## 1pakea2019001 ## Source details **Canonical URL:** [1pakea2019001](https://www.imf.org/-/media/files/publications/cr/2019/1pakea2019001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1pakea2019001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1pakea2019001.pdf.json) --- ### Executive summary — context and recent developments - Macroeconomic misalignment: large fiscal deficits, loose monetary policy, and defense of an overvalued exchange rate eroded buffers, increased external and public debt, and depleted international reserves. - Growth and inflation: - Growth averaged close to 5 percent over the past five years. - Growth estimated to decline to 3.3 percent this year, from 5.5 percent a year ago. - Consumer inflation accelerated to 9.1 percent in May 2019, up from 4.2 percent a year ago. - Fiscal and public debt: - FY 2018 fiscal deficit: 6.5 percent of GDP (2.5 percent of GDP higher than budgeted). - Public debt rose to 75 percent of GDP. - Overall fiscal deficit (excluding grants) expected to widen to over 7 percent of GDP in FY 2019 vs budget target of 5.1 percent. - Revenue shortfall equivalent to 1.4 percent of GDP relative to the budget target; tax-to-GDP ratio estimated to have declined to below 13 percent of GDP. - External position and reserves: - Current account deficit widened to 6.3 percent of GDP in FY 2017/18; expected around $13 billion in FY 2019 (4½ percent of GDP). - Gross official reserves: $8 billion (1.7 months of imports or around 30 percent of the ARA metric) at end-May. - Net international reserves significantly negative at around –$16 billion at end-May 2019 when factoring swaps, liabilities, and forward positions. - REER depreciated by around 21 percent so far in FY 2018/19; another assessment cited a 19 percent real effective depreciation in FY 2019. - Quasi-fiscal and SOE losses: - New arrears in the power sector over FYs 2018 and 2019 ≈ PRs 800 billion (around 2 percent of GDP). - Stock of circular debt: over 4 percent of GDP as of March 2019. - Gas sector arrears: over ½ percent of GDP. - Losses in PIA, Pakistan Steel Mills, and Pakistan Railways total over 2 percent of GDP. - Financial sector: - System-wide capital adequacy: 16.1 percent in March 2019. - NPLs declined to 8.2 percent by March 2019. - Private credit growth: 16.1 percent yoy in March 2019. - SME and agriculture NPLs: 15 percent and 17 percent, respectively. - Social indicators: - Unemployment < 6 percent; labor force participation ≈ 30 percent. - Informality > 70 percent of economic activity. - Poverty ≈ 30 percent of population. - Literacy rate 60 percent vs 80 percent for regional peers. - Demographics: 2/3 of population under age 30. ### Program objectives and key policy pillars - Authorities request IMF support under a 39-month Extended Fund Facility (EFF) to stabilize the economy and lay foundation for robust balanced growth. - Core pillars: - Fiscal consolidation with ambitious FY 2020 budget and revenue mobilization to generate 4–5 percentage points of GDP in additional tax revenue. - Flexible, market-determined exchange rate and appropriate monetary policy by a strengthened and independent central bank. - Energy sector reforms to eliminate quasi-fiscal losses and encourage investment; depoliticize tariff setting and adjust tariffs to cost recovery. - Expanding social spending and broadening safety nets to protect the most vulnerable. - Structural reforms: strengthen institutions, governance, transparency, and investment climate. ### External financing and IMF access - Program expected to coalesce broader support from multilateral and bilateral creditors in excess of US$38 billion. - Authorities secured full financing for the first year and firm commitments from key bilateral partners. - Requested EFF access: SDR 4,268 million (210 percent of quota), equivalent to about $6 billion. - Proposed IMF arrangement: - 39-month extended arrangement. - SDR 716 million proposed to be disbursed upon approval. ### Implementation, risks, and safeguards - Strong, frontloaded implementation is critical; past incomplete implementation derailed adjustments. - Key risks: - Exchange rate overshooting and second-round inflation if monetary policy not tight. - Fiscal slippages and political resistance to reforms. - Legislative hurdles and provinces underdelivering on commitments. - Large short-term debt and near-term rollover needs. - Potential FATF blacklisting affecting capital inflows. - External shocks: security, trading partners' growth, oil prices, global financial conditions. - Safeguards: - Safeguards assessment of SBP initiated; to be completed before first review. - SBP and MoF signed memorandum of understanding on servicing Fund credit. ### Selected quantitative highlights (reported) - FY 2018 fiscal deficit: 6.5 percent of GDP. - Public debt: 75 percent of GDP. - Current account deficit: 6.3 percent of GDP in FY 2017/18; ≈ $13 billion in FY 2019 (4½ percent of GDP). - Growth: average close to 5 percent (past five years); estimated 3.3 percent current year. - Inflation: 9.1 percent in May 2019. - Gross official reserves: $8 billion at end-May. - External financing commitments expected in excess of US$38 billion. - Requested EFF access: SDR 4,268 million (210 percent of quota) ≈ $6 billion. - Circular debt additions: close to PRs 800 billion (≈ 2 percent of GDP); stock over 4 percent of GDP as of March 2019. - Gas sector arrears: over ½ percent of GDP. - SOE cumulative losses (PIA, PSM, Railways): over 2 percent of GDP. - FY 2019 overall fiscal deficit (excluding grants): expected to be over 7 percent of GDP vs budget target 5.1 percent. - Revenue shortfall: 1.4 percent of GDP relative to budget target. - Tax-to-GDP ratio: below 13 percent of GDP. - Banking: capital adequacy 16.1 percent (March 2019); NPLs 8.2 percent (March 2019); private credit growth 16.1 percent yoy (March 2019). - Remittances: 6½ percent of GDP with growth of 10.4 percent in July–May FY 2018/19. - FDI expected to fall to 0.6 percent of GDP in FY 2018/19; net public external borrowing projected to increase to 3.1 percent of GDP in FY 2018/19. ### A. Macroeconomic framework — projections and dynamics - Near term: - Economic activity expected to decelerate to below potential in 2019/20 due to higher interest rates, fiscal consolidation, and administered price adjustments. - Targeted social assistance to offset impact on most vulnerable. - Medium term: - Real GDP growth projected to recover to 5 percent assuming steady reform implementation. - Real effective exchange rate aligned with fundamentals expected to boost exports. - Inflation: - Initial increase from currency depreciation; tight monetary policy to bring inflation down to around 5–6 percent in the medium term. - Public debt and deficits: - General government debt projected to peak at 80.5 percent of GDP in FY 2020 and decline to 67 percent of GDP by FY 2024. - Current account and reserves: - Current account deficit expected to narrow to less than 2 percent of GDP by FY 2024. - International reserves expected to recover to over 4 months of import cover by 2023 (still short of 100 percent of ARA metric). - Risks: Outlook subject to considerable risks, mainly domestic policy implementation and external events. ### B. Fiscal policies — objectives and measures - Fiscal objectives: - Ensure debt sustainability by reducing fiscal and eliminating quasi-fiscal deficits while creating space for social and development spending. - Raise tax-to-GDP ratio by 4–5 percentage points. - Improve primary deficit by 4½ percent of GDP by FY 2023 and bring overall fiscal deficit to around 2½ percent of GDP. - Reduce general government debt from 80.5 percent (FY 2020) to 67 percent (FY 2024). - FY 2020 budget (prior action): - Primary fiscal adjustment target: 1.2 percent of GDP underpinned by permanent revenue measures of 1.7 percent of GDP. - Federal government wages expected to increase by 7.5 percent. - Incorporates implicit subsidies in power sector previously not budgeted. - Social protection in budget: - BISP allocations to increase by 80 percent on an annual basis. - Additional PRs 50 billion in subsidies to insulate poorest households from power tariff increases. - Multi-year tax policy and administration effort: - Aim: additional 4–5 percentage points of GDP in tax revenues by program end. - Tax policy reforms include removing exemptions (except basic food and medicines), harmonizing GST, transforming GST into VAT over time, making PIT fairer and more progressive, strengthening real estate and agricultural taxation, eliminating distortionary withholding taxes. - Tax administration reforms include implementing full risk-based audits, increasing penalties, issuing track-and-trace licenses for excises on cigarettes by end-September 2019 (structural benchmark) and rollout by end-March 2020, considering creation of semi-independent national tax authority, and commitment to not grant further tax amnesties (continuous structural benchmark). ### Box: Budget FY 2019/20 — selected fiscal figures and measures - Primary deficit expected to decline to 0.6 percent of GDP from estimated 1.8 percent of GDP in FY 2018/19. - Fiscal consolidation largely revenue driven with estimated Tax Revenues = 1.7 percent of GDP broken down as: - Sales tax: 0.5 percent of GDP (withdrawal of exemptions and preferential rates: 0.4; increase on petroleum products: 0.1). - Income tax: 0.7 percent of GDP. - Federal Excise Duty (FED): 0.2 percent of GDP. - Customs: 0.1 percent of GDP. - Revenue administration measures: 0.1 percent of GDP. - Total revenue measures (Millions): Sales Tax 222,776; FED 90,114; Income Tax 324,982; Customs 60,000; Revenue administration 35,600; TOTAL 733,471 (Millions) — 1.7 percent of GDP. ### Public financial management and intergovernmental fiscal relations - Public Financial Management Act adopted to increase fiscal discipline and require parliamentary approval of budget authorizations. - Legal amendments to limit SRO use. - Authorities will: - Strengthen FRDLA implementation and align annual reports to National Assembly. - Expand MoF macro-fiscal capacity and introduce fiscal risk unit to monitor SOEs, PPPs, and projects. - Strengthen PPP framework and create Treasury office in MoF for commitment controls and cash management, coordinated with debt management unit. - Debt management strategy to lengthen maturity profile and widen investor base. - Provinces committed to deliver surpluses ≈ 1 percent of GDP in FY 2020, increasing to 2.7 percent by program end; provinces to increase property and sales tax collection and assume more spending responsibility. - Fiscal Coordination Committee to meet quarterly. ### C. Poverty reduction and social protection - Poverty headcount ≈ 30 percent. - Ehsaas program as main poverty reduction strategy; BISP reaches over 5 million families. - Social measures: - One-off PRs 1,000 disbursement to existing BISP beneficiaries by end-August 2019. - “One woman one account” to ensure financial and digital inclusion of ~6 million women by end-October 2019 (structural benchmark). - Augment Waseela-e-Taleem CCT with girl bonus PRs 250 quarterly (end-December 2019 structural benchmark). - Finalize NSER update by end-June 2020 (structural benchmark); upon completion increase cash transfers from current PRs 5,000 and explore indexing benefits. - Launch BISP graduation program and nutrition program. ### D. Monetary and exchange rate policies - Exchange rate: - SBP committed to flexible, market-determined exchange rate; since May 16, 2019 SBP allowed market determination. - SBP may intervene to prevent overshooting or disorderly market conditions (DMCs); interventions will not be sterilized. - SBP to scale back short swap/forward foreign exchange position to US$ 4 billion by end of program. - Monetary policy stance: - Tightened by 150 bps to reduce inflation risks and strengthen confidence. - SBP to maintain appropriately tight monetary policy to guide inflation and expectations. - Maintain positive policy rate in real terms consistent with medium-term inflation objective. - Until inflation targeting advanced, NDA and NIR targets will guide money supply consistent with inflation objective of 5–7 percent. - NIR targets to guide reserve accumulation. ### SBP financing of the budget and institutional reforms - Direct SBP financing increased from around PRs 3.6 trillion in FY 2018 to over PRs 7.7 trillion (≈ 20 percent of GDP) today. - Authorities commit to: - Refrain from any new direct financing of the budget by the SBP (continuous performance criterion). - Gradually reduce SBP stock of net government budgetary borrowing (performance criterion). - Reprofiling operation: - Reprofile short-term government debt held by SBP into tradable instruments of 1, 3, 5, and 10 years at interest rates close to market levels before adoption of amended SBP Act; expected amount 7,756 billion rupees. - SBP Act amendments: - Amendments to strengthen autonomy, governance, mandate; submit to parliament by end-December 2019 (structural benchmark). - Ensure price stability as SBP’s primary objective and prohibit direct credit to government. ### Exchange measures, MCPs, and import restrictions - Authorities commit to eliminate administrative restrictions used for balance of payments support, including regulatory duties, import restrictions, and MCPs such as full pre-funding of letters of credit and restrictions on advance payments. - Commitment: not to introduce or tighten exchange restrictions, MCPs, or import restrictions for balance of payments purposes during program (continuous performance criterion). ### Financial sector resilience and bank recapitalization - Dollarization levels: 7.4 percent on loan side; 12.9 percent on deposit side. - Stress tests: - 30 percent depreciation would not push any bank below minimum capital adequacy. - Parallel upward shift in yield curve by 300 bps would send three banks below minimum CAR. - SBP actions: - Monitor NPLs and capitalization; small undercapitalized banks to submit plans by end-September 2019 to reach compliance by end-June 2020. - Failure to implement plans will lead to SBP intervention and resolution; SBP initiated liquidation of a small undercapitalized publicly-owned bank. ### AML/CFT and FATF commitments - Pakistan on FATF list since June 2018 for shortcomings addressing terrorist financing risks. - Authorities commit to implement all measures in FATF action plan by end-October 2019 (structural benchmark) to support exit from FATF list. - NEC to monitor implementation; work with technical assistance providers, including IMF. ### Energy sector policies — objectives and measures - Overarching goal: address inefficiencies and eliminate quasi-fiscal losses; make energy sector an engine of growth. - Power sector measures: - Automatic quarterly tariff adjustment initiated; first tariff increase of over 10 percent to generate PRs 150 billion in additional revenue (prior action). - Second quarterly adjustment before end-August. - FY 2020 electricity tariff schedule to be notified as determined by the regulator by end-September 2019 (structural benchmark). - Amend NEPRA Act amendments to be submitted to parliament by end-December 2019 (structural benchmark) to ensure automaticity of quarterly adjustments and eliminate notification gap. - Comprehensive circular debt reduction plan due end-September 2019 (structural benchmark) with quarterly arrears reduction targets. - Gas sector measures: - FY 2020 gas tariffs as proposed by regulator effective July 1, 2019 (prior action). - Comprehensive plan to reduce gas sector losses approved by end-September 2019; unbundling of two gas companies and OGRA Act amendments proposed. ### Structural policies — SOEs, business environment, and anticorruption - SOE actions: - Initiate privatization of selected enterprises; privatization of seven companies approved. - New audits of PIA and Pakistan Steel Mills by reputable international auditors to be published by end-December 2019 (structural benchmark). - Triage SOEs into sale, liquidation, or retention by end-September 2020 (structural benchmark). - Submit new State-Owned Enterprise Law to parliament by end-September 2020 (structural benchmark). - Business environment: - Reduce customs processing time and documentation; simplify business start-up via e-registration. - Systematic review to eliminate unnecessary regulations hindering investment. - Anticorruption and AML: - Strengthen institutions, asset recovery, financial investigation capacities, and reporting; register prize bonds and bearer instruments; improve asset declaration systems. ### Program financing, access, and monitoring - Program financing expected to mobilize ≈ $38.6 billion over three years. - First 12 months commitments: - China $6.3 billion; Saudi Arabia $6.2 billion; UAE $1 billion; World Bank $1.3 billion; ADB $1.6 billion; Islamic Development Bank $1.1 billion. - Proposed IMF arrangement: - Access: 210 percent of quota (SDR 4,268 million ≈ $6 billion). - Includes SDR 2,184 million of repurchases to the Fund. - Fund’s exposure to Pakistan currently SDR 4,153 million (204 percent of quota or 55 percent of gross official reserves). - Newly proposed purchases SDR 4,268 million → outstanding purchases SDR 5,967 million by December 2022 (42 percent of projected reserves or 294 percent of quota). - Net purchases during program ≈ $2.9 billion, accounting for scheduled repurchases from 2013 EFF disbursements of $3.1 billion. - Monitoring: - Quarterly reviews initially, semi-annual after first year. - Performance criteria include NIR, NDA of SBP, SBP swap/forward position, primary fiscal balance excluding grants, net government budgetary borrowing from SBP, government guarantees, and structural benchmarks per the MEFP. ### Prior actions completed (selection) - Adoption by parliament of FY 2020 budget in line with program. - SBP announced move to flexible market-determined exchange rate and tightened monetary policy by 150 bps. - Formal public agreement between federal and provincial governments on fiscal targets. - Implementation of quarterly automatic tariff adjustment in power sector (~10 percent) to generate PRs 150 billion. - Government notified FY 2020 gas tariff adjustment effective July 1, 2019. ### Public debt sustainability — findings and scenarios - Current assessment: - Debt at the limit of sustainability; strong fiscal adjustment and bilateral lender commitments mitigate risks; debt judged sustainable conditional on full implementation. - Historical/near term: - Government and government-guaranteed debt reached 75.3 percent of GDP by end-FY 2018. - Net public debt ≈ 67 percent of GDP. - Gross financing needs reached almost 34 percent of GDP. - Debt structure: - As of March 2019, 57 percent of domestic public debt maturities < 1 year; stock of short-term debt from Central Bank reached 19 percent of GDP in March. - Three-month T-bills at 8 percent of GDP. - Required adjustment: - Staff recommends primary fiscal balance adjustment of 4.4 percent of GDP over four years starting FY 2020; front-loaded revenue-based consolidation of 4.8 percent of GDP needed. - Program scenario: - Public debt projected to reach 80.5 percent of GDP in 2020 and fall to 67 percent by FY 2024. - Gross financing needs expected to decline to 23 percent of GDP in FY 2020 and to 16.7 percent by FY 2024. - Stress tests and alternative scenarios: - Under constant primary balance and historical performance scenarios, debt ratio could reach 83 percent of GDP by 2024. - Debt ratio exceeds 70 percent of GDP under all stress tests. - Contingent liabilities from SOEs represent additional fiscal risks (~2 percent of GDP). ### External debt sustainability — findings and projections - External debt risks high but EFF projects external debt remains sustainable given sustained fall in external debt and bilateral lender commitments. - External debt projected to rise to ≈ 37 percent of GDP at end-FY 2019, peak in FY 2021, and decline thereafter. - Gross external financing relative to GDP projected to fall from FY 2021 to around 8 percent over medium-term. - Bilateral official creditors’ commitments reduce gross external financing needs by ~1.3 percentage points of GDP on average per year during program. ### Quantitative program and vulnerability indicators (selected table series) - Program gross official reserves (end-period, US$ millions): 13,534; 18,143; 16,141; 9,789; 6,824; 11,187 (program scenario table). - Program gross external financing needs (US$ millions): 21,688; 28,841; 25,502; 23,188; 25,584; 26,745; 27,258; 27,502 (Table 3 series). - Real GDP growth (program scenario, series): 4.1; 4.6; 5.2; 5.5; 3.3; 2.4 (2014/15–2019/20) and medium-term: 3.0; 4.5; 5.0; 5.0 (2020/21–2023/24). - Consumer prices (period average): 4.5; 2.9; 4.1; 3.9; 7.3; 13.0 (2014/15–2019/20); medium-term: 8.3; 6.0; 5.0; 5.0 (2020/21–2023/24). - Current account balance (percent of GDP): -1.0; -1.7; -4.1; -6.3; -4.6; -2.6 (2014/15–2019/20). - General government debt incl. IMF obligations (percent of GDP): 63.3; 67.6; 67.0; 71.7; 74.9; 76.9 (2014/15–2019/20). - Banking system indicators (Regulatory capital to RWA and NPLs series shown): regulatory capital ≈ 16.1 percent (Mar 2019); NPLs ≈ 8.2 percent (Mar 2019). - Vulnerability indicators (Table 8 selected): public sector gross financing requirement (percent of GDP): 29.4; 33.7; 36.0; 23.6; 22.7; 20.2; 18.5; 16.7 (2016/17–2023/24). ### Program conditionality — performance criteria and structural benchmarks (selection) - Continuous performance criteria: - No new flow of SBP credit to general government. - No introduction or tightening of exchange restrictions, MCPs, or import restrictions for balance of payments purposes. - Zero accumulation of external public payment arrears. - Quantitative performance criteria (selected): - Floor on SBP net international reserves (millions of U.S. dollars): -11,853; -17,743; -18,478; -16,311; -12,844; -10,790 (end-period series). - Ceiling on SBP net domestic assets (billions of PKR): 7,296; 8,852; 8,911; 8,800; 8,445; 8,727. - Ceiling on SBP net FX swaps/forwards position (negative, US$ millions): 7,532; 8,055; 8,055; 8,055; 8,055; 7,555. - Ceiling on net government budgetary borrowing from SBP (PKR billions): 4,737; 7,756; 7,756; 7,756; 7,756; 7,187. - Floor on net tax revenues collected by FBR (cumulative, PKR billions): 1,795; 4,153; 1,071; 2,367; 3,757; 5,503. - Cumulative floor on Targeted Cash Transfers Spending (BISP, PKR billions): 30; 100; 458; 6.4; 133.2; 180 (quarterly/cumulative schedule). - Structural benchmarks (selected with dates): - Issue licenses for track-and-trace for cigarette excises — end-September 2019. - Adopt measures to strengthen AML/CFT framework — end-October 2019. - Submit SBP Act amendments to parliament — end-December 2019. - Notify FY 2020 electricity tariff schedule as regulator determines — end-September 2019. - Prepare comprehensive circular debt reduction plan — end-September 2019. - Conduct and publish new audits of PIA and Pakistan Steel Mills — end-December 2019. - Triage all SOEs — end-September 2020. - Finalize BISP banking contracts and launch financial inclusion for women — end-October 2019. - Finalize NSER update — end-June 2020. ### Monitoring, reporting, and technical parameters - TMU defines program exchange rate: 141.3172 rupee per U.S. dollar. - On April 16, 2019, SBP NIR estimated at negative US$15,557 million; projected end-June 2019 NIR: negative US$17,743 million. - SBP aggregate net derivative position at end-April 2019: negative US$8,055 million. - Liability management operation expected amount: 7,756 billion rupees. - Stock of publicly guaranteed debt as of end-March 2019: 1,265.1 billion rupees. - Stock of power sector payables as of end-March 2019: PRs 762.4 billion; stock of PHPL: PRs 807 billion. - Stock of tax refund arrears as of March 31, 2019: 90 billion rupees. - Electricity tariff components: - Uniform weighted average tariff: PRs 13.51/kWh. - Weighted average tariff: PRs 11.95/kWh. - Inter-disco tariff rationalization: PRs 1.03/kWh. - Debt servicing surcharge (DSS): PRs 0.43/kWh. - Neelum-Jhelum Surcharge: PRs 0.1/kWh. - Lifeline 0–50 kWh/month tariff: PRs 2/kWh. _Italic: Source — EXECUTIVE SUMMARY and selected excerpts from "Pakistan — 39-month Extended Fund Facility proposal and IMF staff report" and associated MEFP, TMU, and supplementary information contained in the supplied content unit._ ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context and recent developments - Pakistan’s economy is at a critical juncture due to misaligned economic policies (large fiscal deficits, loose monetary policy, and defense of an overvalued exchange rate) that fueled consumption and short-term growth but eroded macroeconomic buffers, increased external and public debt, and depleted international reserves. - Growth and inflation: - Growth averaged close to 5 percent over the past five years. - Growth is estimated to decline to 3.3 percent this year, from 5.5 percent a year ago. - Consumer inflation accelerated to 9.1 percent in May 2019, up from 4.2 percent a year ago. - Fiscal and public debt: - Procyclical fiscal policies led to a surge in the FY 2018 fiscal deficit to 6.5 percent of GDP, 2.5 percent of GDP higher than budgeted. - Public debt rose to 75 percent of GDP. - The overall fiscal deficit (excluding grants) is expected to widen to over 7 percent of GDP in FY 2019 against a budget target of 5.1 percent. - Revenue shortfall equivalent to 1.4 percent of GDP relative to the budget target; tax to GDP ratio is estimated to have declined to below 13 percent of GDP. - External position and reserves: - The current account deficit widened to 6.3 percent of GDP in FY 2017/18 and is expected to remain large at around $13 billion in FY 2019 (4½ percent of GDP). - Gross official reserves stood at $8 billion (1.7 months of imports or around 30 percent of the ARA metric) at end-May. - Net international reserves were significantly negative at around –$16 billion at end-May 2019 when factoring in the PBOC swap line, liabilities to other central banks, and forward/swap positions with domestic banks. - The REER depreciated by around 21 percent so far in FY 2018/19; another assessment cited a 19 percent real effective depreciation in FY 2019. - Quasi-fiscal and SOE losses: - New arrears in the power sector over FYs 2018 and 2019 reached close to PRs 800 billion (around 2 percent of GDP). - The stock of circular debt stood at over 4 percent of GDP as of March 2019. - Arrears in the gas sector total over ½ percent of GDP. - Losses in the three largest State-Owned Enterprises (Pakistan International Airlines, Pakistan Steel Mills, and Pakistan Railways) now total over 2 percent of GDP. - Financial sector and banking: - System-wide capital adequacy was 16.1 percent in March 2019. - Nonperforming loans (NPL) declined to 8.2 percent by March 2019 (from 8.3 percent a year ago). - Private credit growth was 16.1 percent year-on-year in March 2019. - NPLs in the SME sector and agriculture remain high at 15 percent and 17 percent, respectively. - Social and inclusive growth indicators: - Unemployment is less than 6 percent, but labor force participation is around 30 percent. - Informality exceeds 70 percent of all economic activity. - Poverty remains around 30 percent of the population. - Literacy rate is 60 percent versus 80 percent for regional peers. - Demographic challenge: 2/3 of the population is under the age of 30. ### Program objectives and key policy pillars - Authorities request Fund support under a 39-month Extended Fund Facility (EFF) to stabilize the economy and lay the foundation for robust and balanced growth. - Key elements of the program: - Fiscal consolidation: - A decisive fiscal consolidation starting with an ambitious FY 2020 budget. - Comprehensive efforts to drastically improve revenue mobilization at both federal and provincial levels to generate 4-5 percentage points of GDP in additional tax revenue. - Exchange rate and monetary policy: - A flexible, market-determined exchange rate to restore competitiveness, rebuild official reserves, and provide a buffer against external shocks. - An appropriate monetary policy to shore up confidence and contain inflation, conducted by a strengthened and independent central bank. - Energy sector reforms: - Reforms to eliminate quasi-fiscal losses and encourage investment, including depoliticizing gas and power tariff setting and adjusting tariffs to cost recovery. - Social protection and spending: - Expanding social spending and strengthening and broadening safety nets to support the most vulnerable. - Structural reforms: - Strengthening institutions, increasing governance and transparency, and promoting an investment-friendly environment to improve productivity and ensure sustainable growth. ### External financing and Fund access - The Fund-supported program is expected to coalesce broader support from multilateral and bilateral creditors in excess of US$38 billion, which is crucial to meet Pakistan’s large financing needs. - The authorities have secured full financing for the first year and received firm commitments from key bilateral partners to maintain their exposure throughout the program period, including by extending new loans consistent with program objectives. - The authorities are requesting access under the EFF of SDR 4,268 million (210 percent of quota), equivalent to about $6 billion. ### Implementation, risks, and safeguards - Strong and steadfast program implementation will be key to mitigate program risks. Past incomplete policy implementation derailed adjustment efforts and allowed repeated cycles of economic and financial stress. - The authorities’ ability to overcome entrenched resistance to reforms is critical for program success. - The document notes that bold and frontloaded actions already undertaken demonstrate commitment, and significant external support is key to mitigate risks and allow the program to achieve its objectives. - Financial sector risks include banks’ increasing reluctance to provide credit to the government and demand for very short maturities, accentuating financing and rollover difficulties for large deficits and maturing domestic debt. ### Selected quantitative highlights (as reported) - FY 2018 fiscal deficit: 6.5 percent of GDP (2.5 percent of GDP higher than budgeted). - Public debt: 75 percent of GDP. - Current account deficit: 6.3 percent of GDP in FY 2017/18; around $13 billion in FY 2019 (4½ percent of GDP). - Growth: average close to 5 percent over the past five years; estimated 3.3 percent in the current year. - Inflation: 9.1 percent in May 2019 (near five-year high). - Gross official reserves: $8 billion (1.7 months of imports; ~30 percent of ARA metric) at end-May. - External financing commitments expected in excess of US$38 billion. - Requested EFF access: SDR 4,268 million (210 percent of quota) ≈ $6 billion. - Circular debt additions: close to PRs 800 billion (around 2 percent of GDP); stock over 4 percent of GDP as of March 2019. - Gas sector arrears: over ½ percent of GDP. - SOE cumulative losses (PIA, PSM, Railways): over 2 percent of GDP. - FY 2019 overall fiscal deficit (excluding grants): expected to be over 7 percent of GDP vs budget target 5.1 percent. - Revenue shortfall: 1.4 percent of GDP relative to budget target. - Tax-to-GDP ratio: below 13 percent of GDP. - Banking: capital adequacy 16.1 percent (March 2019); NPLs 8.2 percent (March 2019); private credit growth 16.1 percent yoy (March 2019). - Remittances: 6½ percent of GDP with growth of 10.4 percent in July–May FY 2018/19. - FDI expected to fall to 0.6 percent of GDP in FY 2018/19; net public external borrowing projected to increase to 3.1 percent of GDP in FY 2018/19. *Source: EXECUTIVE SUMMARY, Pakistan — 39-month Extended Fund Facility proposal and IMF staff report (June 20, 2019).* ### 9. The authorities’ program, supported by the proposed EFF arrangement, aims at ### 9. The authorities’ program, supported by the proposed EFF arrangement, aims at ### Program pillars - Effective macroeconomic stabilization with protection for the most vulnerable: - Multi-year revenue mobilization effort aimed at generating 4–5 percentage points of GDP in additional tax revenue. - Strategy for cost recovery in energy and SOEs. - Market-determined flexible exchange rate to reduce external imbalances, improve competitiveness, and support the build-up in international reserves. - Independent, forward looking, and data dependent monetary policy to shore up confidence and reach the inflation objective. - More social and development spending to protect the most vulnerable. - Governance and structural reforms to strengthen institutional frameworks and foster stronger growth: - Improve public financial management for fiscal discipline and greater budgetary transparency. - More autonomy for the State Bank of Pakistan as it prioritizes price stability. - Reform the energy sector to ensure efficiency and better services. - Modernize the SOE legal framework. - Strengthen anticorruption institutions. - Remove bottlenecks and regulatory impediments to investment and job creation. - Adequate new financing to support the policy efforts: - Catalyze new external financing from official and bilateral partners to close the financing gap and allow reforms to work. ### A. Macroeconomic framework — key projections and dynamics - Near term: - Economic activity expected to decelerate to below its potential in 2019/20 due to higher interest rates, fiscal consolidation, and administered price adjustments. - Targeted increases in social assistance to help offset most of the impact on the most vulnerable. - Medium term: - Real GDP growth projected to recover to 5 percent assuming steady implementation of reforms. - A real effective exchange rate in line with fundamentals will increase competitiveness and boost exports. - Inflation: - Initial increase driven by currency depreciation; appropriately tight monetary policy aimed at keeping a positive real policy rate projected to bring inflation down to around 5–6 percent in the medium term. - Public debt and deficits: - General government debt projected to peak at 80.5 percent of GDP in FY 2020 and decline to 67 percent of GDP by FY 2024. - Current account and reserves: - Current account deficit expected to narrow to less than 2 percent of GDP by FY 2024. - International reserves expected to gradually recover to over 4 months of import cover by 2023, albeit still short of 100 percent of the Fund’s ARA metric. - Risks: - Outlook subject to considerable risks, mainly to domestic policy implementation and external events. ### B. Fiscal policies — objectives and measures - Fiscal objective: - Ensure debt sustainability by reducing fiscal and eliminating quasi-fiscal deficits via stronger revenue mobilization while creating space for social and development spending. - Raise the tax to GDP ratio by 4–5 percentage points. - Improve the primary deficit by 4½ percent of GDP by FY 2023 and bring the overall fiscal deficit to around 2½ percent of GDP (in line with the FRDLA). - Reduce general government debt from 80.5 percent of GDP in FY 2020 to 67 percent of GDP by FY 2024. - FY 2020 budget (prior action): - Targets a primary fiscal adjustment of 1.2 percent of GDP underpinned by high-quality permanent revenue measures of 1.7 percent of GDP. - Federal government wages expected to increase by 7.5 percent, below the rate of inflation. - Incorporates implicit subsidies in the power sector that previously were not budgeted. - Social protection in the budget: - Allocations to the Benazir Income Support Program (BISP) to be increased by 80 percent on an annual basis. - Additional PRs 50 billion in subsidies to insulate poorest households from increases in power tariffs. - Multi-year tax policy and administration effort: - Aim to achieve an additional 4-5 percentage points of GDP in additional tax revenues by the end of the program. - Tax policy reforms: - Remove exemptions and preferential treatment (except for basic food and medicines). - Greater inter-provincial harmonization and coordination of GST. - Transform GST into a broad-based VAT over time. - Make PIT fairer and more progressive by raising upper-end PIT structure and consider eliminating PIT tax credits and deductions for higher income brackets. - Strengthen taxation on real estate and on agricultural turnover or income by provinces. - Ensure equivalent taxation of all sources of income. - Eliminate distortionary withholding taxes. - Tax administration reforms: - Implement full, risk-based audit framework facilitated by reversal of legal provisions limiting tax audits. - Increase legal penalties for non-compliance. - Issue licenses for the track-and-trace system for excises on cigarettes by end-September 2019 (structural benchmark) with system rollout by end-March 2020. - Consider creating a new semi-independent national tax authority. - Commitment to not granting further tax amnesties (continuous structural benchmark). ### Box: Pakistan — Budget FY 2019/20 (selected fiscal figures and measures) - Primary deficit expected to decline to 0.6 percent of GDP, from estimated 1.8 percent of GDP in FY 2018/19. - Fiscal consolidation largely revenue driven: - Sales tax measures: eliminate exemptions and preferential rates; align to standard 17 percent sales tax rate. - Income tax measures: reduce thresholds to PRs 600,000 (salaried) and PRs 400,000 (non-salaried); increase top rates; resume withholding tax on telecom services; rationalize tax credits. - Federal excise duty increases/introduction on cigarettes, sugary drinks, cement. - Customs: eliminate exemptions on LNG imports and increase additional customs duty for finished and luxury goods. - Revenue administration: modernization and digitalization of FBR functions; track-and-trace system for cigarettes implemented in second quarter. - Budget measures (Percent of GDP): - Primary deficit reduction: 1.2 - Deficit enlarging measures: 0.5 - social spending: 0.2 - power subsidy: 0.2 - federal development spending: 0.1 - provincial development spending: 0.1 - Fiscal consolidation measures — Tax Revenues: 1.7 - Sales tax: 0.5 - Withdrawal of exemptions and preferential rates: 0.4 - Increase tax and levy on petroleum products: 0.1 - Income tax: 0.7 - PIT: lower the threshold and increase tax rates: 0.2 - Withholding rate: resume telecom tax; higher rate to non-filers: 0.1 - Rationalization of tax credits and amortization of expenditure: 0.1 - Capital gain: immovable property valuation; redefine property purchase: 0.1 - Other: minimum tax, gift taxation, change in tax regime for some services: 0.1 - Federal Excise Duty (FED): 0.2 - Increase/introduce FED on cement, cigarettes, sugary drinks: 0.2 - Customs: 0.1 - Withdrawal of exemptions and increase in some custom duty rates: 0.1 - Revenue administration measures: 0.1 - Expenditures: 0.2 - federal current spending rationalization: 0.1 - provincial current spending rationalization: 0.1 ### Public financial management and intergovernmental fiscal relations - Public Financial Management Act adopted to increase fiscal discipline by requiring parliamentary approval of budget authorizations. - Legal amendments to limit use of Statutory Regulatory Orders (SROs). - Authorities will: - Strengthen implementation of the FRDLA by aligning the annual report presented to the National Assembly with the Act. - Expand MoF capacity for macro-fiscal work and introduce a fiscal risk unit in the MoF to monitor fiscal risks including from SOEs, PPPs, and development projects. - Strengthen PPP framework via legal analysis and gap addressing. - Create a Treasury office in the MoF for commitment controls and cash management, coordinated with the debt management unit. - Debt management strategy will aim to lengthen maturity profile and widen investor base. - Provinces’ role: - Provinces committed to deliver surpluses of around 1 percent of GDP in FY 2020, increasing to 2.7 percent by end of the program by saving additional revenues from reforms. - Provinces to increase collection of property and sales taxes and assume more spending responsibility. - Fiscal Coordination Committee to meet quarterly to assess progress. ### C. Poverty reduction and social protection - Poverty headcount around 30 percent of the population. - Ehsaas program is the main poverty reduction strategy. - BISP currently reaches over 5 million families. - Social measures under the program: - One-off disbursement of PRs 1,000 to existing BISP beneficiaries by end-August 2019. - “One woman one account” initiative to ensure financial and digital inclusion of around 6 million women by end-October 2019 (structural benchmark). - Augment Waseela-e-Taleem CCT program with a girl bonus of PRs 250 provided quarterly (end-December 2019 structural benchmark). - Finalize update of the National Socio-Economic Registry (NSER) by end-June 2020 (structural benchmark). - Following completion, authorities will increase cash transfers from current PRs 5,000 and seek ways to index benefits. - Launch new programs under BISP such as the graduation program and a program on nutrition. ### D. Monetary and exchange rate policies - Exchange rate regime: - SBP committed to a flexible, market-determined exchange rate; since May 16, 2019 the SBP has allowed the exchange rate to be market determined. - SBP may intervene to prevent overshooting or disorderly market conditions (DMCs) without suppressing underlying trend; interventions will not be sterilized. - SBP agreed to gradually scale back its short swap/forward foreign exchange position to US$ 4 billion by the end of the program. - Monetary policy stance: - Monetary policy tightened by 150 bps to reduce risks to inflation and strengthen confidence. - SBP will maintain an appropriately tight monetary policy to guide inflation and inflation expectations. - Maintain a positive policy rate in real terms consistent with SBP’s medium-term inflation objective. - Until inflation targeting framework is advanced, NDA and NIR targets will guide money supply consistent with inflation objective of 5–7 percent. - NIR targets will guide reserve accumulation under the program. *PAKISTAN — INTERNATIONAL MONETARY FUND (excerpt, 1pakea2019001)* ### 20. To support the new monetary policy framework, SBP financing of budget deficit will ### 20. To support the new monetary policy framework, SBP financing of budget deficit will ### SBP financing of the budget and monetary policy framework - Direct SBP financing of the budget increased from around PRs 3.6 trillion in FY 2018 to over PRs 7.7 trillion (around 20 percent of GDP) today. - The authorities commit to: - Refrain from any new direct financing of the budget by the SBP (continuous performance criterion). - Gradually reduce the SBP stock of net government budgetary borrowing (performance criterion). - Reprofiling operation: - Reprofile the stock of mostly short-term government debt held by the SBP into short- and long-term tradable instruments of various maturities (one, three, five, and ten years) at interest rates close to market levels. - This operation will take place before the adoption of the amended SBP Act. - Expected effects: support debt sustainability, reduce the government’s interest bill, and avoid crowding out of private credit. ### SBP Act amendments and governance - Amendments to strengthen SBP autonomy, governance, and mandate will: - Address recommendations of the upcoming 2019 Safeguards Assessment Report (operational independence and governance, governor’s tenure, and financial autonomy and accountability). - Ensure price stability as SBP’s primary objective and prohibit any form of direct credit to the government. - Timeline: - Amendments to the SBP Act will be submitted to parliament by end-December 2019 (structural benchmark). ### Exchange measures, MCPs, and import restrictions - Authorities commit to eliminate existing administrative restrictions imposed to support the balance of payments, including: - Regulatory duties on imported intermediate, consumer, and luxury goods. - Import restrictions for balance of payments purposes. - Multiple currency practices (MCP) in the form of: - Requirement to fully pre-fund letters of credit (imposed in early 2017). - Restrictions on advance payment for imports against letters of credit (imposed in July 2018). - Commitment during the program period: - Not to introduce or tighten exchange restrictions, MCPs, or import restrictions for balance of payments purposes (continuous performance criterion). ### Financial sector resilience and bank recapitalization - Dollarization levels: - 7.4 percent on loan side. - 12.9 percent on deposit side. - Stress test note: - 30 percent depreciation would not push any bank below minimum capital adequacy. - A parallel upward shift in the yield curve by 300 bps would send three banks below the minimum CAR. - Authorities’ actions: - Monitor NPLs and banks’ capitalization; stand ready to take measures to keep banks well capitalized. - SBP asked all small undercapitalized banks to submit by end-September 2019 plans to ensure compliance with capital requirements by end-June 2020, including via mergers or sale to new private investors. - Failure to implement plans will result in SBP intervention and resolution under law. - SBP initiated liquidation of a small undercapitalized publicly-owned bank. ### AML/CFT regime strengthening and FATF - Pakistan placed on the FATF list in June 2018 for shortcomings in addressing terrorist financing risks. - Authorities’ commitments: - Implement all measures in the FATF action plan (end-October 2019 structural benchmark) to support exit from the FATF list. - NEC to monitor and coordinate implementation. - Work with technical assistance providers, including the IMF, to complete the action plan. - Asia Pacific Group on Money Laundering scheduled to discuss Pakistan's mutual evaluation report in August 2019. ### Energy sector policies — objectives and measures - Overarching goal: address inefficiencies and eliminate quasi-fiscal losses; make energy sector an engine of growth. - Power sector challenges: effective tariffs below required levels, implicit unbudgeted subsidies, technical and distribution losses. - Key power sector measures: - Automatic quarterly tariff adjustment initiated; first tariff increase of over 10 percent to generate PRs 150 billion in additional revenue (prior action). - Second quarterly adjustment before end-August. - FY 2020 electricity tariff schedule to be notified as determined by the regulator by end-September 2019 (structural benchmark). - Amendments to the NEPRA Act to be submitted to parliament by end-December 2019 (structural benchmark) to: - Ensure full automaticity of quarterly tariff adjustments. - Eliminate gap between regulator determination and government notification. - Comprehensive plan to reduce circular debt prepared by end-September 2019 (structural benchmark) with quarterly arrears reduction targets and options to tackle outstanding stock. ### Gas sector measures - Multi-pronged strategy includes: - Prompt adoption of FY 2020 gas tariffs as proposed by the regulator to become effective on July 1, 2019 (prior action). - Prepare comprehensive plan to reduce losses with government approval by end-September 2019 and monitored through published quarterly reports. - Greater private sector participation, including unbundling of two gas companies. - Amendments to the OGRA Act to ensure regular and timely notification of end-consumer tariffs. ### Protection for lower-income households - Current protection: households consuming 300 units (kwt-h) or below (about 70 percent of all household consumers) are insulated from annual tariff increases. - Authorities will continue this practice and allocate a new subsidy equivalent to 0.1–0.2 percent of GDP to insulate these consumers from the impact of the quarterly tariff adjustment. ### Structural policies — SOEs, business environment, and anticorruption - SOE governance and privatization: - Initiate privatization of selected enterprises; privatization of seven companies approved. - New audits of Pakistan International Airlines and Pakistan Still Mills by reputable international auditors to be published by end-December 2019 (structural benchmark). - Triage SOEs into sale, liquidation, or retention by end-September 2020 (structural benchmark). - Submit new State-Owned Enterprise Law to parliament by end-September 2020 (structural benchmark); IMF to provide technical assistance. - Business environment improvements: - Improve trading across borders by reducing custom-related processing time and documentation hours; review tariff policy. - Simplify procedures to start a business via e-registration and streamlined documentation. - Systematic review to eliminate unnecessary regulations that hinder investment. - Anticorruption and AML tools: - Strengthen anticorruption institutions; national committee to implement UNCAC 2017 recommendations. - Task force to review institutional framework to enhance independence and effectiveness. - Study on establishing a dedicated AML unit in the Federal Investigation Agency (FIA). - Upgrade financial investigation capacities; pursue information exchange agreements to recover unlawful assets. - Asset Recovery Unit in the Prime Minister’s Office to cooperate with FBR’s International Taxation Unit on identifying assets abroad. - Ensure banks improve capacity to identify politically exposed persons and apply enhanced due diligence. - Provide adequate resources to the Financial Monitoring Unit. - Asset declarations of high-level public officials to be comprehensive, filed with a central federal agency, electronically searchable, and appropriately verified. - Register prize bonds and other bearer instruments to eliminate potential illegal uses/tax avoidance. ### Program financing, access, and monitoring - Program financing expected to mobilize total financing of around $38.6 billion over three years from international partners. - First 12 months financing commitments: - China $6.3 billion - Saudi Arabia $6.2 billion - UAE $1 billion - World Bank $1.3 billion - Asian Development Bank $1.6 billion - Islamic Development Bank $1.1 billion - Bilateral partners (China, Saudi Arabia, UAE) committed to maintain exposure and adjust financing modalities to be consistent with debt sustainability objectives. - Proposed IMF arrangement: - 39-month extended arrangement. - Proposed access of 210 percent of quota (SDR 4,268 million, equivalent to about $6 billion). - Includes SDR 2,184 million of repurchases to the Fund. - SDR 716 million proposed to be disbursed upon approval to support policies at start of program. - All purchases to go to the budget to support adjustment, particularly due to end of SBP financing of the budget. - Expected outstanding purchases: - Fund’s exposure to Pakistan currently stands at SDR 4,153 million (204 percent of quota or 55 percent of gross official reserves). - Newly proposed purchases of SDR 4,268 million will result in outstanding purchases of SDR 5,967 million by December 2022 (42 percent of projected reserves or 294 percent of quota). - Net purchases during the proposed program will be around $2.9 billion, accounting for scheduled repurchases from the 2013 EFF disbursements of $3.1 billion. - Monitoring and conditionality: - Initially monitored through quarterly reviews, becoming semi-annual after the first year. - Performance criteria include net international reserves, net domestic assets of the SBP, stock of SBP’s net foreign currency swap/forward position, primary fiscal balance excluding grants, net government budgetary borrowing from the SBP, and amount of government guarantees. - Structural benchmarks and additional targets presented in the MEFP (Tables referenced in source). ### Prior actions completed - Adoption by parliament of the FY 2020 budget in line with program commitments. - SBP announced move to a flexible market-determined exchange rate and tightened monetary policy by 150 bps. - Formal and public agreement between federal and provincial governments on fiscal targets consistent with the program. - Implementation of quarterly automatic tariff adjustment in the power sector by about 10 percent to generate PRs 150 billion in additional revenues. - Government notified FY 2020 gas tariff adjustment as proposed by the regulator to become effective on July 1st, 2019. ### Capacity to repay and safeguards - Capacity to repay remains adequate but subject to higher-than-usual risks due to reserve declines and possible delays in adjustment policies. - Fund exposure figures: - Current exposure SDR 4,153 million (204 percent of quota or 55 percent of gross official reserves). - Proposed purchases and resulting outstanding purchases noted above. - An update safeguards assessment of the SBP has been initiated and will be completed before the first review. - SBP and MoF signed a memorandum of understanding on responsibilities for servicing Fund credit to ensure uninterrupted repayments. ### Program risks and mitigation - Key risks: - Exchange rate transition management risks, including potential overshooting and second-round inflation effects if monetary policy is not sufficiently tight. - Fiscal slippages and political resistance to fiscal measures threatening debt sustainability. - Opposition to governance and institutional reforms by vested interests. - Legislative hurdles due to lack of majority in the upper house. - Provinces underdelivering on budget commitments. - Large short-term debt implying significant near-term rollover needs. - Potential FATF blacklisting leading to freeze of capital inflows. - Other external risks: domestic security, global trade, trading partners’ growth, oil prices, tighter global financial conditions. - Mitigating measures: - Upfront adoption of key policy measures, especially exchange rate flexibility. - Formal and public agreements with provinces on fiscal strategy and procedures to address deviations. - Prudent phasing of purchases. - Increasing social spending to protect the most vulnerable and build support for reforms. - Strong commitments from World Bank, ADB, and key bilateral partners and conservative assumptions on private financing flows. *International Monetary Fund — excerpt from the IMF staff report for Pakistan* ### 38. Pakistan is facing acute economic challenges. Less than three years after the completion ### Pakistan is facing acute economic challenges. ### Key economic challenges - Less than three years after the completion of the last Fund arrangement, Pakistan’s economy is again under duress on the back of large fiscal and external financing needs, which have only been alleviated by short-term bilateral borrowing. - Policy making and economic institutions have not been strong enough to ensure sound macroeconomic policies, giving rise to unbalanced growth, a heavy debt burden, and risks of a disorderly adjustment in the absence of a new program. - Per capita growth has almost stalled, hampered by a difficult business environment, large informality, and an overvalued exchange rate. ### Authorities’ program: objectives and pillars - The program aims to tackle long-standing policy and structural weaknesses based on three pillars: - (i) Stabilization measures, to support the needed macroeconomic adjustment; greater social spending will protect the most vulnerable from the impact of these policies. - (ii) Structural and institutional reforms to foster stronger and more sustainable growth. - (iii) Adequate new financing to cover Pakistan’s large financing and development needs while allowing time for reforms to take hold. - Upfront adoption of difficult measures (for example, the move to a flexible market-determined exchange rate and adoption of a very ambitious FY 2020 budget) are cited as evidence of the authorities’ commitment to reform. - Provincial endorsement of key program parameters will facilitate achievement of program targets. ### Fiscal reforms and revenue strategy - Comprehensive fiscal reforms are critical to ensure fiscal sustainability. - Adoption of the FY 2020 budget based on high-quality revenue measures is an important step. - Further reduction of fiscal and quasi-fiscal deficits will require: - a multi-year revenue mobilization strategy; and - a strategy for cost recovery in energy and SOEs. - The tax base needs to be broadened through well-balanced and equitable measures, including by removing privileges, tax exemptions, and special concessions. - Higher revenue is expected to: - allow public deficit and debt to fall; - open space for higher social and infrastructure spending critical for Pakistan’s development; and - permit more credit to the private sector for investment. ### Exchange rate, external balances, and financing - Maintaining a flexible market-determined exchange rate is key to reduce external imbalances. - Sizable external financial support will facilitate the buildup of reserves. - The authorities recognize that the rupee is best supported through strong policies and reforms that will restore confidence in the economy. - International partners need to support Pakistan with financing that is consistent with the objective of restoring debt sustainability and external viability. - Pakistan faces exceptionally large external financing needs in the coming years; financing commitments received provide necessary assurances for the program and are critical to cover financing needs and allow time for policies to take hold. ### Social protection and inclusiveness - Protecting the most vulnerable from the impact of adjustment policies is an important priority. - Poverty reduction and social inclusion are crucial to ensure sustainable growth and garner broad buy-in for the authorities’ policies. - The inclusion of an indicative floor on social spending signals the authorities’ commitment to support the most vulnerable. ### Institutional reforms and growth impediments - Strengthening institutions and removing impediments to growth will allow Pakistan to realize its full economic potential. - Priority reforms include: - Legislation to improve public finance management to strengthen accountability and transparency in the budgetary process. - Ensuring an independent and professional SBP to deliver on price and financial stability. - Reforming the energy sector and improving SOE governance to ensure efficiency and better services. - Improving the business climate, strengthening efforts to fight corruption, and enhancing the AML/CFT regime to create an enabling environment for private investment and reduce the large informal economy. ### Risks, implementation challenges, and conditionality - Risks to the program are significant given Pakistan’s weak track record on program implementation, including incomplete reforms and policy reversals. - Upfront measures (exchange rate flexibility, fiscal consolidation, and tariff adjustments) may provoke strong backlash from vested interests and the wider population; pressures to reverse policies may quickly emerge. - Structural reform benefits may take years to materialize, creating risks of reform fatigue and backtracking. - Strong ownership and unwavering commitment to program implementation are critical for success. - International support will hinge crucially on the implementation of these reforms. - Other political and external shocks may further complicate an already challenging environment. *International Monetary Fund* ### 47. In view of Pakistan’s structural balance of payments needs and the comprehensive ### 1pakea2019001 - 47. In view of Pakistan’s structural balance of payments needs and the comprehensive ### IMF decision and program support - Staff supports the authorities’ request for an extended arrangement under the EFF in the amount equivalent to SDR 4,268 million (210 percent of quota). - Staff does not recommend temporary approval of the two exchange restrictions because the criteria for approval are not met. ### External sector, reserves, and financing pressures - SBP's derivative position has been pushed to almost $7.7 billion in net obligations. - Gross reserves (millions of U.S. dollars) — program scenario (Table 1, end-period): 13,534; 18,143; 16,141; 9,789; 6,824; 11,187. - Gross official reserves (billions of U.S. dollars) — medium-term projections (Table 2): 16.1; 9.8; 6.8; 11.2; 14.5; 18.9; 24.9; 28.1. - Gross external financing needs (in millions of U.S. dollars) — Table 3 (projections): 21,688; 28,841; 25,502; 23,188; 25,584; 26,745; 27,258; 27,502. - Gross external financing requirements (Table 3a, in millions of U.S. dollars): 30,385; 25,035; 25,616; 28,100; 27,373; 27,886; 31,218. - Available financing (Table 3a, in millions of U.S. dollars): 24,034; 22,070; 27,597; 30,127; 30,207; 33,065; 34,402. - Remaining financing needs (A-B) (Table 3a, in millions of U.S. dollars): 6,352; 2,965; -1,981; -2,027; -2,833; -5,179; -3,184. - Reserve asset trajectory (gross official reserves stock, US$ billions, Table 3a, memorandum): 9.8; 6.8; 11.2; 14.5; 18.9; 24.9; 28.1. ### Macroeconomic outlook and risks - Real GDP growth at factor cost (program scenario, Table 1 / Table 2): 4.1; 4.6; 5.2; 5.5; 3.3; 2.4 (2014/15–2019/20 series) and medium-term projections include 3.0; 4.5; 5.0; 5.0 (2020/21–2023/24). - Consumer prices (period average) (Table 1 / Table 2): 4.5; 2.9; 4.1; 3.9; 7.3; 13.0 (2014/15–2019/20) and medium-term: 8.3; 6.0; 5.0; 5.0 (2020/21–2023/24). - Current account balance (in percent of GDP) (Table 1 / Table 2): -1.0; -1.7; -4.1; -6.3; -4.6; -2.6 (2014/15–2019/20); medium-term projections: -4.1; -6.3; -4.6; -2.6; -2.0; -1.8; -1.7; -1.8 (2016/17–2023/24 varying rows). - Exports and imports (U.S. dollar percentage change, Table 1): Merchandise exports -3.9; -8.8; 0.1; 12.6; 0.2; 8.2; merchandise imports -1.0; 0.0; 17.9; 16.2; -4.2; -4.7 (2014/15–2019/20). - External public and publicly guaranteed debt (Table 1, in percent of GDP): 159.8; 193.3; 209.4; 218.3; 225.2; 234.0 (levels in billions / or percent labeling as in table header). ### Fiscal stance, debt, and public finances - Budget balance (including grants, percent of GDP) (Table 1): -5.3; -4.4; -5.8; -6.4; -6.8; -7.1 (2014/15–2019/20). - Primary balance (excluding grants, percent of GDP) (Table 1): -0.7; -0.3; -1.6; -2.2; -1.8; -0.6 (2014/15–2019/20). - General government debt incl. IMF obligations (percent of GDP) (Table 1): 63.3; 67.6; 67.0; 71.7; 74.9; 76.9 (2014/15–2019/20). - Revenue and grants (percent of GDP) (Table 4b): 15.5; 15.2; 15.0; 16.3; 17.9; 19.1; 19.6; 19.6 (2016/17–2023/24 projection series). - Expenditure (percent of GDP) (Table 4b): 21.3; 21.6; 21.7; 23.4; 23.1; 22.8; 22.2; 22.0 (2016/17–2023/24 projection series). - Overall balance (including grants, percent of GDP) (Table 4b): -5.8; -6.4; -6.8; -7.1; -5.2; -3.7; -2.6; -2.3 (2016/17–2023/24). ### Monetary and financial sector dynamics - Broad money (percent change, Table 5): 13.2; 13.7; 13.7; 9.7; 10.8; 12.1. - Net foreign assets, banking system (Table 5): 8; 131; 1,008; 602; -208; -1,223; -1,025 (billions of rupees series visible in table). - Net FX derivative position (Table 3a, in US$ billions): 6.7; 8.1; 7.6; 5.5; 4.0; 4.0; 4.0. - Banking system soundness (Table 6, selected indicators, Dec 2013–Mar 2019): - Regulatory capital to risk-weighted assets: 14.9; 17.1; 17.3; 16.2; 15.9; 15.6; 15.4; 15.8; 15.9; 15.9; 16.1; 16.2; 16.1. - Nonperforming loans (NPLs) to gross loans: 13.3; 12.3; 11.4; 10.1; 9.9; 9.3; 9.2; 8.4; 8.3; 7.9; 8.0; 8.0; 8.2. - Return on assets (after tax): 1.1; 1.5; 1.5; 1.3; 1.2; 1.1; 0.9; 0.9; 0.9; 0.8; 0.8; 0.8; 0.8. ### Program financing schedule and IMF access - Schedule of reviews and purchases (Table 9) indicates an approval and successive review purchases totaling 4,268 million SDR, corresponding to 210 percent of quota. - Table 7 (Indicators of Fund Credit) shows the EFF principal trajectory and related projected debt service to the Fund across years (SDR-denominated series presented in table). ### Program operational targets and conditionality highlights - Quantitative performance criteria and indicative targets (Table 12) include: - Floor on net international reserves of the SBP (millions of U.S. dollars): -11,853; -17,743; -18,478; -16,311; -12,844; -10,790 (end-period series for specified dates). - Ceiling on net domestic assets of the SBP (stock, billions of Pakistani rupees): 7,296; 8,852; 8,911; 8,800; 8,445; 8,727. - Ceiling on SBP's stock of net foreign currency swaps/forward position (negative, millions of U.S. dollars): 7,532; 8,055; 8,055; 8,055; 8,055; 7,555. - Ceiling on general government primary budget deficit (cumulative, excluding grants, billions of Pakistani rupees): 153; 702; 102; 145; 193; 276. - Ceiling on net government budgetary borrowing from the SBP (stock, billions of Pakistani rupees): 4,737; 7,756; 7,756; 7,756; 7,756; 7,187. - Cumulative floor on Targeted Cash Transfers Spending (BISP) (billions of Pakistani rupees): 30; (quarterly/cumulative schedule shows higher targets across the fiscal year including 100; 458; 6.4; 133.2; 180 — as presented in table format). - Floor on net tax revenues collected by the FBR (cumulative, billions of Pakistani rupees): 1,795; 4,153; 1,071; 2,367; 3,757; 5,503 (quarterly/cumulative schedule). - Zero new flow of SBP's credit to general government (continuous performance criterion). - Zero ceiling on accumulation of external public payment arrears by the general government (continuous performance criterion). - Zero new accumulation of external public payment arrears and zero new SBP credit flow are specified continuous criteria. ### Key vulnerability indicators - Current account (percent of GDP) (Table 8): -4.1; -6.3; -4.6; -2.6; -2.0; -1.8; -1.7; -1.8 (2016/17–2023/24 series). - Gross international reserves (GIR, billions of U.S. dollars) (Table 8): 16.1; 9.8; 6.8; 11.2; 14.5; 18.9; 24.9; 28.1. - Public sector gross financing requirement (Table 8): 29.4; 33.7; 36.0; 23.6; 22.7; 20.2; 18.5; 16.7 (percent of GDP). - General government and government guaranteed debt (incl. IMF) (percent of GDP) (Table 8): 70.0; 75.3; 79.1; 80.5; 78.0; 74.4; 70.8; 67.1 (2016/17–2023/24). _Italic: Source — Pakistani authorities; IMF staff estimates, projections, and associated tables and figures contained in the supplied content unit._ ### 1. Move to a flexible, market-determined exchange rate by (i) announcing that the SBP moves to a flexible market-determi ### 1pakea2019001 - 1. Move to a flexible, market-determined exchange rate by (i) announcing that the SBP moves to a flexible market-determi ### Immediate program actions and measures - Move to a flexible, market-determined exchange rate by: - (i) announcing that the SBP moves to a flexible market-determined exchange rate with a focus on price stability and interventions are limited to safeguarding financial stability and preventing disorderly market conditions (DMC) - (ii) tightening the monetary stance by 150 bps. - Reach formal public agreement between the federal and provincial governments on the fiscal targets consistent with the program. - Adopt by parliament the FY 2020 budget consistent with program targets. - Adopt a package of measures in the energy sector: - (i) Implement a quarterly automatic tariff adjustment in the electricity sector by about 10 percent to generate Rs 150 billion in additional revenues. - (ii) Notify by government the FY 2020 gas tariff adjustment as proposed by the regulator to become effective on July 1st, 2019. ### Structural benchmarks (selected) - Fiscal - 1. Commit to not grant further tax amnesties — Continuous. - 2. Issue licenses for the track-and-trace system for excises on cigarettes — end-September 2019. - Monetary/Financial - 3. Adopt measures to strengthen the effectiveness of the AML/CFT framework to support the country’s efforts to exit the Financial Action Task Force list of jurisdictions with serious deficiencies — end-October 2019. - 4. Submit to parliament, in consultation with IMF staff, amendments to the State Bank of Pakistan Act to address all recommendations of the new 2019 Safeguards Assessment Report and the 2016 Technical Assistance Report on Central Bank Law Reform (MEFP para. 14) — end-December 2019. - State-Owned Enterprises - 5. Notify the FY 2020 electricity tariff schedule as determined by the regulator — end-September 2019. - 6. Prepare a comprehensive circular debt reduction plan in collaboration with international partners (para. 19 MEFP) — end-September 2019. - 7. Submit to parliament amendments to the NEPRA Act to (i) ensure full automaticity of the quarterly tariff adjustments and (ii) eliminate the gap between the regular annual tariff determination and notification by the government — end-December 2019. - 8. Conduct and publish new audits by reputable international auditors of Pakistan International Airlines and Pakistan Steel Mills — end-December 2019. - 9. Conduct a triage of all SOEs, dividing them into companies to (i) maintain under state management; (ii) privatize; or (iii) liquidate — end-September 2020. - 10. Submit to Parliament a new State-Owned Enterprise law to improve governance and transparency in line with IMF recommendations — end-September 2020. - Social Protection and gender - 11. Finalize BISP's banking contracts and launch financial inclusion strategy for women — end-October 2019. - 12. Update the benefit structure of Waseela-e-Taleem (WeT) to narrow the educational gender gap — end-December 2019. - 13. Finalize the update of the BISP beneficiaries' database (National Socio-Economic Registry) — end-June 2020. ### Public debt sustainability: key findings and projections - Current assessment and risks - Debt is at the limit of sustainability and subject to high uncertainty, but strong fiscal adjustment in the program and firm commitments from major bilateral official lenders to maintain their exposure well beyond the program period mitigate risks, therefore debt is judged sustainable. - Public debt-to-GDP ratio remains high, with government and government-guaranteed debt having reached 75 percent of GDP in FY 2018. - Public debt will only be sustainable with full implementation of the adjustment program. - Historical and near-term levels - Government and government-guaranteed debt increased to 75.3 percent of GDP by the end of FY 2018, up from 70 percent of GDP in the previous fiscal year. - Public debt excluding guarantees reached about 72 percent of GDP. - Net public debt increased to around 67 percent of GDP. - Gross financing needs reached almost 34 percent of GDP, up from 29.4 percent a year ago. - Debt structure and maturities - As of March 2019, 57 percent of domestic public debt had a maturity of less than a year, up from 54 percent in June 2018. - The stock of short-term debt from the Central Bank more than doubled in last ten months, reaching 19 percent of GDP in March. - Three-month T-bills remained high at 8 percent of GDP. - The annual increase in short-term public debt has surpassed the upper risk-assessment benchmark. - Required fiscal adjustment and program scenario - Staff recommends an adjustment of 4.4 percent of GDP in primary fiscal balance over four years starting from FY 2020, together with an end to currency intervention. - Front-loaded and revenue-based fiscal consolidation measures of 4.8 percent of GDP are needed to achieve the desired level of adjustment. - Under the program scenario: - Public debt is projected to reach 80.5 percent of GDP in 2020, partly reflecting currency depreciation. - Public debt is projected to fall to 67 percent of GDP by FY 2024. - Public debt excluding guarantees will come down to 64 percent of GDP. - Gross financing needs are expected to decline to 23 percent of GDP in FY 2020 and further to 16.7 percent by FY 2024, reflecting the reprofiling of short-term domestic debt held by the Central Bank. - The re-profiling of central bank holdings of government debt will help render gross financing needs more manageable. - Stress tests and alternative scenarios - Under the constant primary balance scenario (assuming primary balance remains at the level of 2018), and under the scenario based on historical performance (assuming real GDP growth, the primary balance and real interest rates at the historical average of the past ten years), the debt ratio would reach 83 percent of GDP by 2024, and gross financing needs would remain at 26 percent of GDP. - The debt ratio exceeds 70 percent of GDP under all stress-test scenarios. - Under interest rate and exchange rate shock scenarios, debt reaches 73 and 72 percent of GDP in 2024, respectively. - Contingent liabilities from loss-making SOEs, to the extent not covered by government guarantees, represent additional fiscal risks (about 2 percent of GDP). - Other considerations - The forecast track record for real GDP growth has been good but forecast errors for primary balance and inflation have been large in the past and often on the optimistic side. - Since the programmed fiscal consolidation is revenue-based, the fiscal multiplier is relatively low and the impact on growth is expected to be moderate. - The three-year adjustment in the cyclically-adjusted primary balance (CAPB) under the program scenario falls just in the top quartile; the three-year average CAPB level sits right around the median in a sample covering all countries. ### External debt sustainability: key findings and projections - Current status and projected path - External debt risks remain high, but under the EFF, external debt is estimated to remain sustainable given a sustained fall in external debt and strong commitments from bilateral official lenders. - External debt is projected to rise to around 37 percent of GDP at end-FY 2019 mainly driven by sizable external borrowing, a large current account deficit and currency depreciation. - Under the EFF program, external debt is projected to steadily decline after peaking in FY 2021, returning to a more sustainable path. - Gross external financing relative to GDP needs are projected to steadily fall from FY 2021, declining to around 8 percent over the medium-term. - Role of bilateral official creditors - Given firm commitments from major bilateral official lenders to maintain their exposure during the program period, underlying gross external financing needs would be lower by 1.3 percentage points of GDP on average per year during the program and beyond the program period. - Drivers of moderation in external debt - Narrower current account deficit. - Non-debt creating capital inflows. - Recovery in economic growth. *PAKISTAN — INTERNATIONAL MONETARY FUND (Annex I and Structural Benchmarks excerpt).* ### 8. The projected external debt path is subject to heightened risks. Bound and stress tests ### 8. The projected external debt path is subject to heightened risks. Bound and stress tests ### Elevated external debt vulnerability and stress-test findings - The external debt-to-GDP ratio "would be adversely affected by shocks." - Under a real depreciation shock scenario, "the external debt ratio would reach around 60 percent." - Stress tests show the external debt ratio is "sensitive mostly to current account and exchange rate shocks." - The heightened risk "highlights the need for strong macroeconomic policy adjustments and structural reforms for external debt sustainability." - "Financing assurances as discussed in the main text are critical." ### Stress-test design, thresholds, and benchmarks (as presented) - Gross financing needs benchmark used: 15 percent (cells highlighted green/yellow/red depending on exceedance vs. baseline and shock). - Shocks and parameters referenced: "200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt." - EMBIG used as market-perception indicator: "EMBIG, an average over the last 3 months, 20-Feb-19 through 21-May-19." - External financing requirement defined as: "the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period." ### Key projected public debt and financing indicators (Program scenario, selected items; "In percent of GDP" unless otherwise noted) - Nominal gross public debt (2017–2024): 63.3, 70.0, 75.3, 79.1, 80.5, 78.0, 74.4, 70.8, 67.1. - Public gross financing needs (2017–2024): 27, 29.4, 33.7, 36.0, 23.6, 22.7, 20.2, 18.5, 16.7. - Sovereign spreads: EMBIG (bp) = 408. 5Y CDS (bp) = 376. - Real GDP growth (2017–2024, in percent): 3.5, 5.2, 5.5, 3.3, 2.4, 3.0, 4.5, 5.0, 5.0. - Inflation (GDP deflator, in percent, 2017–2024): 9.9, 4.3, 2.8, 7.8, 12.6, 9.8, 6.9, 5.2, 5.1. - Effective interest rate (in percent): 8.6, 6.9, 7.0, 6.8, 9.2, 9.2, 8.7, 8.3, 8.5. - Change in gross public sector debt (2017–2024, cumulative): 1.9, -0.1, 5.3, 3.8, 2.0, -2.5, -3.6, -3.6, -3.7 (cumulative -7.5). - Identified debt-creating flows (2017–2024, cumulative): 1.3, -0.6, 3.7, -1.7, -3.8, -4.0, -4.3, -4.3, -4.0 (cumulative -22.1). - Primary deficit (2017–2024): 1.8, 1.5, 2.1, 1.6, 0.4, -1.0, -2.1, -2.7, -2.7 (cumulative -6.6). - Primary (noninterest) revenue (2017–2024, cumulative): 14.1, 15.5, 15.2, 15.0, 16.3, 17.9, 19.1, 19.6, 19.6 (cumulative 107.6). - Primary (noninterest) expenditure (2017–2024, cumulative): 16.0, 17.1, 17.3, 16.6, 16.7, 16.9, 17.0, 16.9, 16.9 (cumulative 101.0). ### External debt sustainability projections (Program scenario, selected items) - Baseline external debt-to-GDP (2014–2024, selected years): 26.8 (2014), 24.1 (2015), 26.5 (2016), 27.4 (2017), 30.3 (2018), 36.7 (2019), 43.4 (2020), 43.5 (2021), 42.2 (2022), 41.2 (2023), 39.3 (2024). - Change in external debt (2014–2024, selected): 0.4, -2.7, 2.5, 0.9, 2.9, 6.3, 6.7, 0.1, -1.3, -1.0, -1.9. - Current account deficit excluding interest payments (2014–2024): 0.6, 0.3, 1.0, 3.3, 5.4, 3.6, 1.2, 0.6, 0.3, 0.2, 0.3. - Exports (in percent of GDP, 2014–2024): 12.4, 11.1, 9.8, 9.0, 9.5, 10.6, 12.5, 13.0, 13.0, 13.1, 13.1. - Imports (in percent of GDP, 2014–2024): 20.3, 18.5, 18.0, 19.2, 21.6, 22.1, 22.9, 22.6, 22.1, 21.8, 21.5. - External debt-to-exports ratio (in percent, 2014–2024): 215.2, 217.4, 269.8, 303.2, 317.6, 344.8, 345.8, 333.6, 325.0, 315.4, 299.9. - Gross external financing need (in billions of US dollars, 2014–2024): 10.8, 9.1, 11.4, 21.7, 28.8, 25.5, 23.2, 25.6, 26.7, 27.3, 27.5. - Gross external financing need (in percent of GDP, selected): 4.4, 3.4, 4.1, 7.1, 9.2, 10-Year10-Year9.0, 8.9, 9.3, 9.0, 8.6, 8.1 (tabulated in source). ### Bound-test outcomes (selected scenarios and observations) - Interest rate shock and current-account (CA) shock scenarios are presented; shaded charts show program scenario vs. historical and various shock paths. - A one-time real depreciation of 30 percent is used in one real depreciation shock scenario (noted to push external debt higher, consistent with the external debt ratio reaching around 60 percent in a real depreciation shock). - Combined shocks, growth shocks, and non-interest current account shocks are illustrated to materially increase gross nominal public debt and public gross financing needs in stress scenarios. ### Assessment of baseline realism, forecast track record, and fiscal adjustment - Forecast track record charts for Pakistan (real GDP growth, primary balance, inflation) show distributions of forecast errors and percentile ranks; several entries labeled "n.a." for Pakistan median forecast error data. - Boom-bust analysis and "Assessing the Realism of Projected Fiscal Adjustment" show Pakistan's 3-year adjustment in cyclically-adjusted primary balance (CAPB) and 3-year average level of CAPB with percentile ranks: "3-year CAPB adjustment has a percentile rank of 13%"; "3-year average CAPB level has a percentile rank of 48%." ### Policy recommendations and program measures (from Letter of Intent and MEFP highlights) - Immediate and medium-term policy pillars emphasized: - "Strong macroeconomic policy adjustments and structural reforms" to restore external debt sustainability. - "Financing assurances" to support the adjustment and market confidence. - Specific measures already taken or planned: - Adoption of the FY 2020 budget "based on significant revenue gains to accelerate fiscal consolidation." - Adoption of a "flexible market-determined exchange rate" with SBP intervention limited to preventing disorderly conditions. - "Further tightened monetary policy to shore up confidence and control inflation." - "Increased gas and power tariffs to stop the growth of quasi-fiscal deficits." - Expanded social support, including establishment of "Ehsaas as our main poverty reduction and safety nets program." - A comprehensive economic recovery program aiming to "increase tax revenues by 4–5 percent of GDP to reduce the large budget deficit and ensure debt sustainability while generating the resources needed to expand productive government spending in health, education, and social support." - Financing request: - Request for a 39-month extended arrangement under the IMF’s Extended Fund Facility (EFF) "in the amount equivalent to SDR 4,268 million (equivalent to 210 percent of Pakistan’s quota, about US$6 billion at current exchange rates)." - Program intended to catalyze additional financial support from development and bilateral partners and private sources; noted "significant financial commitments already announced by our main official and bilateral donors." _Italic: Source: IMF staff; content derived from "Pakistan: Public DSA Risk Assessment" and associated Program Scenario and Letter of Intent (as presented in the supplied content)._ ### 1. Pakistan's economy faces a challenging macroeconomic situation despite the ### 1. Pakistan's economy faces a challenging macroeconomic situation despite the ### Macroeconomic diagnosis and objectives - Sustained weakening in Pakistan's economic fundamentals has led to a growth slow-down and unsustainable balance of payments and fiscal deficit. - Causes identified: limited implementation of structural reforms, insufficient domestic revenue mobilization, inefficiencies and losses in State Owned Enterprises (SOEs). - Program objective: coordinated decisive measures to stabilize the economy and lay foundations for robust and balanced growth; sequence an ambitious economic program addressing immediate stabilization and structural reforms. ### Fiscal policy — overall strategy and targets - Key pillar: generate revenue resources to support human capital development while ensuring debt sustainability. - Target to increase tax revenue by 4–5 percent of GDP. - Target a cumulative fiscal primary adjustment of 4½ percent of GDP by FY 2023. - FY 2020 budget (prior action) targets a primary fiscal adjustment of 1.2 percent of GDP through high-quality revenue measures. - Federal government wage increases set to 7.5 percent to maintain a tight income policy. - Budget incorporates government-provided implicit subsidies amounting to PRs 35 billion. - Aim to increase spending in Benazir Income Support Program (BISP) by 0.4 percent of GDP on an annual basis initially. ### Fiscal consolidation approach beyond FY 2020 - Adjustment strategy primarily revenue-based to achieve a 4–5 percentage points of GDP increase in tax revenues by the end of the program. - Emphasis on maintaining low tax rates with a broad tax base; some tax rate increases may be unavoidable. - Measures include tax policy reform, tax administration reform, modernizing public finance management, limiting SRO use for tax concessions, enforcing fiscal discipline, strengthening PPP framework, improving cash and debt management. ### Tax policy measures (selected list) - Tax policy reform measures: - Harmonize and coordinate inter-provincial GST and eliminate all, but for basic foods and medicines, GST exemptions and preferential rates. - Transform the GST into a broad-based VAT overtime. - Strengthen taxation on agricultural turnover or income by provinces. - Raise the upper-end of the PIT structure; eliminate PIT tax credits and deductions for higher income slabs. - Ensure equivalent taxation of all sources of income; eliminate distortionary withholding taxes; real estate taxation. - Tax administration reform measures: - Create a new semi-independent national tax authority to collect main revenue sources. - Reverse legal provisions limiting tax audits. - Implement a full, risk-based audit framework. - Increase legal penalties for tax non-compliance. - Issue licenses for the track-and-trace system for excises on cigarettes by end-September 2019 (structural benchmark) and implement the system by end-March 2020. - Commit to not granting further tax amnesties (continuous structural benchmark). ### Estimated revenue yields from FY 2020 tax measures (table of key figures as presented) - Sales Tax: 222,776 (Millions) — 0.5 (Percent of GDP) - Measures include petroleum products levy increase to 15 PRs (and set as a floor) and GST rate at 17 percent (set as a floor); cancel SRO # 480 and bring steel sector, edible oil and medium to large retailers to 17 percent GST regime; extend retail price taxation Third Schedule; cancel SRO#1125 and bring exportable sectors to standard GST regime at 17 percent rate with immediate cash refund for exported goods only; remove certain items from exemptions (packaged food), and apply GST tax at 17 percent; increase GST on sugar from 8 percent to 17 percent; redefine the exemption available to Cottage Industry. - Federal Excise Duty (FED): 90,114 (Millions) — 0.2 (Percent of GDP) - Increase FED on cigarettes and remove the third tier; introduce FED on cigarettes coming from non tariff areas; increase/introduce FED on sugary drinks to 13 percent; increase FED on cement from 1.5 Rs per kg to 2 Rs. - Income Tax: 324,982 (Millions) — 0.7 (Percent of GDP) - PIT: lower the threshold to PRs 400,00 and 600,000 for non-salaried and salaried individuals respectively, increase tax rates; increase rate of minimum tax u/s 113 from 1.25 to 1.5; extend higher withholding tax rates for non-filers; resume Telecom withholding rate; change income tax regime of Services sector (banks and insurance companies); abolish BMR credit incentives; increase holding period liable to tax for capital gain tax on immovable properties and securities; taxation of gifts from unrelated person at standard PIT rate; aligning value of immovable properties with market rates; reduction of number of WHTs & simplification of procedures; amortization of expenditure in BOT projects over useful life; long term lease hold right may be considered as purchase of property; taxation of formal agricultural sector within the scope of federal government; rationalization of tax credit available to Non-profit organizations (NPOs). - Customs: 60,000 (Millions) — 0.1 (Percent of GDP) - Increase in Additional Customs Duty Rate on finished and luxury goods; withdrawal of exemption on import of LNG and subjected to 5 percent duty. - Revenue administration measure: 35,600 (Millions) — 0.1 (Percent of GDP) - Implement Track and Trace system for Tobacco Products; Automated monitoring of GST and income at retail (point of sale); changes in ADCIR mechanism; separation of audit & adjudication functions; making procedure for prosecution easier; enabling and strengthening FBR field formations; cleansing of databases and integration to enable effective data mining; enabling efficient enforcement through investment in FBR infrastructure and process reengineering; taxpayer education and facilitation. - TOTAL: 733,471 (Millions) — 1.7 (Percent of GDP) ### Public finance management, SROs, and fiscal risk - Adopted an organic budget law to minimize variance in budget authorizations, require ex-post parliamentary approval, restrict virements, expand annual budget statements content, define accounting standards, and provide legal basis for cash management system and establishment of a treasury single account (TSA). - Eliminated legal authorization for executive to grant tax exemptions/concessions through SROs without prior National Assembly approval; refrain from issuing any SRO reducing the GST rate below 17 percent on petroleum products. - Strengthen enforcement mechanism of the Fiscal Responsibility and Debt Limitation Act (FRDLA); expand MoF capacity for macro-fiscal work. - Establish a fiscal risk unit in the MoF to identify and monitor fiscal risks from SOEs, PPPs, IPPs and development projects, coordinating with the PPP Authority. ### PPPs, cash and debt management - Commit to strengthen PPP legal framework; conduct legal analysis to determine need for PPP law amendments or secondary legislation; ensure Pakistan Infrastructure Bank (proposed) created in line with best international governance standards. - Create a Treasury office for commitment controls and cash management; strengthen debt management office; centralize issuance and management of public debt; develop a new Medium-Term Debt Strategy. - Lengthen maturity profile of public debt and introduce new market instruments to widen investor base; transparently account for all borrowing and contingent liabilities; ensure collateralized public external debt or external arrears properly accounted. ### Federal-provincial fiscal relations - Fiscal consolidation requires large provincial surpluses; signed a formal written agreement with provinces on the fiscal strategy and required provincial surpluses, including revenue and fiscal surplus targets by province for FY 2020 and implications in case of missed targets (prior action). - Progress to be assessed in quarterly meetings of the Fiscal Coordination Committee (FCC); aim to strengthen FCC's legal basis to make decisions binding. - Measures to rebalance inter-governmental relationships (in context of ongoing NFC): - Pass additional spending responsibilities to provinces, including higher education, health, social protection, agricultural subsidies, and regional public infrastructure investment. - Create a jointly funded contingency fund for economic shocks and natural disasters. - Provinces to increase tax-collection efforts in sales tax on services, property tax, and agricultural income tax, and harmonize tax systems to eliminate fragmentation. - Reduce scope of the divisible pool and reform revenue sharing formula to improve inter-provincial equity. ### Poverty reduction and social protection (Ehsaas and BISP commitments) - Establish Ehsaas as main poverty reduction and safety nets program; use BISP to implement many initiatives. - Immediate commitments: - Provide a one-off disbursement to BISP recipients: government directive by July 15, 2019 to provide a one-off disbursement by end-August 2019 in the amount of PRs 1,000 to existing BISP beneficiaries. - Finalize new banking contracts for stipend disbursements and launch financial inclusion program for women by end-October 2019 (structural benchmark); “one woman one account” initiative to provide saving accounts to women under BISP. - Update Waseela-e-Taleem (WeT) by end-December 2019 (structural benchmark) to provide a girl bonus of PRs 250 quarterly to narrow the educational gender gap. - Update National Socio-Economic Registry (NSER): 35 percent of estimated household caseload surveyed, quality assured and validated with NADRA database by end-December 2019; finalize NSER update by end-June 2020 (structural benchmark). Aim to expand BISP cash transfer coverage under a progressive design. - Permanently increase BISP cash transfers from current PRs 5,000 at least with the rate of inflation for eligible families; maintain real value via fiscally sustainable indexation mechanism. - Launch BISP’s graduation program and take steps to introduce a CCT program on nutrition. ### Monetary and exchange rate policies - Monetary policy focus: gradually reduce and keep inflation low and stable; commitments include: - Maintain a flexible market-determined exchange rate. - Further strengthen State Bank of Pakistan's (SBP) monetary policy and operational framework. - Improve communication with public and markets to guide decisions and inflation expectations. - Prior action: moved to a flexible market-determined exchange rate and allowed the exchange rate to be market determined. - SBP intervention limited to preventing disorderly market conditions and possible exchange rate overshooting but not suppressing a trend; interventions will not be sterilized and monetary stance will be tightened if intervention is needed. - Gradually scale back SBP’s short swap/forward foreign exchange position to US$ 4 billion by the end of the program. ### Monetary stance and central bank financing - Increased policy rate by 150 bps (prior action). - Policy rates to be kept positive in real terms consistent with inflation objective and monetary aggregate targets; will tighten proactively if inflationary pressures persist. - End central bank financing of budget deficits: eliminate direct financing of the budget by the SBP (continuous performance criterion), including via purchases of government papers in the primary market. - Target reduction of SBP stock of net government budgetary borrowing over time (performance criterion). - Launch liability management operation of the stock of government credit held by the SBP to transform it into tradeable instruments at maturities of one, three, five, and ten years and at interest rates close to market levels agreed with the SBP. ### Strengthening SBP institutional framework - Amendments to the State Bank of Pakistan Act to strengthen autonomy, governance, and mandate: submit amendments by end-December 2019 (structural benchmark). - Amendments to address 2019 Safeguards Assessment recommendations including: - Ensure full operational independence in pursuit of price stability as SBP's primary objective. - Lengthen the governor's tenure and delink it from the electoral cycle. - Improve SBP governance: clear delineation between management and oversight, establishment of Executive Board, protect personal autonomy of SBP Board and MPC members. - Enhance SBP's financial autonomy and accountability by strengthening profit distribution rules and specifying adequate recapitalization requirement. - Prohibit any form of direct credit to government. *Source: 1pakea2019001 - Pakistan IMF program text (provided content).* ### 15. We will phase out the administrative measures imposed to support the balance of ### 15. We will phase out the administrative measures imposed to support the balance of payments ### Balance of payments measures - Administrative measures to be phased out include regulatory duties on imported intermediate, consumer, and luxury goods, import restrictions for balance of payments purposes, and multiple currency practices (MCP). - MCPs in the form of: (i) a requirement to fully pre-fund letters of credit, imposed in early 2017; and (ii) restrictions on advance payment for imports against letters of credit, imposed in July 2018—are subject to approval under Article VIII of the IMF's Articles of Agreement. - Commitment: phase these measures out as the balance of payments stabilizes. - Commitment: during the program period, will not introduce or tighten exchange restrictions, MCPs, or import restrictions for balance of payments purposes (continuous performance criterion). ### Strengthening financial sector resilience - Objective: closely monitor potential adverse impact of adjustment policies on NPLs and individual banks' capitalization; ensure all banks are well capitalized. - SBP action: asked all small undercapitalized banks to submit by end-September 2019 plans to ensure compliance with capital requirements by end-June 2020, including via mergers or sale to new private investors. - Consequence: failure to implement plans will result in SBP intervention and resolution under relevant provisions of law. - Additional step: initiated the liquidation of a small undercapitalized publicly-owned bank. ### AML/CFT framework and FATF action plan - Urgent strengthening of AML/CFT framework to support exit from FATF list of jurisdictions with serious deficiencies (Pakistan placed in FATF list in June 2018). - Action plan components to be implemented (end-October structural benchmark): - (a) properly identify and assess terrorist financing (TF) risks posed by entities as given in the FATF action plan; - (b) complete the sectoral risk assessment on cash couriers; - (c) implement targeted financial sanctions without delay (i.e., asset freezing and ongoing prohibitions to provide funds and financial services); - (d) apply a risk-based supervision of financial institutions (e.g., on-site inspection schedules and off-site assessments ) taking into account TF risks; - (e) demonstrate enforcement against violations of TF sanctions; - (f) improve inter-agency coordination (including between federal and provincial authorities) in combating TF risks, including TF investigations and prosecutions. - Institutional arrangements: National Executive Committee (NEC) monitoring and coordinating FATF action plan implementation. - Timeline: Asia Pacific Group on Money Laundering expected to discuss Pakistan's mutual evaluation report in August 2019. - Technical assistance: seeking help from providers, including the IMF. ### Energy Sector Policies — overview - Launched comprehensive energy sector reform to address inefficiencies hindering production and services and to support Pakistan's growth potential. - Power sector issues: sizeable losses, insufficient collections, weak governance, regulatory deficiencies, circular debt accumulation. - Circular debt and liabilities: - Around PRs 350 billion were accumulated in FY 2019 (flow). - The stock of circular debt stands now at PRs 762 billion. - Power sector liabilities of PRs 807 billion parked in PHPL through March 2019. - Established a task force on energy to advise the Prime Minister on measures and key decisions for reform. ### Energy Sector Policies — power sector actions - a. Tariff adjustments: - Implemented a quarterly automatic tariff adjustment in the electricity sector by about 10 percent to generate PRs 150 billion in additional revenues to reduce circular debt accumulated over the first half of FY 2019 (prior action). - Remaining quarterly adjustment costs will be subsequently passed by end-August 2019. - Notify the FY 2020 electricity tariff schedule as determined by the regulator by end-September, 2019 (structural benchmark). - b. Circular debt reduction strategy: - Prepare by end-September 2019 a comprehensive circular debt reduction plan in collaboration with international partners (structural benchmark) with quarterly targets for losses, collection, and accumulation of arrears (flow) by DISCO. - Plan elements include: - (i) monitoring and incentive framework for strengthening sector performance, including bill collection and distribution losses; - (ii) improving distribution companies' governance; - (iii) reducing or eliminating implicit government subsidies to particular economic sectors; - (iv) assessing investment needs and designing an investment plan; - (v) addressing the stock of circular debt to service the interest on accumulated power sector debt. - c. Timely notifications for end-consumer tariffs: - Over PRs 200 billion of new circular debt were accumulated in the first half of FY 2019 from delays in updating tariffs. - Introduced automaticity of quarterly tariff adjustments; will submit to parliament by end-December 2019 changes to the NEPRA Act to (i) ensure full automaticity of the quarterly tariff adjustments and (ii) eliminate the gap between the regular annual tariff determination and notification by the government (structural benchmark). ### Energy Sector Policies — gas sector actions - a. Adoption of the FY 2020 gas tariff adjustment (prior action). New tariffs proposed by the regulator became effective as of July 1, 2019. - b. Reducing unaccounted for gas losses (UFG): - Current UFG level of 13 percent due to commercial and technical losses is significantly above allowed benchmarks. - Two gas companies preparing UFG reduction plans for government approval by end-September 2019. - Plans introduce 30 Key Monitoring Indicators, including on theft control and compliance with industry standards. - Ministry of Energy to produce and publish quarterly monitoring reports documenting implementation and assessing compliance. - c. Bringing private sector investment: - Plans include: (i) integrate transmission under one National gas transmission company and create multiple gas DISCOs through unbundling the two companies, aiming to complete by FY 2020; (ii) complete the review of the petroleum policy to be approved by the Council of Common Interest to facilitate exploration and establish compliance-based regulations; (iii) operationalize third party access agreement through issuance of a network code enabling consumers to directly purchase LNG from the terminal. - d. Timely notifications for gas tariffs: - Propose changes to the OGRA Act for Council of Common Interest (CCI) approval by end-December 2019 to eliminate the gap between regular semi-annual tariff determination and notification. - After CCI approval, a bill will be introduced in parliament for adoption. ### Protecting vulnerable households - Continue program to insulate from annual tariff increases households consuming 300 units or below—close to 70 percent of all household consumers—through tariff differential subsidies. - Budgeted a new subsidy, and only for this year, equivalent to over 0.1 percent of GDP aimed at insulating those same consumers from the impact of the recently introduced quarterly tariff adjustment. ### Structural policies — SOE reform and governance - Objective: improve SOE governance, transparency, efficiency to reduce fiscal risks and boost investment and growth; separate ownership and regulatory functions of the state. - a. Privatization actions: - Initial privatization targets: two (02) newly commissioned RLNG power plants at Balloki and Haveli Bahadur; two (02) specialized banks namely SME Bank and First Women Bank (FWBL); two (02) real estate assets namely Jinnah Convention Centre-Islamabad and Services Intl' Hotel-Lahore; offering of Government of Pakistan (GoP) residual 18.39 percent equity in Mari Petroleum. - Financial Advisor (FA) for the privatization of two RLNG plants has been appointed; intend to approve the Transaction Structure latest by September 2019 after the FA completes due diligence. - Appointment of FA(s) for privatization of SME Bank and Services International Hotel completed in June 2019. - Will identify additional companies for divestment and possibility to divest valuable non-core assets of large SOEs. - b. Strengthening monitoring of SOEs: - Prepare a comprehensive report on state-owned enterprises comprising: - a) overview of the sector during the year, including financial performance; - b) full list of companies owned by the government, broken down by industry, policy objectives, and type of ownership; - c) overview of how government has exercised ownership policy, including board appointments and governance arrangements; - d) impact of sector on government finances and the economy; - e) information on individual companies including abridged financial statements, list of board members and auditors, and amount of subsidies received from the budget, if any. - From this report, derive a triage of all SOEs into companies to (i) maintain under state management; (ii) privatize; or (iii) liquidate (end-September 2020 structural benchmark). - c. Increasing SOE transparency: - Pakistan International Airlines and Pakistan Steel Mills to conduct new audits by reputable international auditors based on financials until end-2018; audits to be completed and published by end-December 2019 (structural benchmark). - Auditor General of Pakistan to complete and publish by March 2020 a special audit of Pakistan Railroads based on FY 2019 financials. - d. Enhancing SOE legal framework: - Prepare a draft of a new State-Owned Enterprise Law by end-December 2019 with IMF technical assistance. - Law to be laid before parliament by end-September 2020 (structural benchmark). - Key elements to include: (i) clear definition of goals and rationale for State ownership; (ii) clear definitions of roles and responsibilities of key institutions; (iii) establishment of performance agreement procedures and responsibilities. - e. Establishing a holding company: - Holding company established to manage SOEs to increase independence and improve performance. - Consulting with IMF staff to ensure adequate governance and safeguards. ### Structural policies — improving business environment and governance - Business environment reforms to encourage private investment and job creation include: - a. Improve trading across borders by reducing custom-related processing time and reducing hours to prepare import/export documents through expansion of electronic document exchanges; review tariff policy to facilitate trade. - b. Simplify procedures to start a business by expanding e-registration and reducing required documentation. - c. Conduct systematic and transparent review of existing regulations to remove onerous regulations; assess regulations against objective criteria of good regulation and eliminate or simplify as appropriate. - Governance and anti-corruption measures: - Strengthen effectiveness of anticorruption institutions: national follow-up committee established to implement UNCAC 2017 recommendations; legislative amendments for criminal liability for legal persons and protection of whistleblowers. - Form task force to review institutional framework of anticorruption institutions to enhance independence and effectiveness. - Support provinces to strengthen Anticorruption Establishments via legal reform and sufficient financial resources. - Study establishment of a dedicated AML unit in the Federal Investigation Agency (FIA) for ML investigations and prosecutions. - Upgrade capacities of law enforcement agencies for financial investigations. - Pursue agreements on international cooperation and information exchange to trace and recover assets abroad. - Created an Asset Recovery Unit at the Prime Minister's Office, cooperating with the FBR's International Taxation Unit to identify assets abroad owned by Pakistani residents in implementation of the OECD Convention on Mutual Administrative Assistance in Tax Matters. - Enhance AML tools to support anti-corruption: - Ensure banks and reporting institutions improve capacities to identify politically exposed persons and apply enhanced due diligence. - Conduct outreach to improve compliance with suspicious transaction reporting. - Provide sufficient resources to empower the Financial Monitoring Unit to improve dissemination of financial intelligence for corruption investigations. - Ensure asset declarations of high-level public officials are comprehensive, filed with a central federal agency, electronically searchable, and appropriately verified. - Register prize bonds and other bearer instruments to rein in their use for potential illegal activities/tax avoidance. ### Financing and program monitoring - Financing needs for the next 39 months (the program period) projected to amount to $38.6 billion given the policies outlined. - Financing commitments to close the gap for the first 12 months of the arrangement: - China $6.3 billion - Saudi Arabia $6.2 billion - UAE $1 billion - the World Bank $1.3 billion - the Asian Development Bank $1.6 billion - the Islamic Development Bank $1.1 billion - Agreements reached with main bilateral partners to maintain their exposure throughout the program period; further work on modalities to ensure new financing consistent with program debt sustainability objectives. - Program monitoring: - Program subject to quarterly reviews, quarterly performance criteria, and continuous performance criteria as set out in the TMU. - Completion of the first two reviews scheduled for December 2019 and March 2020 will require observance of quantitative performance criteria for end-September 2019 and end-December 2019, respectively, and continuous performance criteria as specified in Table 1. - All quantitative performance criteria and indicative targets are listed in Table 1; prior actions and structural benchmarks are set out in Table 2. - TMU attached to describe definitions of quantitative PCs, consultation, and data provision requirements. *Source: 1pakea2019001 - 15. We will phase out the administrative measures imposed to support the balance of payments.* ### 28. Safeguards and budget support. We understand that, in line with Fund's policy, a ### 28. Safeguards and budget support ### Safeguards and use of IMF financing - A safeguards assessment is expected to be completed by the time of the first program review, in line with Fund policy. - IMF financing is requested for budget support and will be maintained in government accounts at the State Bank of Pakistan (SBP). - The SBP and the Ministry of Finance have signed a memorandum of understanding clarifying responsibilities related to this agreement. - Prize bonds: outstanding stock about 20 percent of currency in circulation. ### Quantitative performance criteria and indicative targets (summary of Table 1) - Floor on net international reserves (NIR) of the SBP (millions of U.S. dollars): -11,853 -17,743 -18,478 -16,311 -12,844 -10,790 - Ceiling on net domestic assets (NDA) of the SBP (stock, billions of Pakistani rupees): 7,296 8,852 8,911 8,800 8,445 8,727 - Ceiling on SBP's stock of net foreign currency swaps/forward position (negative, millions of U.S. dollars): 7,532 8,055 8,055 8,055 8,055 7,555 - Ceiling on general government primary budget deficit (cumulative, excluding grants, billions of Pakistani rupees): 2/ 153 702 102 145 193 276 - Ceiling on net government budgetary borrowing from the SBP (stock, billions of Pakistani rupees): 4,737 7,756 7,756 7,756 7,756 7,187 - Ceiling on the amount of government guarantees (stock, billions of Pakistani rupees): 1,313 1,611 1,611 1,611 1,611 1,611 - Zero new flow of SBP's credit to general government: 0 0 0 0 - Zero ceiling on accumulation of external public payment arrears by the general government: 0 0 0 0 - Cumulative floor on Targeted Cash Transfers Spending (BISP) (billions of Pakistani rupees): 30 100 458 6.4 133.2 180 - Cumulative floor on general government budgetary health and education spending (billions of Pakistani rupees): 349.2 698.4 1,221 1,744 - Floor on net tax revenues collected by the FBR (cumulative, billions of Pakistani rupees): 1,795 4,153 1,071 2,367 3,757 5,503 - Ceiling on net accumulation of tax refund arrears (billions of Pakistani rupees): 3/ 90 90 -75 -57.5 -57.5 -57.5 - Ceiling on power sector payment arrears (cumulative flow, billions of Pakistani rupees): 3/ 1,415 1,686 233 962 81 (Sources: Pakistani authorities; and Fund staff estimates. Fiscal year runs from July 1 to June 30. All definitions as per the attached Technical Memorandum of Understanding. 2/ Cumulative from the start of each fiscal year. "-" means surplus. 3/ Data for December 2018/June 2019 is an actual/projected stock as of the end of the month. Quarterly targets are cumulative flows from end-June 2019.) ### Structural conditionality (summary of Table 2) - Prior Actions for Program Approval: - Move to a flexible, market-determined exchange rate by: (i) announcing SBP moves to a flexible market-determined exchange rate with a focus on price stability and interventions limited to safeguarding financial stability and preventing disorderly market conditions (DMC); and (ii) tightening the monetary stance by 150 bps. - Reach formal public agreement between the federal and provincial governments on the fiscal targets consistent with the program. - Adopt by parliament the FY 2020 budget consistent with program targets. - Adopt a package of measures in the energy sector: (i) Implement a quarterly automatic tariff adjustment in the electricity sector by about 10 percent to generate Rs 150 billion in additional revenues; and (ii) notify by government the FY 2020 gas tariff adjustment as proposed by the regulator to become effective on July 1st, 2019. - Structural Benchmarks (selected, with dates): - Commit to not grant further tax amnesties — Continuous - Issue licenses for the track-and-trace system for excises on cigarettes — end-September 2019 - Adopt measures to strengthen the effectiveness of the AML/CFT framework — end-October 2019 - Submit to parliament, in consultation with IMF staff, amendments to the State Bank of Pakistan Act to address all recommendations of the new 2019 Safeguards Assessment Report and the 2016 Technical Assistance Report on Central Bank Law Reform — end-December 2019 - Notify the FY 2020 electricity tariff schedule as determined by the regulator — end-September 2019 - Prepare a comprehensive circular debt reduction plan in collaboration with international partners — end-September 2019 - Submit to parliament amendments to the NEPRA Act to (i) ensure full automaticity of the quarterly tariff adjustments and (ii) eliminate the gap between the regular annual tariff determination and notification by the government — end-December 2019 - Conduct and publish new audits by reputable international auditors of Pakistan International Airlines and Pakistan Steel Mills — end-December 2019 - Conduct a triage of all SOEs, dividing them into companies to (i) maintain under state management; (ii) privatize; or (iii) liquidate — end-September 2020 - Submit to Parliament a new State-Owned Enterprise law to improve governance and transparency in line with IMF recommendations — end-September 2020 - Finalize BISP's banking contracts and launch financial inclusion strategy for women — end-October 2019 - Update the benefit structure of Waseela-e-Taleem (WeT) to narrow the educational gender gap — end-December 2019 - Finalize the update of the BISP beneficiaries' database (National Socio-Economic Registry) — end-June 2020 ### Technical Memorandum of Understanding — key definitions and parameters - Program exchange rate: the Pakistani rupee to the U.S. dollar is set at 141.3172 rupee per one U.S. dollar. - On April 16, 2019, the NIR of SBP are estimated at negative US$15,557 million. - Projected stock of NIR at end-June 2019: negative US$17,743 million. - At end-April 2019, the SBP's aggregate net derivative position was negative US$8,055 million. - Table A — Use by SBP of foreign assets related to commercial consortium loan (cumulative flows from July 1, 2019; millions of Renminbi): End-Sep 2019: 0; End-Dec 2019: 0; End-Mar 2020: 2,000; End-Jun 2020: 4,000. - Reserve money (RM) projected amount for end-June 2019: 6,345 billion rupees (NDA targets for Sept 2019 and Dec 2019 will be adjusted by the full amount of the excess/shortfall of actual stock of RM in end-June 2019 relative to this projected amount). - Definitions of performance criteria (selected list): - Floor on the net international reserves (NIR) of the SBP (millions of U.S. dollars). - Ceiling on the net domestic assets (NDA) of the SBP (stock, billions of Pakistani rupees). - Ceiling on SBP's stock of net foreign currency swap/forward position (millions of U.S. dollars). - Ceiling on the general government primary budget deficit excluding grants (cumulative flows, billions of rupees). - Ceiling on net government budgetary borrowing from the SBP (including provincial governments) (stock, billions of rupees). - Ceiling on the amount of government guarantees (stock, billions of Pakistani rupees). - Continuous Performance Criteria: - No new flow of SBP's credit to general government. - Zero ceiling on the accumulation of external payment arrears by the general government. - Indicative Targets: - Floor on targeted cash transfers spending (BISP) (cumulative, billions of Pakistani rupees). - Floor on general government budgetary health and education spending (cumulative, billions of Pakistani rupees). - Floor on net tax revenues collected by the Federal Board of Revenue (FBR) (cumulative, billions of Pakistani rupees). - Ceiling on net accumulation of tax refund arrears (flow, billions of Pakistani rupees). - Ceiling on power sector payment arrears (flow, billions of Pakistani rupees). ### Fiscal and financing definitions (selected) - General government: central (federal) government and local (provincial) governments, excluding state-owned enterprises; includes new funds or other special budgetary or extra-budgetary entities of a fiscal nature per IMF’s Manual on Government Finance Statistics 2001. - Net international reserves (stock) of the SBP: dollar value of the difference between usable gross international reserve assets and reserve-related liabilities, evaluated at the program exchange rates. - Usable gross international reserves: holdings of foreign currencies; holdings of SDRs; reserve position in the IMF; holdings of fixed and variable income instruments; excludes claims on residents, assets in nonconvertible currencies, precious metals, illiquid assets, pledged or collateralized assets, and assets not readily available for intervention. - Reserve-related liabilities: all foreign exchange liabilities to residents (except general government) or nonresidents, including foreign currency liabilities (remaining maturity one year or less), derivatives positions on a net outstanding basis, outstanding IMF credits, foreign exchange deposits with SBP from foreign governments/central banks/banks/international organizations, and certain domestic financial institution deposits (excluding regulatory capital deposits). - Gross sale and net purchase of foreign exchange by SBP defined to include outright and swap transactions, measured on a net daily basis. - General government primary budget deficit (excluding grants): overall general government budget deficit (excluding grants) minus consolidated interest bill of federal and provincial budgets. - Net external program financing: includes external privatization receipts; budget support grants; budget support loans from multilateral and official bilateral sources; private sector sources; rescheduled government debt service and change in stock of external debt service arrears net of amortization; excludes external financing counted as reserve liabilities of the SBP. *Source: https://www.imf.org/-/media/files/publications/cr/2019/1pakea2019001.pdf* ### 25. Net external budget financing is defined as net external program financing minus ### 25. Net external budget financing is defined as net external program financing minus ### Definitions and adjustment mechanisms - Net external budget financing = net external program financing minus privatization receipts, minus budget support grants, plus all other external loans for the financing of public projects or other federal or provincial budget expenditures, plus transfers of external privatization receipts from the privatization account to the budget. - Ceiling on general government primary budget deficit (excluding grants) is adjusted: - Upward (downward) by the cumulative excess (shortfall) in external project financing relative to program projections evaluated in rupee terms at actual exchange rates. External project financing = disbursements from bilateral and multilateral creditors to the general government for specific project expenditure. - Downward for any shortfall in targeted cash transfers (BISP). - Upward for BISP overperformance up to PRs 40 billion in FY 2019/20 from their indicative targets. - Downward for any excess (cumulatively, starting from July 1, 2019) in the flow of power sector payment arrears above respective indicative program targets, excluding non-recoveries and excess line losses. - Downward by the full amount of any increase in the stock of budgetary arrears on social payments (wages, pensions, social benefits) accumulated since the beginning of the fiscal year. - Downward by the full amount of any excess in the cumulative flow of tax refund arrears above respective indicative program targets. ### Ceiling on Net Government Budgetary Borrowing from the SBP - Definition: - Net government budgetary borrowing from the SBP (including provincial governments) = SBP claims on the general government minus general government deposits with the SBP. - SBP claims include government securities, treasury bills, treasury currency, and debtor balances; exclude accrued profits on government securities. - Government deposits with the SBP exclude the Zakat Fund. - Liability management operation: - Will transform the stock of government credit held by the SBP into short- and long-term tradeable instruments at 1, 3, 5 and 10-year maturities at interest rates close to market levels. - The expected amount of the operation is 7,756 billion rupees. - The 3-year and 5-year papers will be amortizing instruments and 1- and 10-year papers will be bullet bonds. - Adjustment mechanism: - The ceiling will be adjusted upward (downward) by the amount of cumulative excess (shortfall) in the total amount of liability management operation relative to the baseline projection. ### Ceiling on the Amount of Government Guarantees and related ceilings - Ceiling applies to stock of publicly guaranteed debt issued by the central government; mark-to-market revaluation exchange rate applies to all foreign currency denominated guaranteed debt. - Excludes guarantees issued by the Ministry of Finance for the SBP borrowing from the IMF. - Stock of publicly guaranteed debt as of end-March 2019 totals 1,265.1 billion rupees. - Continuous performance criteria: - Zero flow of SBP's direct credit to the general government (including purchases of public debt securities on the primary market) throughout the program period. - Zero ceiling on accumulation of external public debt payment arrears (set at zero). External public debt payment arrears = all unpaid debt-service obligations of the general government, SBP, and state-owned enterprises to nonresidents beyond 30 days after due date, including unpaid penalties or interest charges. ### Other continuous performance criteria and indicative targets - During the Extended Arrangement, Pakistan will not: - (i) impose or intensify restrictions on making payments and transfers for current international transactions; - (ii) introduce or modify multiple currency practices (MCP); - (iii) conclude bilateral payment agreements inconsistent with Article VIII of IMF Articles of Agreement; - (iv) impose or intensify import restrictions for balance of payments purposes. - MCP performance criterion excludes MCPs arising from the multiple-price foreign exchange auction system operating in line with IMF staff advice. - Indicative targets (floors): - Floor on targeted cash transfers spending by the Benazir Income Support Program (BISP). - Floor on general government budgetary health and education spending (federal and provincial). - Floor on net tax revenues collected by the Federal Bureau of Revenue (FBR). ### Tax refund arrears and power sector arrears definitions and stocks - Ceiling on net accumulation of tax refund arrears (indicative target): - Applies to cumulative flow of tax refund arrears. - Stock of tax refund arrears as of March 31, 2019 was 90 billion rupees. - Stock defined as tax refund claims not settled (cash refund, netting, government bond/promissory note, or official rejection) within a specified time period after submission. - Power sector payment arrears (indicative target): - Defined as power sector payables in arrears arising from: - non-recoveries from supply to AJ&K, industrial support package, other federal and provincial governments including FATA, private consumers, and Baluchistan Tube Wells; - accrued markup from servicing of PHPL; - line losses and non-collections not recognized by NEPRA; - GST Non-Refund; - late payment surcharges; - delay in tariff determinations. - Monitoring mechanism: - Stock of payment arrears includes payables of PRs 762.4 billion, and the stock of PHPL of PRs 807 billion as of end-March 2019. - Projected evolution of stock and flow of payables for FY 2019/20 and components provided in program tables. ### Electricity tariffs and surcharges (definitions and values) - Current notified uniform weighted average electricity tariff = PRs 13.51/kWh for all classes of consumers; includes: - weighted average tariff of PRs 11.95/kWh, - inter-disco tariff rationalization of PRs 1.03/kWh, - debt servicing surcharge (DSS) of PRs 0.43/kWh, - Neelum-Jhelum Surcharge of PRs 0.1/kWh. - Current notified electricity tariff for users at 0–50 kWh/month = PRs 2/kWh (retained). - Uniform Weighted Average Notified Tariff formula yields PRs 11.95 kWh (formula given precisely in source). - Inter-disco tariff rationalization PRs 1.03/kWh to maintain uniform tariff across DISCOs after target subsidy to protected consumer categories. - DSS of PRs 0.43/kWh to cover servicing of Syndicated Term Credit Financing obtained by PHPL. - Neelum-Jhelum Surcharge PRs 0.10/kWh levied on all classes except lifeline consumption 0–50 kWh/month. ### Monitoring and reporting requirements (selected items and frequencies) - State Bank of Pakistan (SBP): - SBP balance sheet summary: Weekly, First Thursday of the following week. - SBP balance sheet at program exchange rates and by official exchange rates: Monthly, Within 15 days of the end of each month. - Monetary survey summary: Monthly, Within the first 30 days of each month. - International reserves: Daily, The following working day. - Foreign exchange market rates and volumes: Daily/Monthly, Within one day/monthly within five working day. - Net International Reserves at program exchange rates: Quarterly, Seventh working day after quarter end. - External financing (foreign assistance received and projections): Quarterly, Within 15 days of the end of each quarter. - T-bill and coupon bond auction data: Fortnightly, Last working day of the fortnight. - Ministry of Finance (MOF): - External debt disbursements and stock of outstanding short-term and medium- and long-term external debt: Monthly, Within 25 days of the following month. - Federal government state budget: Monthly, Within 30 days of the end of each month. - Federal government: Detailed quarterly financing plan for coming 12 months: Monthly, One month in advance. - Consolidated general government: Quarterly, Within 45 days of the end of each quarter; Annual, Within 180 days of the end of each year. - Federal Board of Revenue (FBR): - Revenue collection and tax arrears: Monthly, Within seven days of the end of each month. - All tax refund claims in arrears: Monthly, Within seven days of the end of each month. - Automated GST refunds and metrics: Quarterly, Within seven days of the end of each month. - Pakistan Bureau of Statistics (PBS): - Detailed monthly price indices (SPI, CPI, WPI): Monthly, Within five days of the following month. - Ministry of Water and Power, Ministry of Petroleum and Natural Resources, BISP, and others: specified monthly/quarterly reporting of sectoral indicators, subsidies, payables, gas supply, UFG losses, BISP coverage, and enterprise financial statements with specified timing. ### Key figures from tables and projections - Liability management operation expected amount: 7,756 billion rupees. - Stock of publicly guaranteed debt as of end-March 2019: 1,265.1 billion rupees. - Stock of power sector payables as of end-March 2019: PRs 762.4 billion. - Stock of PHPL as of end-March 2019: PRs 807 billion. - Stock of tax refund arrears as of March 31, 2019: 90 billion rupees. - Electricity tariff components: - Uniform weighted average tariff: PRs 13.51/kWh. - Weighted average tariff: PRs 11.95/kWh. - Inter-disco tariff rationalization: PRs 1.03/kWh. - Debt servicing surcharge (DSS): PRs 0.43/kWh. - Neelum-Jhelum Surcharge: PRs 0.1/kWh. - Lifeline 0–50 kWh/month tariff: PRs 2/kWh. - Projected disbursements to Pakistan (Table 2, In millions of U.S. dollars): - Multilateral and bilateral disbursements: Jul-Sep'19 = 2,305; Oct-Dec'19 = 4,029; Jan-Mar'20 = 6,557; Apr-Jun'20 = 3,509. - of which: in cash 1/ : Jul-Sep'19 = 2,042; Oct-Dec'19 = 3,711; Jan-Mar'20 = 6,191; Apr-Jun'20 = 3,120. - of which: Saudi oil facility: Jul-Sep'19 = 835; Oct-Dec'19 = 856; Jan-Mar'20 = 670; Apr-Jun'20 = 839. - International bond issuance: Oct-Dec'19 = 1,000. - Commercial borrowing: Jul-Sep'19 = 700; Apr-Jun'20 = 1,300. - Gross Inflows: Jul-Sep'19 = 3,005; Oct-Dec'19 = 5,029; Jan-Mar'20 = 6,557; Apr-Jun'20 = 4,809. - of which: in cash: Jul-Sep'19 = 2,742; Oct-Dec'19 = 4,711; Jan-Mar'20 = 6,191; Apr-Jun'20 = 4,420. - Program exchange rates of the SBP (As of May 3, 2019 in units of currency per U.S. dollar): - EUR 0.896456 - JPY 111.699717 - CNY 6.741081 - GBP 0.769292 - AUD 1.428981 - CAD 1.346196 - THB 32.035948 - MYR 4.141502 - SGD 1.362695 - INR 69.267944 - SDR 0.723019 *International Monetary Fund — Excerpt from the Pakistan program documentation (as provided in the source content).* ### 1. Scheduled Banks6,523,4186,011,6203,930,955 ### 1. Scheduled Banks6,523,4186,011,6203,930,955 ### A. Composition of Government-related Balances (Scheduled Banks and State Bank) - Scheduled Banks - a) Government Securities: 2,825,874 2,392,359 2,570,893 - b) Treasury Bills: 4,781,299 4,726,007 2,476,396 - c) Government Deposits: -1,083,755 -1,106,745 -1,116,334 - State Bank - Total: 3,667,619 5,103,597 7,374,746 - a) Government Securities: 2,748 2,740 2,745 - b) Accrued Profit on MRTBs: 73,948 133,617 129,653 - c) Treasury Bills: 3,594,318 4,970,154 7,242,341 - of which: MTBs created for replenishment of cash balances: 3,593,670 4,969,500 7,240,300 - d) Treasury Currency: 9,562 9,565 9,569 - f) Government Deposits (Excl. Zakat and Privatization Fund): -40,546 -38,281 -38,057 ### B. Provincial Governments and Subcomponents - Provincial Governments (Net): -798,077 -1,071,620 -1,083,945 - 1. Scheduled Banks: -743,864 -838,523 -767,505 - a) Advances to Punjab Government for Cooperatives: 1,024 1,024 1,024 - b) Government Deposits: -744,888 -839,547 -768,529 - 2. State Bank: -54,213 -233,097 -316,440 - a) Debtor Balances (Excl. Zakat Fund): 5,515 00 - b) Government Deposits (Excl.Zakat Fund): -59,728 -233,097 -316,440 ### C. Net Government Budgetary Borrowings From Banking System - Net Govt. Budgetary Borrowings From Banking System: 9,392,960 10,043,597 10,221,756 - Through SBP: 3,613,406 4,870,500 7,058,307 - Through Scheduled Banks: 5,779,554 5,173,097 3,163,450 ### Memorandum Items and Cash-basis Figures - 1. Accrued Profit on SBP & BSC holding of MRTBs & MTBs: 73,953 133,626 129,658 - 2. Scheduled banks' deposits of Privitization Commission: -2,007 -3,741 -2,091 - 3. Outstanding amount of MTBs (Primary market; discounted value): 4,743,836 4,673,434 2,453,412 - Net Govt. Borrowings (Cash basis) From Banking System: 9,283,551 9,861,138 10,071,205 - (i) From SBP: 3,539,453 4,736,874 6,928,649 - (ii) From Scheduled Banks: 5,744,098 5,124,264 3,142,556 ### Key narrative findings and program context (Supplementary Information) - Request and staff position on exchange restrictions and MCP - Authorities request approval for temporary retention of exchange restrictions and a multiple currency practice (MCP) under Article VIII. - Specific measures maintained: (i) requirement to fully pre-fund letters of credit (imposed early 2017); (ii) exchange restrictions on advance payment for imports against letters of credit (imposed July 2018). - Authorities committed to phase them out and eliminate them by the end of the program. - Staff supports retention for a period of 12 months on grounds that they are non-discriminatory, imposed for balance of payments reasons, and temporary. - Date: June 28, 2019 - Authorities’ statement (July 3, 2019) — overview of causes, response, and program aims - Causes of macroeconomic challenges - Large twin deficits primarily related to a consumption-driven rise in domestic demand. - External factors: rising oil prices, security issues, lower capital inflows, hardening financial conditions abroad. - Overvalued exchange rate contributed to external sector woes by encouraging imports. - Total consumption expenditures increased to 94 percent of GDP in FY2017/18 from 91 percent of GDP in FY2014/15. - Current account deficit widened to US$20 billion (6.3 percent of GDP) in FY2017/18. - Fiscal structural weakness: narrow tax base and over-reliance on indirect and withholding taxes; tax-to-GDP ratio among the lowest in peer groups. - First eleven months of FY2018/19: tax collections declined reflecting fall in imports and sluggish domestic sales of automobiles, cement, and petroleum products. - Expenditure rigidities: untargeted subsidies and SOE losses. - Structural impediments discouraging private investment include administered prices (especially in the energy sector) and barriers reflected in World Bank ease of doing business ranking. - Authorities’ efforts and outcomes - External adjustment: greater exchange rate flexibility, proactive monetary tightening, higher import duties. Current account deficit narrowed to US$12.7 billion during the first eleven months of FY2018/19 from US$17.9 billion in the same period in the previous year. - Exports: export volume grew by 17.7 percent in FY2017/18 and 6.8 percent (yoy) during July 2018-May 2019; export value saw a small fall due to lower prices but quality improved with high value-added textiles increasing in volume and value. - Fiscal adjustment: FY2019/20 budget aims to document the economy, remove tax exemptions/concessions, and contain current expenditures. Provinces agreed to transfer part of surpluses to federal coffers starting FY2019/20. Budget increases social spending to protect the poor and vulnerable. - Monetary policy: tighter stance anchored inflation expectations but hampered growth. Real GDP growth provisionally estimated at 3.3 percent in FY2018/19, down from 5.5 percent in FY2017/18 and an average annual growth of 4.7 percent during the previous five years. - Engagement with international community: authorities approached the Fund for an extended arrangement under the Extended Fund Facility (EFF); program intended to pave the way for support from World Bank and ADB and continued bilateral creditor support. - Main elements of the Fund-supported program (as stated by authorities) - Improving competitiveness: move to a flexible, market-determined exchange rate regime; FY2019/20 measures to improve business climate including simplifying customs processes and business registration; regulatory reviews to facilitate private investment. - Broadening the tax base: documentation of the economy, removal of tax exemptions/concessions, strengthening tax administration to lift tax ratios to peer country levels. - Improving cost recovery in the energy sector: rationalize subsidies, allow regulators to set tariffs in line with generation costs and gas purchase prices, institutionalize regular and timely adjustments. - Strengthening SBP’s autonomy: amendments to the SBP Act; government ending deficit monetization from July 1, 2019. - Implementing SOE reform: comprehensive program to improve SOE governance and efficiency and facilitate privatization. - Enhancing social protection coverage and safety nets: rationalize subsidies and current expenditures to create room for higher targeted social spending. - Strengthening AML/CFT regime: full implementation of the FATF-agreed action plan; National Executive Committee to monitor coordination. - Forward-looking assessment - Authorities confident the Fund-supported program will address macroeconomic imbalances and structural challenges. - Exchange rate flexibility expected to strengthen financial markets, improve resource allocation, act as shock absorber, rebuild foreign reserves, and allow central bank to focus on price and financial stability. - Fiscal tightening, documentation and taxation efforts expected to rebalance domestic demand. - Energy sector reforms and PFM modernization expected to reduce quasi-fiscal costs and improve treasury cash management. - Program distinguishes itself by correcting misaligned policies early and initiating structural reforms at the outset to reduce need for future IMF resources. *Italic: Supplementary information from PAKISTAN REQUEST FOR AN EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY—SUPPLEMENTARY INFORMATION (June 28, 2019 / July 3, 2019).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1pakea2019001.pdf_