Net Forex Reserves and Primary Deficit Missed Among 8 Performance Criteria of IMF

The government has met all the prior actions, including parliament approval for a personal income tax (PIT) reform, required for the successful completion of the seventh and eighth reviews under the Extended Fund Facility (EFF) of the International Monetary Fund (IMF).

This was revealed in the Letter of Intent (LoI) submitted by the government to the IMF. The Fund was informed that the government has met all four prior actions, which include

1. Parliament approved the fiscal year 2023 budget, including a personal income tax (PIT) reform and in line with the IMF staff agreement to meet program targets on June 29, 2022, which the President signed into law on 30 June 2022 to take effect on 1 July 2022. The Ministry of Finance also published a Statement of Contingent Liabilities with all guarantees expected to be issued during the fiscal year 2023 on 10 June 2022, which — together with the finance bill —  was laid before the National Assembly on 10 June 2022 and approved on 29 June 2022.
2. The federal and provincial governments signed the Memoranda of Understanding (MoUs) on provincial fiscal targets consistent with the fiscal year 2023 budget
3. The government reversed the relief package announced in February by the PTI regime. It eliminated post-tax fuel subsidies on 16 June 2022 and the Rs. 5 per kWh blanket power subsidy from 1 June 2022. It also increased the petroleum development levy (PDL) on petrol by Rs. 10 per liter and on diesel by Rs. 5 per liter both on 1 July 2022, and 1 August 2022, respectively. Furthermore, the government committed to implementing monthly PDL increases of Rs. 10 per liter for petrol and Rs. 5 per liter for diesel on 1 September 2022  and on 2 August 2022, which was followed by increases of Rs. 5 per liter per month for both fuels until the PDL reaches Rs. 50 per liter in January 2023 (petrol) and April 2023 (diesel)
4. The government also sought to catch up on power tariffs. In this regard, it notified:
   (i) the entire subsidy reform markup (Rs. 0.20 per kWh) on 5 July 2022. On 25 July 2022, the government announced a three-stage increase related to the combined fiscal year 2022-23 annual rebasing (AR), with the first stage (Rs. 3.50 per kWh) to take effect on 25 July 2022; the second stage (Rs. 3.50 per kWh) on 1 August 2022, and third stage on 1 October 2022 (Rs. 0.91 per kWh).

Quantitative Performance Criteria

The Fund was further informed that the government met six of the eight quantitative performance criteria (QPCs). These include:

1. Ceiling on net domestic assets (NDA) of the SBP
2. Ceiling on the SBP’s stock of net foreign currency swaps/forward position
3. Ceiling on net government budgetary borrowing from the SBP
4. Ceiling on the amount of government guarantees
5. Continuous PCs on both zero new flow of SBP credit to the government and zero external public payment arrears.

However, the government missed the two QPCs regarding:

1. The floor on net international reserves (NIR), as it lost reserves in a difficult external environment
2. Ceiling on the primary budget deficit due to the costly relief package introduced by the PTI regime (most notably fuel and electricity subsidies as well as fuel taxation) and spending pressures (mainly from the energy sector which were not sufficiently budgeted for).

Performance Criteria

Furthermore, the government missed three continuous performance criteria (PCs):

1. Non-intensification of exchange restrictions and the non-modification of multiple currency practices (MCP) as it extended the set of items subject to cash margin requirement on 7 April 2022.
2. Non-imposition of import restrictions for balance of payment purposes as it imposed an import ban on luxury and nonessential items on 19 May 2022
3. Non-imposition of exchange restrictions as it imposed a requirement for prior approval of initiating payments for imports of certain goods on 20 May 2022.

Indicative Targets

The government met two of the six indicative targets (ITs). We met the ITs on:

1. The floor on the net tax revenue collection with a small margin
2. The floor on the gross issuance of longer-term debt instruments.

It missed four ITs:

1. The floor on targeted cash transfer spending (BISP), mainly because of a slower-than-envisaged enrollment into the unconditional cash transfer (UCT) program, Kafalat, and an earlier-than-programmed phasing-out of the emergency cash transfer program on account of an improved COVID-19 trajectory
2. The floor on health and education spending due to less expenditure on both COVID-19 vaccine procurement in FY22 Q3 and education due to the implementation of COVID restrictions
3. Ceiling on the net accumulation of tax refund arrears due to administrative delays
4. Ceiling on power sector payment arrears mainly due to delayed tariff adjustments and higher-than-expected generation and financial costs.

Government’s Demands

The government requested approval from the IMF Executive Board for the following:

1. Retention of the exchange restrictions and MCP that the authorities maintained temporarily due to BOP difficulties and that was inconsistent with the government’s obligations
2. Several program-related issues, including waivers of nonobservance for the two missed end-June 2022 PCs on the floor on NIR of the SBP, the ceiling on the general government primary budget deficit, three missed continuous PCs on the non-imposition and non-intensification of exchange restrictions, the non-modification of MCPs, and the non-imposition of import restrictions for balance of payments purposes
3. Completion of the combined seventh and eighth review and the related purchase in the amount of SDR 894 million. To facilitate the implementation of the reform program, meet the higher financing needs in FY23, and catalyze additional financing, the government requested the fund to provide an extension of the EFF until end-June 2023 (with new quarterly PCs that reflect macroeconomic developments and a reset as well as new structural benchmarks) and augmentation of access by SDR 720 million (around 36 percent of quota).

The LoI states that the program will continue to be monitored through quarterly reviews, prior actions (PAs), quantitative performance criteria (QPCs), indicative targets (ITs), and structural benchmarks (SBs) as described in the attached MEFP and Technical Memorandum of Understanding (TMU).