ISLAMABAD:
The International Monetary Fund mission has returned to Washington without reaching a staff-level agreement with Pakistan for the release of over $1 billion loan tranche but it said that “significant progress” was made during the talks towards striking a deal.
A day after the end of the first review talks, the IMF issued a press statement that acknowledged “strong implementation” on the programme. But it remained short of announcing the Staff Level Agreement, which is critical to maintaining economic stability in Pakistan.
One of the reasons for not announcing the agreement was that the IMF handed over the first draft of the Memorandum for Economic and Financial Policies (MEFP) to Pakistan just before its departure to Washington, said the senior finance ministry officials. They stated that the agreement would be reached very soon once a consensus is achieved on the MEFP.
The MEFP is a policy document that defines the basis of cooperation during the programme period and it is revised after the end of every review programme.
IMF Mission Chief Nathan Porter announced through a news statement that “the mission and the authorities will continue policy discussions virtually to finalise these discussions over the coming days”.
Without the staff level agreement, the IMF management cannot take Pakistan’s case to the board for the approval and completion of the first review and the disbursement of the second loan tranche of over $1 billion.
“The IMF and the Pakistani authorities made significant progress toward reaching a Staff Level Agreement (SLA) on the first review under the 37-month Extended Arrangement under the Extended Fund Facility (EFF), said Nathan Porter, the IMF mission chief.
The smooth continuation of the programme is critical to uninterrupted rollovers of the foreign debts by four bilateral creditors, Saudi Arabia, the United Arab Emirates, China and Kuwait.
The Ministry of Finance on Saturday gave a detailed briefing to Prime Minister Shehbaz Sharif about the outcomes of the review talks, according to government sources. They said that the prime minister was apprised about the progress and the new proposed structural benchmarks by the IMF.
Pakistan and the IMF talks were held from March 3 to 14. Before the EFF mission, the IMF also held meetings for the $1.3 billion worth Resilience and Sustainability Facility (RSF) — the 26th lending package that Islamabad is seeking for climate change related spending.
The Finance Ministry officials still hoped that the staff level agreement will be reached in the next two to three weeks. They said that the IMF did not have major issues in the implementation of the programme. However, they added, both sides were still adjusting the fiscal and the power sector related targets.
It took the IMF and Pakistan almost three months to reach a staff level agreement for the $7 billion 25th IMF package last year. The talks had ended without an agreement on May 23rd last year but the agreement was reached on July 12th, following an approval by the board in September.
The Finance Ministry officials said that most of the discussions have taken place.
Strong implementation
The IMF acknowledged progress on the implementation of key reforms.
The “programme implementation has been strong, and the discussions have made considerable progress in several areas”, Porter said.
The mission chief added that progress was made on the planned fiscal consolidation to durably reduce public debt, maintenance of sufficiently tight monetary policy to maintain low inflation, acceleration of cost-reducing reforms to improve energy sector viability, and implementation of Pakistan’s structural reform agenda to accelerate growth.
He said that the discussions were also held to strengthen social protection and rebuild health and education spending.
The sources said that during the talks, the IMF emphasized a steady path of economic growth and avoiding any new sprint that can cause a balance of payments crisis.
The sources said that the IMF has projected 2.8% economic growth rate for the next fiscal year, which is slightly lower than the government’s downward revised projection of 3.1%. The budget target for the economic growth is 3.6%.
The government did make progress on the fiscal front but it could not undertake the structural reforms, said Miftah Ismail, former Finance Minister.
The provincial governments introduced Agriculture Income Tax laws with a delay but the implementation has not yet begun, which is a breach of the programme. Likewise, the government has not amended the Sovereign Wealth Fund Act and it also implemented the condition on making the gas for the captive power plants unaffordable with a delay.
The Finance Ministry met the conditions on the primary budget surplus and increased the debt maturity period. But the Federal Board of Revenue failed to achieve its tax targets and the Tajir Dost Scheme also badly failed.
The central bank did achieve its targets and it also committed with the IMF to keep the monetary policy tight, said the sources. The IMF did raise some concerns about the rigidity in the exchange rate regime but no major change in the path is expected, said the sources.
RSF loan
Nathan Porter said that the “progress has also been made in discussions on the authorities’ climate reform agenda, which aims to reduce vulnerabilities from natural disasters-related risks, and accompanying reforms which could be supported under a possible arrangement under the Resilience and Sustainability Facility (RSF).
Pakistan is seeking 1 billion SDR or $1.32 billion new loan for coping with the climate change issues. The IMF has proposed 13 conditions for the new loan, including slapping carbon levy on the petroleum products and internal combustion engine cars.
