Pakistan & IMF Begin Talks for New Bailout Package

Islamabad, May 14 (PTI) Pakistan and the IMF have started negotiations for a fresh bailout package to address the cash-strapped country's fiscal challenges and implement crucial reforms, media reports said on Tuesday.

On Monday, the International Monetary Fund's (IMF) mission chief to Pakistan, Nathan Porter, called on Finance Minister Muhammad Aurangzeb to "kick start the discussions on further engagement with the Fund," the Ministry of Finance said in a statement.

“The finance minister welcomed the IMF team and thanked them for the successful completion of the Stand-By Arrangement (SBA),” said the ministry statement.

Aurangzeb also "apprised the IMF team about the improvement in the macroeconomic indicators over the course of the SBA and underscored the government's commitment to continue with and expand upon the reform agenda”.

Last month, Pakistan completed a short-term USD 3 billion programme with the IMF, which bailed the country out of any default.

It was unclear whether the IMF mission would end with a formal staff-level agreement for the next bailout package, according to The Express Tribune newspaper.

The duration, instrument, and size of the next IMF programme were open to discussion, the report said, quoting sources.

Prime Minister Shehbaz Sharif's decision to announce the Rs 23 billion subsidies for consumers in Pakistan-occupied Kashmir (PoK) has weakened the government's case in the eyes of the IMF, sources said.

Sharif approved the immediate provision of Rs 23 billion after the disputed region was rocked by protests against high wheat flour prices and inflated electricity bills.

As many as three people were killed during the clashes, while more than 100 were injured.

During the meeting, Porter raised the issue of the shortfall in tax collection and pointed out the disparity in the federal and provincial taxation, the report said.

Fiscal adjustment of at least 1.5 per cent of the GDP (Gross Domestic Product) or about Rs 1.6 trillion would have to be made in the coming budget, The Dawn newspaper reported.

This will be achieved through a combination of additional revenue measures coupled with expenditure rationalisation and privatisation, the report said, quoting sources.

The next few days of engagements would work out specific allocation of shares for these three major areas, sources said.

While the two sides would remain engaged over sector-specific issues in the coming days, sources said most of the spadework was already in place in the recently concluded nine-month Stand-By Agreement (SBA).

Future lines were also generally drawn that would need to be taken to the finish line before the presentation of the federal budget in the parliament, tentatively scheduled for June 6-7, the report said.

The finance minister has already announced to have started working on pension reforms as one of the key expenditure rationalisation measures to be supported by fewer allocations for development spending.

The focus on the revenue side would be on expanding the tax net by transforming the general sales tax into real value-added tax (VAT), notwithstanding its inflationary impact, coupled with the expansion of the tax base to retail and wholesale traders, agriculture, reduction in income tax slabs and their uniform applicability to all incomes, irrespective of the source to diversify the revenue sources, the report said.

Petroleum levy is also expected to be one of the key sources of non-tax revenue, and its target is expected to be at least Rs 1.1 trillion in the coming budget.

The government has already committed to the IMF to continue gas and electricity tariff adjustments ‘in a timely manner' starting with the new fiscal year and simultaneously make efforts for energy cost reductions and the induction of the private sector to address circular debt.

It has also promised to continue the tight monetary policy and switch to a market-based exchange rate besides strengthening social security and state-owned enterprises (SOEs), even though the fund expects major risks to the reform programme owing to political unrest and the geopolitical situation.

On Tuesday, Prime Minister Sharif announced that the debt-struck country will privatise all state-owned enterprises, barring strategic ones.

Last week, an advance team of the Washington-based global lender reached Pakistan to hold talks after Islamabad requested a longer and larger bailout package.

Pakistan has sought the next bailout package in the range of USD 6 and USD 8 billion for three years under the Extended Fund Facility (EFF) with the possibility of augmentation through climate financing, media reports said last month.

If successful, it would be the 24th IMF bailout programme for Pakistan.

Pakistan narrowly averted default last summer, and the economy has stabilised after the completion of the last IMF programme, with inflation coming down to around 17 per cent in April from a record high of 38 per cent last May.

The country is still dealing with a high fiscal shortfall, and while the external account deficit has been controlled through import control mechanisms, it has come at the expense of stagnating growth, which is expected to be around two per cent this year compared to negative growth last year.