IMF Acknowledges Pakistan’s Reform Program in a Detailed Statement

The International Monetary Fund has acknowledged Pakistan’s reform program is on track and already producing results after the completion of the first review of Pakistan’s economic performance.

According to a press statement issued by the Finance Ministry, in its latest report IMF conceded that the business environment has improved and market confidence is returning back.

The IMF adds in its assessment that the government recognizes that structural reforms, especially in the SoE sector, are key to revive economic activity and growth. The IMF has released SDR 328 million (about $452.4 million), bringing total disbursements to SDR 1,044 million (approx $1.45 billion).

The report has confirmed that End-September performance criteria (PCs) were observed with wide margins. These include:

• Zero budgetary borrowings from SBP
• Primary budget deficit ceiling
• A ceiling on government guarantees
• Zero external public payment arrears
• SBP net international reserves (NIR), net domestic assets (NDA), and swaps/forwards targets met.

In addition to above, all structural benchmarks (SBs) for end-September, except the SB on AML/CFT, were completed

Inflation Outlook

On the inflation outlook, IMF has lowered Inflation projection for FY20 to 11.8%, down from 13% earlier on account of this fact that the administrative and energy tariff adjustments are expected to offset the effects from weak domestic demand claimed the report. Thereafter, inflation is expected to converge to 5-7%. The report confirms that inflation has been started to stabilize, along with core inflation, and the SBP stance is appropriate (no need for further rate hikes).

However, the ministry is of the view that it will do much better than IMF projection. As inflation during Jul-Nov was 10.8% and with measures taken, it can be brought down to 5% over the medium term.

A significant improvement has been witnessed in the external sector. Overall, the Current Account Deficit (CAD) shrunk by almost two-thirds (74%) in the Q1 FY20 compared to the same period of FY 2019. CAD is projected to decline to 2.4% of GDP in FY20 (4.9%), which is lower than earlier IMF forecasts of 2.6%.

The report states that the transition to a market-determined exchange rate has allowed the rupee to find its new equilibrium quickly, thereby, successfully correcting the ‘exchange rate overvaluation’ of the last 5 years. The report has also acknowledged strong fiscal performance in the First Quarter of FY2020 while stating a Primary surplus of 0.6% of GDP and an overall deficit of 0.6% of GDP, about 1% of GDP better than programmed.

In addition, tax revenue growth was in double-digits (net of refunds) even though customs receipts and other external sector-related taxes have suffered due to import compression.

Current Economic Performance

Pakistan economy has witnessed significant improvements in recent months as evidenced by the performance of key economic indicators mentioned below:

• The exchange rate is stable for 5 months
• Rupee appreciated by 3.2% (Rs/$ 160.1 to 154.89) (20th Dec, 2019)
• Stock Exchange 100-Index up 20.1 percent since 1st July, 2019 (33,996) to 40,832(20th Dec, 2019)
• SBP FX Reserves increase to $10.8 billion (13th Dec, 2019), from 7.2bn (June 2019)
• Ease of Doing index up by 28 points (108/190) and World Bank rank Pakistan in Top 10 improvers.
• After 4 years of outflow, total foreign portfolio investment up $1.2bn during Jul-Nov FY20 (-330 million last year).
• FDI increased to 850 million (477.3 million last year) 78.1%. Total foreign investment reached to $2 billion (last year 147 million).
• Incorporation of Companies increased by 25.8 % (7,177 from 5,707) during Jul-Nov FY2020.
• FBR tax collection grew by 16.8% to Rs. 1615.2 billion during July-November, FY2020 against Rs. 1382.9 billion last year. Within total FBR tax collection domestic tax collection grew up 21.5% and import taxes down 2.6% (import compression).
• On the external side, exports increased by 4.7% to $10.31 billion during July-November, FY2020 against $9.85 billion in the same period last year, while imports decreased by 21.1% to $18.31 billion during July-November, FY2020 against $23.22 billion in the same period last year.
• The trade deficit decreased 40.1% to $8.002 billion during July-November, FY2020 against $13.36 billion in the same period of last year.
• Cement dispatches increased by 5.8% to 20.462 million ton (15.4million ton). Cement export increased by 21.5% to 3.608 million ton (2.4 million ton).

Other Developments Include:

• PSDP releases system is accelerated. In this regard ways & means and Finance Division endorsement is eliminated.
• PSX becomes the best performing market as per Bloomberg in the last three months. PSX benchmark KSE 100-Index gained around 10,500 points in the last three months.
• Moody’s Investors Service upgraded Pakistan’s credit rating outlook to stable from negative.
• On the external front, in the month of November 2019 exports increased 11.23% to $2.110 billion against $1.897 billion in the same month last year while imports decreased 13.18% to $3.648 billion as compared with $4.202 billion in the comparable period last year.
• In October 2019, on M-o-M, LSM registered a growth of 4.01% (Sep 1.9%), indicating an upward trajectory. Cement dispatches increased by 10.6% in November to 4.35 million ton (3.9 million ton).
• Another important development is that Karkey renegotiated to save Pakistan $ 1.2 billion.

Circular Debt

Monthly flow decreased from Rs. 38 billion in July 2019 to about Rs. 10 billion. Targeted to be zero next year. Strategy for dealing with the stock of debt being finalized. Protection for lower-end consumers <300 from price rationalization. More effective recovery/detection of electricity theft (>50 million).

Ministry of Energy will issue an additional Rs. 250 billion Sukuks (with government guarantee) in FY2020 to retire the CPPA liabilities of the IPPs.

Exporter’s Package

An additional credit of Rs. 200 billion for exporters under the Export Finance Scheme (EFS) in FY2020 The interest rate differential (between Kibor and EFS markup) will be paid by an additional Rs. 10 billion subsidy by the government in FY2020.

This will boost the export sector and reduce their cost of doing business SBP will give an additional Rs. 100 billion worth of lending to the exporters, to be subsidized by the government through SBP profits.

Compact for Jobs & Growth

• Scale-up Affordable Housing devised by Naya Pakistan Housing Authority
• Additional budgetary allocation of Rs. 20 billion to 30 billion in FY2020 to cover the 10% down payment by beneficiaries of affordable housing. The total impact of this stimulus to the economy will be equivalent to Rs. 200 billion to Rs. 300 billion.
• Tax Credits equal to 10% of the amount of expense related to these projects including labour related costs will be allowed to the developer for the first two years

Key Concessions Won by Government

The ceiling on NDA of SBP (Performance benchmark) has been enhanced to Rs. 9.1 trillion, an increase of Rs. 339 billion in FY20. This is positive for growth and will be utilized for concessional financing for the export industry.

The ceiling on government guarantees has been enhanced to Rs. 1.8 trillion, an increase of Rs. 252 billion in FY20. This is positive for growth and will allow the government to settle the outstanding stock of circular debt.

The floor on FBR tax collections for FY20 has been revised lower to Rs. 5.2 trillion, due to strong improvement in non-tax revenue. During H1 Fy20, government non-tax revenue collection has hit Rs. 878 billion which is 75% of full-year budgeted collection of Rs. 1.16 trillion. This is positive for growth and will ease the burden on the public and businesses.