IMF Extended Fund Facility Arrangement for

Pakistan

Sustainable Development Policy Institute, July 19, 2019

IMF Resident Representative: Ms. Teresa Daban Sanchez

 Overview of the Presentation

• Introduction: What is the IMF? How are the

IMF-Pakistan relations?

• What are Pakistan’s Macro-Critical Imbalances?

• What are the POLICIES and REFORMS envisaged

under the IMF-Supported Program?

• GOALs, RISKs and MITIGATING FACTORS

• How the IMF-Supported Program will be

Implemented and Reviewed?

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 IMF - An Overview

• What is the IMF? Some confusion in the public opinion,

even after 18 arrangements…

• How IMF serve to its country members?

• Policy Assessment and Advice (e.g. Article IV Consultations)
• Lending (Facilities to support governments’ programs)
• Capacity Building (e.g. Trainings and Technical Assistance]

• What are the main IMF Facilities?

• Concessional rates: Poverty Reduction and Growth Facility (PRGF),
and the Extended Credit Facility (ECF);
• Market Based rates: such as the Stand-By Arrangements (SBA),
Extended Fund Facility (EFF), among others

3
 IMF-Pakistan: A Historical Perspective

• Pakistan Joined IMF on July 11 1950

• 18 Lending arrangements since 1958,
• Why? Pakistan’s recurrent BOP Crisis,
either for external shock or internal
factors
• Only the EFF 2013-2016 2013-16 was
fully disbursed
• The stability gains achieved since late
2016 eroded. Pakistan again in a
challenging situation

• Information about Pakistan and IMF at

• https://www.imf.org/en/Countries/PAK

4
 What are Pakistan’s Main Macro-Critical Imbalances?

• Ballooning public deficits and losses in state owned

companies, in a context of perennial low tax
revenues and base.
• Increasing government borrowing—both domestic
and international, a high and unsustainable debt
level and interest payments (25 percent of the
government revenue)
• Increase in trade deficit, reflecting high deficit,
and keeping the exchange rate constant.
• Loose monetary policy, decline in SBP’s reserves to
finance increasing imports, and despite extra
funding
• Inflation increase, growth skewed toward
consumption, competitive loss, low investment and
job creation.

5
 Pakistan Economy: Key Macro-Critical Imbalances

• High Fiscal Deficit and High Level of Debt

High Fiscal Deficit (excluding grants) Public Debt Profile (as a % of GDP)
% of GDP 90

0 80
-1 FRDLA
70
-2
-3 60

-4 50
-5
40
-6
30
-7
-8 20
-9
10
-10
0
2011/12
2007/08

2008/09

2009/10

2012/13

2013/14

2014/15

2015/16

2016/17

2017/18

2018/19
2010/11

2019/20

2014/15 2015/16 2016/17 2017/18 2018/19 2019/20

External Debt Domestic Debt Total Debt

6
 Pakistan Economy: Key Macro-Critical Imbalances

• Increasing losses of SOEs and power sector circular debt

PSEs Losses and Government Guarantees Accumulation of power sector arrears

(Percent of GDP)
(In PRs billion)
6
Outstanding Guarantees to PSEs 800
5 of which energy 700
PSEs Cumulative Losses
of which Energy 600 EFF 2013-16 Ends here
4
500
3 400
2 300
200
1 100
0 0
FY13 FY18* -100 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
* Preliminary. Includes PIA, PSM, Railways, and DISCOS. Note: Includes new circular debt and new loans to the
Power Holding Company Limited (PHCL).

7
 Pakistan Economy: Key Macro-Critical Imbalances

• Low Tax Revenue and Comparative Macroeconomic Position

Tax Revenue (as a % of GDP) Pakistan Relative to Emerging Market Economies

(In percent of GDP, unless otherwise indicated)

14
Real GDP
Growth (%)
12
Private
Investment
10 EM average (2018)
FDI
8 Pakistan (2017/18)
Exports
6
Reserves
4
Tax Revenue
2
Social
Spending 1/
0
Gross
2009/10

2010/11

2011/12

2012/13

2013/14

2014/15

2015/16

2016/17

2017/18

2018/19
2007/08

2008/09

Public Debt

0 20 40 60 80

Sources: IMF WEO Database, World Bank ASPIRE and WDI Database. 1/ Health,
education and social safety net spending.

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 Pakistan Economy: Key Macro-Critical Imbalances

• An Overvalued Exchange Rate and Increasing Current Account Deficit

External competitiveness remains weak, some

recent improvements notwithstanding. Continued External Pressures.....................
Real and Nominal Effective Exchange Rate Current Account Balance (as a % of GDP)
October 2009 – March 2019 (Indices, 2010 = 100)
130 0
-1
120 -2
-3
110
-4
-5
100
-6
-7
90
-8
80 -9

2009/10

2011/12
2010/11
2007/08

2008/09

2012/13

2013/14

2014/15

2015/16

2016/17

2017/18

2018/19
REER NEER
70
Oct-09 May-11 Dec-12 Jul-14 Feb-16 Sep-17 Apr-19

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 Pakistan Economy: Key Macro-Critical Imbalances

• Rising External Financial Needs and Erosion in SBP Reserves

Rising External Financing Needs... Erosion of FX Reserves (million U.S. dollars)

(Gross external financing needs, percent of GDP)
20000
10
18000
9 Non-interest current
account deficit 16000
8
14000
Debt and debt service
7
falling due 12000
6
Gross external financing 10000
5 need 8000
4 6000
3 4000
2 2000
1 0

Aug-12

Aug-13

Aug-14

Aug-15

Aug-16

Aug-17

Aug-18
Apr-12

Dec-12
Apr-13

Dec-13
Apr-14

Dec-14
Apr-15

Dec-15
Apr-16

Dec-16
Apr-17

Dec-17
Apr-18

Dec-18
Apr-19
0
2011/12 2013/14 2015/16 2017/18 2019/20 2021/22

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 Pakistan Economy: Key Macro-Critical Imbalances

• Declining and consumption-focused growth, and increasing inflation

Trend in Real GDP Growth (%) Headline and Core Inflation

10 18.0
9 16.0

8 14.0

7 12.0

6 10.0

5 8.0

4 6.0

3 4.0

2 2.0

1 0.0

Jul-09

Jul-10

Jul-11
Jan-11

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18
Jan-10

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19
0
2007 2010 2013 2016 2019
Headline Core (NFNE)

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 Pakistani Authorities’ Spade Work

• Some steps to stabilize the economy since early 2018:

some exchange rate depreciation, monetary tightening
(e.g. increase in the SBP policy rate), power and gas
tariffs adjustments, and two minibudgets. In addition,
the government secured sizable short-term financing
from bilateral creditors.

• All these measures fell short of the comprehensive

policy actions and reforms needed to ensure
macroeconomic stability.

• The government has developed a comprehensive 3-year

program to stabilize the economy and lay the foundation
for robust and balanced growth.

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 What are the POLICIES envisaged under the IMF-
supported Program?

• FIRST, a revenue-based fiscal consolidation,

focused on removing exemptions and
privileges, greater coordination with
provinces, and an elimination of quasi-fiscal
circular debt

• SECOND, a market-determined and flexible

exchange rate, and a strengthened central
bank focused on achieving price stability

• THIRD, the strengthening of social safety

net, to protect the most vulnerable as
needed, by expanding coverage and budget
allocation of Benazir Income Support
Program and Conditional Cash Transfer

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 What are the REFORMS aimed under the IMF-Supported
Program?
• Improving public financial management to instill
fiscal discipline and transparency (e.g. new PFM
Law)
• More autonomy for the State Bank of Pakistan
as it prioritizes price stability (e.g. no more
government borrowing from SBP)
• Strengthening tax policy and administration
• Reforming the energy sector to ensure
efficiency and better services
• Modernizing the SOE legal framework
• Strengthening anticorruption institutions; and
progressing on FATF issues
• Removing bottlenecks and regulatory
impediments to investment and job creation
(e.g. speeding custom clearance, simplifying
procedures to start a business, etc).
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 What are the GOALs that this program aims at
achieving over the medium term?

• Debt sustainability
• Stronger tax collections and a better
FBR
• Independent Central Bank
• Market-determined Exchange Rate
regime
• Moderate inflation trajectory
• Sustainable and inclusive growth
• Power Sector Efficiency
• A new PFM regime/framework
• Better management of SOE
• Getting out of FATAF grey list

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 RISKS

• Fiscal slippages, resistance to fiscal measures,

debt sustainability at risk
• Opposition to governance and institutional
building by vested interests
• The absence of a majority by the ruling party in
the upper house; provinces may underdeliver on
their surplus commitments
• Large amount of rollover needs for short-term
debt, and
• Failure to get out of grey-list by FATF could
have implications of capital inflows to Pakistan,
and jeopardizing the financing assurances under
the program.
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 Supporting Factors
• Strong ownership by incumbent government
and authorities and continuation of reforms
• Upfront adoption of key policy measures,
especially on greater exchange rate
flexibility
• Securing formal agreements with the
provinces on the overall fiscal strategy,
including procedures to address deviations
• Increasing social spending to protect the
most vulnerable from the impact of reforms
and garner support for these measures; and
• strong commitments of support from the
World Bank, ADB, and key bilateral partners
and conservative assumptions on private
financing flows.
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 How the IMF-Supported program will be
implemented and reviewed?
• Quarterly Reviews; first one before end
December; if successful, they will be
followed by disbursements.

• Performance Criterion; numerical targets of

key variables such as primary balance, level
of reserves, etc.

• Indicative Targets; numerical targets that

help monitor quality of the adjustment, such
revenues collections, spending on health and
education

• Structural Benchmarks; actions, such as

preparing a piece of legislation
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