IMF Ready to Adjust Pakistan’s Bailout Program Due to COVID-19

The duration and size of the International Monetary Fund (IMF)’s Extended Fund Facility (EFF) program continue to be the same; However, it will be adjusted in the event of a need arising as a consequence of to third COVID-19 wave, said IMF Resident Representative, Teresa Daban Sanchez, during a keynote session with Sustainable Development Policy Institute (SDPI) Executive Director, Dr. Abid Qaiyum Suleri, on Wednesday.

“In principle, the duration and size of the program continue to be the same right now (as in the second to fifth quarterly review agreed on February 16, 2021), but like in previous reviews, recalibration on the speed of implementation of policies reforms will continue. The economy is improving. However, there is still space and room to continue policy implementation with the reform program,” she added.

Sanchez said that the COVID-19 shock temporarily disrupted progress under the EFF program. However, the authorities’ multifaceted policy response has been crucial in mitigating its human and economic impact.

The COVID-19 shock has required a recalibration of policies and reforms. The new package strikes an appropriate balance between supporting the economy, ensuring debt sustainability, and advancing structural reforms.

The authorities remain committed to ambitious policy actions and structural reforms to strengthen economic resilience, advance sustainable growth and achieve the EFF’s medium-term objectives, she added.

She further added that the program aims to improve institutions and enhance the performance of a regulatory institution like NEPRA for fiscal discipline. Policies need to be adjusted realistically, and if there is any need in the third wave, then the program will be adjusted accordingly – the package is not a strait-jacket.

Replying to a question on the possibility of another Rapid Financing Instrument (RFI), she said that the government is monitoring the third wave, and another RFI would depend on how the pandemic evolves. She further added that related policies would be adjusted to the situation on the ground, and if there is any need to increase spending – whether on social support for the vulnerable or a higher level of COVID related health spending – it will be accommodated in the fiscal strategy and would be reviewed as an adjuster and it would not be a problem.

She said that the extra expenditure would require extra funding, which needs to consider many other factors. There are other ways of funding if the situation is very complicated. If Pakistan needs extra funding, the international community would consider support, but it is a secondary matter, and the important thing is to have a strategy with programs that support the vulnerable.

Replying to another question on benchmark related to National Socio-Economic Registry (NSER) by the end of June 2021, she said that the goal is to support the people in need because of the third wave.

If it is completed, it would be much better and can identify the people in a better way. There is no compromise on helping people and saving lives for sure, she added.

Pakistan has been proposing State Bank of Pakistan (SBP) reforms in the past. On the perception that granting autonomy to SBP would compromise national sovereignty under the IMF program, Sanchez stated that all reforms that have been recommended were long over-due and necessary to help the poor and vulnerable, adding that IMF cannot dictate the country’s legislation and plays an advisory role, upon request adding that countries having independent central banks are more stable from a macroeconomic perspective.

Pakistan is doing just what peer countries are doing to have more strong and stable predictable policymaking for the future, she added.

Sanchez stated, “A change or transition in the ministers or authorities does not affect our role and commitment with the people of Pakistan.” On tax reforms, she said that tax policy reform needs to be very comprehensive and deep, and corporate income tax and personal income tax both need to be strengthened.

While commenting on circular debt, Sanchez said that debt sustainability is the main role of IMF in any country, and with the right policies and with improved management countries can better manage their debt profile. Pakistan is doing well in this area of the program. SOEs improved management would be a major component for the betterment of the country.

Replying to a question on power tariff increase, she said that once the review has been completed, the government puts together a strategy package, the goals the measures, calculations of actions and risks and we then begin work on the new review – the technical work does not stop.

Replying to another question on provinces onboard regarding tax harmonization, she said that the provinces are on board in the whole strategy. Though it is a complex matter, they are advancing positively, she added.

Regarding the cut in Public Sector Development Program (PSDP), she said there is room for spending, which is good for the country, including social and infrastructure.

“My perception is that the PSDP portfolio has been challenging because of COVID, and its implementation would have been affected, or there may have been some different consideration there, but there is no constraint from the IMF under the program,” she said.

She added that Pakistan is all set to achieve some major goals, including revenue base fiscal sustainability. It is being achieved through removing exemptions and privileges, enhancing social and productive spending, coordination with provinces, and eliminating quasi-fiscal circular debt and SOE losses.

The goals that are very important for the future direction of the country include a market-determined flexible exchange rate and an independent central bank, with a primary focus on price stability.

In addition to strengthening institutions and bringing reforms, especially in the areas of PFM, central bank’s autonomy, tax policy and administration, energy sector, SOEs administration, and FATF, etc., strengthening of social safety net to protect the most vulnerable is a key requirement

While shedding light on the impact of COVID-19, she remarked that the economy was on track with a 2.4 percent growth rate till March 2020. However, after May 2020, it witnessed a decline by 1.5 percent as resources were diverted towards Covid-19 mitigation and containment.

“In the current situation and amid the third wave of the pandemic, the growth is projected at 1.5 percent, and inflation will remain volatile,” Sanchez said and added that the monetary policy is accommodative and fiscal policy is prudent, but the public debt guarantees increased to 92.8 percent GDP.

The Fund wants Pakistan to introduce tax reform and must also limit tax exemptions, she added. She emphasized that a recalibration of policies and reforms and increasing the revenue collection, ambitious tax policy reforms, and broad base fiscal structural reforms are the needs of the hour.

In the energy and gas sector, a recalibration of the Circular Debt Management Plan (CDMP) which includes short-and-medium term measures like increasing revenue by aligning power tariff with cost recovery levels, reducing generation costs, streamlining fiscal impact, would be important steps.

It could be achieved by targeted subsidy and governance issues like the NEPRA act amendment, reducing TD losses and theft that are the major pillars of the program.

Sanchez, while commenting on FATF compliance, said that the progress so far and plan for the future is encouraging. However, the plan execution will need more rigorous measures, she added.

When asked about the possibility of imposing ‘Corona Wealth Tax’ in the next fiscal budget, she added that it is the prerogative of the parliament for levying such kind of tax.

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