An International Monetary Fund (IMF) team is currently in Pakistan for the highly anticipated first scheduled Stand-By Arrangement (SBA) staff review. This review is important, as it will determine whether Pakistan has been successful in bridging the $6.5 billion external financing gap agreed upon with the IMF.
In July, the IMF approved a nine-month standby arrangement for Pakistan under which it provided it with a substantial amount of $3 billion. The first loan tranche of $1.2 billion has already been disbursed to Islamabad, showcasing the IMF’s confidence in Pakistan’s ability to meet its financial commitments.
With this positive start, it is widely expected that Pakistan will clear the review easily. The government has taken several measures to address economic challenges and implement structural reforms, which have been acknowledged by the IMF. In order to meet the stringent conditions set by the IMF, Pakistan has taken the bold step of significantly increasing gas tariffs. The move came as a necessary measure to tackle the ever-increasing circular debt, which has been accumulating at an alarming rate of 350-400 billion Pakistani rupees ($1 billion) per year.
According to Energy Minister Muhammad Ali, this hike in gas tariffs is expected to generate a substantial amount of 400 billion rupees ($1.2 billion) and effectively put an end to the losses incurred by the state-run gas sector. This strategic decision aims not only to address the immediate financial challenges faced by Pakistan but also to ensure long-term sustainability in its energy sector.
Pakistan’s commitment to privatize state-owned enterprises (SOEs) as part of the current IMF deal is a significant step toward improving its economic performance. The IMF had called on Pakistan to place at least 203 SOEs under the oversight of the Finance Ministry to enhance their efficiency and effectiveness.
At the top of the list for privatization is Pakistan International Airlines (PIA), a loss-making entity that has been a burden on the country’s economy. Additionally, regasified liquefied natural gas (RLNG) power plants, Pakistan Steel Mills (PSM), and state-owned electricity distribution companies are also targeted for privatization.
By implementing these measures, Pakistan aims to streamline its operations, reduce inefficiencies, and attract private investment. This move not only aligns with IMF recommendations but also demonstrates Pakistan’s commitment to economic reforms.
As part of its proactive approach, Pakistan has already communicated to the IMF a well-thought-out backup plan to tackle any potential shortfall in tax revenue. In the event of a shortfall in tax collection in the coming weeks, Islamabad plans to expand the scope of taxation within the retail sector. It is improving real estate-based revenue collection as well, as real estate transactions are a significant source of untapped revenue. Through more effective targeting and enforcement mechanisms, Pakistan aims to enhance its ability to collect taxes from this sector. These moves aim to ensure that all avenues for revenue generation are explored and optimized.
A key reason for Pakistan’s proactive compliance with the IMF over the current deal is the country’s anticipation of a bigger loan deal in the future. It is understood that Pakistan will require a larger IMF deal once the current program expires early next year. However, it is important to note that any new IMF deal will have to be negotiated with an elected government rather than the current caretaker government.
Pakistan has already announced elections for February next year, which means a new government will likely be in place to handle the next review and negotiate a new deal with the IMF. This active compliance with the current deal can be seen as Pakistan’s way of doing its homework and ensuring it meets its obligations to secure a favorable position for future negotiations.
It is important for Pakistan to stay on track with these measures and agreed terms with the global lender as they hold tremendous potential in unlocking opportunities for growth and attracting foreign investment. With careful implementation and monitoring, these measures can pave the way for a stronger economy that benefits both businesses and citizens alike.
Source : The Diplomat