IMF Gives a ‘Thumbs Up’ on Performance, With a ‘Let’s Keep Talking’ on Targets Ahead

SoDATA (South Data) — The International Monetary Fund (IMF) on Friday completed staff level review of its $6bln loan to Pakistan with a thumbs up on performance and a “let’s keep talking” on achieving benchmarks ahead before it releases 3rd tranche of the loan (3rd quarter of the 3-year program that started last year).

The IMF was fully satisfied with Pakistan’s progress during July-December period but was concerned about the future roadmap, says a report in The Express Tribune.

No staff level agreement was reached but “the doors are open for the possibility of attaining one in coming days”.

Key indicators for such an agreement on staff level are reportedly the need for : A) mini-budget, B) new tax collection target for the Federal Board of Revenue (FBR) and C) hike in electricity prices.

There has also been a shortfall in revenues (tax and non-tax) collections. Lesser tax revenues than targeted is one of the key reasons observers cite.

FBR blames it on lesser duties collected due to slowdown in imports and an overambitious collection target.

Being heavily dependent on indirect taxes (such as import duties, etc.) amid a very narrow direct tax base — this is a hot potato from public policy and political standpoints, observers say — the talking points keep adding.

The IMF would release the third loan tranche after a staff-level agreement is reached (on A, B and C) and approved by the IMF Executive Board.

The released statement draws positive talking points though on performance under review. They are:

1. There has been considerable progress in the last few months in advancing reforms and continuing with sound economic policies.
2. All end-December performance criteria were met, and structural benchmarks have been completed.
3. In implementing the program, development and social spending have been accelerated.”

However, steadfast progress (going forward) on program implementation will pave the way for the IMF Executive Board’s consideration of the review which will culminate with “staff level agreement”.

The IMF added other positive points. They are:
1. The macroeconomic outlook remains broadly as expected at the time of the first review.
2. Economic activity has stabilized and remains on the path of gradual recovery.
3. The current account deficit has declined, helped by the real exchange rate that is now broadly in line with fundamentals, while international reserves continue to rebuild at a pace considerably faster than anticipated. 4. Inflation should start to see a declining trend as the pass-through of exchange rate depreciation has been absorbed and supply-side constraints appear to be temporary.
5. Fiscal performance in the first half of the fiscal year remained strong, with the general government registering a primary surplus of 0.7 percent of GDP on the back of strong domestic tax revenue growth.
6. Development and social spending have been accelerated.”

According to Bilal Lakhani, “Positive IMF review of Pak economy is a stunning line by line rebuttal of opposition & prime time TV anchor‘s narrative of doom & gloom. It’s a major endorsement of the govt’s reform journey on the economy.”

Dr Zubair Khan, an economist says it’s an opportunity for Pakistan to renegotiate the program.

Using the factors that generally determine credit score — Three C’s of Credit – Character, Capital and Capacity, Pakistan gets a B+ on performance.

Still, they remain on the table for expected performance going forward. Given a B+, going forward could be a matter of negotiations.

In December, Moody’s – a leading global agency – upgraded Pakistan’s credit rating outlook to ‘stable’ from ‘negative’ ahead of the launch of Eurobond and Sukuk worth around $2 billion in the world markets.

“The change in outlook to stable is driven by Moody’s expectations that the balance of payments dynamics would continue to improve, supported by policy adjustments and currency flexibility”.

Meanwhile, there’s a general expectation build-up that the government should come up with some relief for the public as a result of price hikes and high inflation.