock of Net Fx currency swaps/forward position (negative, USD mn) 4,200 4,000  Achieved – (As per SBP Governor)
Ceiling on net GoP budgetary borrowing from the SBP (stock, PKR bn) 4,708 4,708  Reduced by PKR 281bn to PKR4,965bn (Data Sept 22, 2023)
Ceiling on primary budget deficit (cumulative, excl. grants, PKR bn) (87) (1,232)  Data not yet available – difficult to Achieve 
Ceiling on the amount of GoP Guarantees (stock, PKR Bn) 4,000 4,050  Expected to achieve 
Cumulative floor on targeted cash transfers spending (BISP) (PKR bn)  88 186  Achieved
II. Continuous Performance Criteria      
Zero new flow of SBP's credit to the general government –     –     
Zero ceiling on accumulation of external public payment arrears by the general government –    –     
III. Indicative Targets      
Cumulative floor on general government budgetary health and education spending (PKR bn) 465 1,031
The floor on net tax revenues collected by the FBR (cumulative, PKR bn) 1,977 4,425  tax Revenue PKR 2,041 Bn (Higher by PKR64 Bn
Ceiling on net accumulation of tax refund arrears (cumulative, PKR bn) 32 43  –
Ceiling on power sector payment arrears (cumulative flow, PKR bn)  (155) 64  Power tariff increased

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Posted on: 2023-11-02T13:28:58+05:00