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IMF agrees to release loan tranche, spells out tough conditions

Implementation of the FATF actions plan also demanded

SAMAA | - Posted: Nov 22, 2021 | Last Updated: 2 months ago
Posted: Nov 22, 2021 | Last Updated: 2 months ago

The International Monetary Fund (IMF) has agreed to release the next loan tranche of $1b to Pakistan under the $6bn programme. However, a staff-level agreement reached between the Fund and the Pakistan government spells out tough conditions.

The agreement, which still needs to be approved by the Fund’s Executive Board, also praises Pakistan for meeting key targets and will likely improve investors’ trust in the country.

The breakthrough comes after protracted negotiations that began on October 4. The next loan tranche of $1.059 billion would bring the total IMF disbursements to Pakistan to $3.27 billion.

In a statement, the IMF confirmed the “staff-level agreement on policies and reforms needed to complete the sixth review under the EFF (Extended Fund Faciliity).”

The agreement spells out a number of conditions agreed between the Fund and Pakistan.

Taxes, interest rate, and SBP

It urges Pakistan to achieve “small primary surpluses” by reducing high public debt and fiscal vulnerability and to broaden the tax base “by
removing remaining preferential tax treatments and exemptions.”

The fund also asks Pakistan to use monetary policy for curbing inflation, preserving exchange rate flexibility, and strengthening international reserves. The State Bank Of Pakistan (SBP) on Friday increased the interest rate by 150 basis points to 8.75%.

Another important demand that Pakistan has agreed to is “the independence of the SBP” which the IMF says must be “strengthened with the approval of the SBP Act Amendments, [and that ] the central bank should gradually advance the preparatory work to formally adopt an inflation targeting (IT) regime in the medium term, underpinned by a forward-looking and interest-rate-focused operational framework.”

The Fund also asks Pakistan “to modernize the SBP’s operational framework as well as to strengthen monetary transmission and communication.”

Competition desired in energy sector

About the energy sector, the IMF has demanded a reduction in the circular debt by lowering supply cost and by introducing “more competition” in the power sector.

The Fund says “advancing the strategy for the electricity sector reforms, agreed with international partners, is important to bring the sector to financial viability, and tackle its adverse spillovers on the budget, financial sector, and real economy. In this regard, steadfast implementation of the Circular Debt Management Plan (CDMP) will help guide the planned management improvements, cost reductions, timely alignment of tariffs with cost recovery levels, and better targeting of subsidies to the most vulnerable. Substantially lowering supply costs, however, will require a modern electricity policy that: (i) ensures that PPAs do not impose a heavy burden on end-consumers; (ii) tackles the poor and expensive generation mix, including a wider use of renewables; and (iii) introduces more competition over the medium term.”

AML/CFT action plan, level playing field for businesses

The Fund has also emphasized the strengthening of economic productivity, investment, and private sector development.

It has urged the Pakistan government to “improve governance,” transparency, and efficiency of the state-owned enterprise (SOE) sector by offering a level playing field, improving the legal framework, controlling corruption, simplifying the procedures for starting a business and tje approval of foreign direct investment and “by completing the much-advanced action plan on AML/CFT.”

Anti-money laundering and Combating the Financing of Terrorism (AML/CFT) action plans are often linked with the Financial Action Task Force (FATF) demands that Pakistan has been trying to meet.

It urges Pakistan to boost competitiveness, and exports by implementing the approved national tariff policy, negotiating new free trade agreements; and (iii) facilitating the integration in global supply chains by improving firms’ reliability and product quality, and registering firms with all necessary entities for tax and business purposes.

The IMF also emphasized, and Pakistan agreed to, promoting financial deepening and inclusion.

Climate change

The two parties also agreed to “stepping up to climate change” and Pakistan will be accelerating the finalization of its National Adaptation Plan (NAP), and implementing “an adequate set of measures to meet the COP26 Nationally Determined Contribution (NDC) targets and securing sufficient financing, including from international partners.”

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