In March 2021, the Executive Board of the International Monetary Fund (IMF) completed the combined second through fifth reviews of the Extended Arrangement under the Extended Fund Facility (EFF) for Pakistan. This led the fund to allow an immediate release equivalent to about $500 million for budget support to Pakistan.
Now the IMF has released a detailed report on the contents of the reviews. The report discusses policy considerations, program performance in Pakistan, and outlook and risks that define Pakistan’s prevalent economic, social, and monetary conditions.
Among the key economic developments identified by the report is that the Pakistani economy had been turning the corner prior to the pandemic.
Furthermore, decisive policy and reform implementation under the EFF-supported program began to reduce economic imbalances and set the stage for improving economic performance.
The report detailed that the external position and confidence in the rupee had strengthened under the new market-determined exchange rate, attracting considerable foreign participation in the domestic debt market.
However, the outbreak of the pandemic forced the authorities to shift their policy priorities toward supporting the economy while saving lives and livelihoods. The policy response was enabled by the fiscal and monetary policy gains attained in the first nine months of FY 2020.
Aside from health containment measures, the authorities executed a proactive and comprehensive set of measures, including a temporary fiscal stimulus, a large expansion of the social safety net, monetary policy support, and targeted financial initiatives.
As a result of these policies, the IMF believes that growth showed signs of revival, inflation was eased, the banking sector remained stable, external imbalances improved significantly, and overall prudency continued in fiscal policies.
The policy discussion section of the IMF report comprehensively sheds light on fiscal, monetary, and financial policies that the government had implemented before and after the pandemic had shaken the global economy and drastically impacted Pakistan in the process.
Amid the evolving pandemic situation, the IMF supported the Pakistani authorities in recalibrating the macroeconomic policy mix and formulating a package of measures that strikes a balance between supporting the economy, ensuring debt sustainability, and advancing structural reforms while maintaining social cohesion.
Now the program has been resumed and it aims to achieve the five targets that have been in place since the beginning of the program:
- Sustaining fiscal discipline anchored on medium-term consolidation while mobilizing revenues and controlling spending to make space for more infrastructure and social spending;
- Ensuring disinflation through an adequate monetary policy stance;
- Preserving the market-determined exchange rate and continuing rebuilding external buffers;
- Restoring the financial viability of the energy sector; and
- Advancing structural reforms, including the addressing of deficiencies in the AML/CFT regime, SOE governance, and the business climate.
Further explanation of the fiscal program for FY 2021 says that it targets an underlying primary deficit of 0.5 percent of the GDP (excluding grants and one-off spending).
This is in line with the budget adopted in June 2020 and balances the program debt sustainability objectives against the economy’s cyclical position.
It is expected to result in stronger revenues that are expected to increase by 0.5 percent of the GDP from FY 2020 due to the net impact of measures like a hike in the petroleum levy, reinforced tax administration efforts; and other automatic stabilizers.
The report added that the authorities have made an important step in their multi-year tax policy strategy by committing to the parliamentary adoption of a comprehensive corporate income tax (CIT) reform in March 2021.
Furthermore, the provinces formally agreed again to contribute to the federal government’s fiscal strategy via a Memoranda of Understanding (MoU) targeting a surplus of around 0.5 percent of the GDP in FY 2021, conditional on the FBR tax collection.
The report added that the IMF board also believes that ambitious tax policy reforms will underpin the FY 2022 budget. This will be done through general sales tax (GST) reform and personal income tax (PIT) reform, while other broader measures like strengthening tax administration, enhancing public financial management, improving debt management, and safeguarding the quality and transparency of pandemic-related spending will also improve the fiscal framework.