ISLAMABAD  -  The International Monetary Fund (IMF) has set ten structural benchmarks for stand­by-arrangement (SBA) facility for Pakistan in­cluding halt on grant­ing further tax amnes­ties, increasing power tariffs by end of current month and avoiding the practice of issuing new preferential tax treat­ments or exemptions.

Other structural benchmarks included issuance by the Cen­tral Monitoring Unit (CMU) of its first peri­odic report on the per­formance of SOEs, using latest available data, to the federal government by end-December 2023, inflation adjustment of the unconditional cash transfer (Kafalat) and average premium be­tween the interbank and open market rate will be no more than 1.25 percent during any consecutive 5 business day period. The government would submit amendments to parliament to align Pakistan’s early in­tervention, bank resolution, and crisis management ar­rangements with interna­tional good practices, in line with IMF staff recommenda­tions by end December and notification of the annual re­basing (AR) for FY24 to take effect on July 1, 2023. The government would have to improve state-owned enter­prise (SOE) governance by: (i) operationalizing the re­cently approved SOE law into a policy that clarifies owner­ship arrangements and the division of roles within the federal governments; and (ii) amending the Acts of four se­lected SOEs to make the new SOE law completely applica­ble to those SOEs.

The IMF has issued a de­tailed report on Pakistan af­ter approving SBA facility last week. According to the IMF, the incomplete and uneven policy implementation un­der the 2019–23 EFF was a missed opportunity to set the economy on a sounder foot­ing, and help Pakistan avoid the costs of yet another eco­nomic crisis. The EFF aimed to provide a comprehensive framework to strengthen fis­cal and external sustainabil­ity and advance structural and institutional reforms to foster stronger and more bal­anced growth. The emphasis on social protection is aimed to garner support for the au­thorities’ policies. While en­couraging progress was made early in the program, including on fiscal adjust­ment, transitioning to a flex­ible and market-determined exchange rate, and setting up of a more modern and in­dependent central bank, this progress did not persist.

The IMF noted that the new SBA aims to rebuild confi­dence and entrench stabili­ty. To reduce near-term un­certainty and risks, the new program focuses on contain­ing the budget and external deficits, bringing inflation under control, restoring the proper functioning of the ex­change market, rebuilding reserve buffers, and advanc­ing some critical reform ef­forts. While the authorities have taken actions in these areas, these need to be sus­tained in the program period if Pakistan is to regain stabil­ity and remain sustainable. Success will hinge on strong and sustained ownership, firm implementation, and significant external finan­cial support, and be under­pinned by program monitor­ing. Policies and monitoring should thus support exter­nal financing, with restored FX market functioning and stronger policies supporting a recovery in remittances in FY24 and other inflows (in­cluding FDI) thereafter

Pakistan has committed not to use “supplementa­ry grants” via executive fiat to authorize spending over what has been legislatively appropriated by parliament outside of severe natural di­sasters. The government has assured to expand the per­sonal income tax (PIT) base by another 300,000 persons through the use of data on the withholding tax of business­es, third-party data, and phys­ical surveys to book new indi­viduals. The government will also seek to bring the service sector, notably retailers, into the tax net by making better use of data (e.g., from tax col­lected through electricity bills on commercial connections).

According to the IMF, the cabinet is expected to adopt an updated FY24 CDMP this month with measures to help contain the budgeted FY24 power subsidy to PRs 976 billion (0.9 percent of GDP). The FY24 power subsidy will also allow CD stock payments of Rs 392 billion (0.4 percent of GDP) to compensate the projected FY24 CD flow of Rs 392 billion and stabilize the FY24 CD stock at its expect­ed end-FY23 level of Rs 2,374 billion (2.2 percent of GDP).

The IMF program is fully fi­nanced but with exceptional­ly high risks. Financing com­mitments from bilateral and multilateral partners will help cover public gross exter­nal financing needs in FY24 and the reserve position at end-FY24 is consistent with program objectives. Bilater­al creditors are expected to maintain their exposure to Pakistan in line with program commitments and there are commitments for $3.7 bil­lion of additional financing expected from Saudi Arabia and the UAE. These togeth­er with commitments from multilateral institutions, in­cluding the Islamic Develop­ment Bank, and other pledg­es at the Geneva conference provide the necessary financ­ing assurances. Nonetheless, financing risks remain ex­ceptionally high, arising from large public sector external rollover needs, a sizable cur­rent account deficit, a diffi­cult external environment for Eurobond issuance given re­cent downgrades and high spreads, and limited reserve buffers to help cover the fi­nancing needs in case of de­lays in scheduled inflows.