The IMF’s Executive Board yesterday approved a 39-month extended fund facility (EFF) for Pakistan of cUS$6bn (210% of quota). The approval allowed an immediate disbursement of cUS$1bn. This follows the staff-level agreement on a programme on 12 May.
The EFF will support the authorities’ strategy to reduce economic vulnerabilities and generate sustainable and balanced growth through: fiscal consolidation, while expanding social spending; eliminating quasi-fiscal losses in the energy sector; restoring competitiveness and rebuilding reserves through a flexible market determined exchange rate; removing impediments to growth; strengthening institutions and increasing transparency.
We think there are two key takeaways:
First, the programme seems to imply only a modest upfront fiscal effort – we thought the IMF may have demanded more. Despite highlighting the need for a “decisive fiscal consolidation”, the IMF projections appear to mirror the Government’s FY 19/20 budget in June, which the Fund described as “an important initial step”. The budget projected an overall fiscal deficit of 7.1% of GDP, compared with 7.2% in FY 18/19 . The IMF’s fiscal projections appear consistent with this, with the budget deficit (including grants) of 7.1% of GDP in FY 19/20, albeit up from 6.8% in the previous fiscal year. So at best, the fiscal projections might envisage an improvement this year, but it is only a small one.
Moreover, the IMF also note that achieving the fiscal objectives will “require a multi-year revenue mobilization”. We are sceptical. The budget relies heavily on unrealistic revenue plans, in our opinion. In the IMF’s own projections, revenue goes up 1.3ppts this year to 16.3% of GDP from 15.0% – which would be an achievement – but spending goes up by more, from 21.7% of GDP to 23.4% (+1.7ppts). We remain concerned about implementation risks if the government delivers on spending increases, but fails on revenue mobilisation.
Second, the programme is expected to unlock over US$38bn from official sector creditors (multilateral and bilateral), according to the press release. This is huge, amounting to nearly 14% of GDP, or 1330% of the IMF quota. It is not clear how much of this has already been pledged and disbursed, but we know there have been commitments from Qatar, Saudi Arabia, UAE and China. It will be interesting to see the phasing of such official sector money and how it is tied to meeting IMF performance reviews. Unless a substantial share is made dependent on compliance with programme criteria (and a lot of bilateral financing is not always transparent), it could even reduce the government’s incentive to reform.
We expect more details to be provided in the country report (when it is published).
PKR per US$
Pakistan official reserves (US$bn)