## 1. Recent Revenue Performance

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### Recent economic developments
- Economic activity softened as the economy adjusted to new policies after rapid but unbalanced growth.
- High-frequency indicators: weaker large-scale manufacturing; higher exports of food and textiles; stronger domestic cement production.
- Labor market: anecdotal evidence of rising unemployment; underemployment in the informal sector may mask trend.
- Exchange rate and reserves:
  - Rupee depreciated by about 15 percent in H2 FY 2019 to a peak of PRs/US$164 in late-June, then stabilized around PRs/US$155.
  - SBP abstained from foreign exchange sales since program approval and occasionally purchased foreign exchange from the interbank market.
  - SBP gross reserves increased by more than US$1.8 billion between July 1 and November 29.
  - SBP reduced its net short swap/forward forex position by more than US$3 billion.
- Inflation and monetary policy:
  - Headline inflation: 12.3 percent y-o-y in November.
  - Core inflation: 8.1 percent.
  - SBP policy rate: 13.25 percent since July 2019.
- External sector Q1 FY 2020:
  - Q1 FY 2020 current account deficit shrunk by almost two-thirds compared to Q1 FY 2019.
  - Total imports fell by 23 percent y-o-y in Q1 FY 2020.
  - Imports of machinery and equipment rose about 2 percent y-o-y.
  - Exports rose 2 percent y-o-y with 17 percent volume growth.
  - Remittances stagnating.
- Banking sector and credit:
  - Average capital adequacy ratio (CAR): 17.1 percent at end-September (from 16.2 percent at end-December 2018).
  - Private sector credit growth: 9.3 percent y-o-y in September.
  - Gross non-performing loans (NPLs): 8.8 percent of total loans at end-September (up from 8.0 percent at end-December 2018).
  - Banking sector exposure to energy sector: 17 percent of outstanding loans.
  - NPL provisioning: 80.5 percent at end-September.

### FY 2019 outturn and Q1 FY 2020 execution
- FY 2019 fiscal outturn:
  - General government primary deficit: 3.5 percent of GDP.
  - General government overall deficit: 8.9 percent of GDP.
  - Targets were 1.8 percent (primary) and 7 percent (overall).
  - Federal revenue collection: 2 percent of GDP lower than expected.
  - Around ¾ of the revenue shortfall due to one-off factors (delays in renewing telecom licenses; temporary delay in sale of state assets; weaker-than-expected tax amnesty proceeds (~1 percent of GDP); shortfall in SBP profit transfers related to exchange rate depreciation (0.5 percent of GDP)).
  - General government debt (including guarantees and IMF borrowing) rose to 88 percent of GDP.
- Q1 FY 2020 budget execution:
  - General government registered a primary surplus of 0.6 percent of GDP (measured from above-the-line).
  - Overall deficit of 0.6 percent of GDP, about 1 percent of GDP better than programmed.
  - Outperformance driven by stronger-than-expected non-tax revenues and double-digit growth in tax revenue net of refunds.
  - Customs receipts and external-sector related taxes up only 6 percent y-o-y.
  - Spending, including by provinces, remained prudent.
  - General government debt (including guarantees and IMF borrowing) fell to 84.7 percent of GDP at end-September.

### Box 1 — Q1 FY 2020 revenue performance (selected figures and drivers)
- Total revenue nominal growth: 34 percent compared to Q1 FY 2019; overperformed programmed projections by 0.2 percent of GDP.
- Tax revenue drivers:
  - Domestic component of FBR-collected tax revenue grew 25 percent y-o-y due to measures including removal of tax exemptions and zero/reduced rates.
  - Import-stage taxes impacted by import compression; more than 40 percent of total tax revenue is collected at the import stage.
  - Import-stage shortfall: −0.2 percent of GDP lower than programmed.
  - One-off tax inflows: around PRs 30 billion from tax advances and tax amnesty receipts realized in Q1 FY 2020.
  - Provincial tax revenues increased by 18 percent y-o-y.
- Non-tax revenues:
  - Non-tax revenues almost tripled in Q1.
  - Reprofiling of government debt held by the SBP boosted SBP interim profit transfers.
  - One-off inflow of PRs 70 billion (0.2 percent of GDP) from delayed telecom license renewals.
  - Non-tax revenues reached 0.8 percent of GDP, about 0.4 percent of GDP higher than programmed.
- Selected Q1 tax revenue figures (FY 2018/19 → FY 2019/20; growth (%)):
  - Tax revenue: 975.2 → 1142.9; 17.2
  - Federal: 886.6 → 1038.4; 17.1
  - FBR: 832.2 → 964.4; 15.9
  - Domestic tax: 414.2 → 517.8; 25.0
  - Direct tax: 241.1 → 303.1; 25.7
  - Sales Tax (domestic): 134.6 → 168.9; 25.5
  - FED (domestic): 38.5 → 45.8; 19.0
  - Import tax: 418.1 → 446.6; 6.8
  - Direct tax (import): 57.4 → 52.6; ‐8.4
  - Sales Tax (import): 200.5 → 235.0; 17.2
  - FED (import): 3.6 → 3.4; ‐5.1
  - Custom: 156.6 → 155.6; ‐0.6
  - Other federal: 54.4 → 74.0; 36.2
  - Provincial: 88.6 → 104.5; 17.9

### Program performance, missed targets, and structural benchmarks
- Program status:
  - All end-September 2019 and continuous performance criteria (PCs) were observed; met by wide margins (NIR floor; NDA ceiling; ceiling on SBP net foreign currency swaps/forwards; ceiling on net government budgetary borrowing from SBP; ceiling on general government primary budget deficit).
  - Ceiling on government guarantees observed; no external public payment arrears.
- Missed indicative targets (ITs) for end-September:
  - Five ITs missed: targeted cash transfers spending; net accumulation of tax refund arrears; power sector arrears; spending on health and education; net tax revenues collected by FBR.
  - Reasons include lower preliminary estimates for FY 2019 health and education and faster-than-expected external adjustment reducing customs receipts.
  - Revisions/new ITs aim to correct gaps by end-December.
- Structural benchmarks (SBs):
  - Most SBs implemented with delays; some implemented later:
    - Licenses for track-and-trace system for excises on cigarettes issued in October (end-September 2019 SB).
    - Finalization of BISP banking contracts and launch of financial inclusion strategy for women implemented end-October 2019.
    - Circular debt reduction plan completed in November (end-September 2019 SB).
    - Electricity tariff adjustments notified on September 30; Q1 FY 2020 tariff adjustment implemented on November 29.
  - Continuous SB on not granting further tax amnesties observed.
  - Progress on strengthening AML/CFT framework incomplete (end-October 2019 SB).
  - End-December SBs progress: NEPRA Act amendments being prepared; international auditors selected for audits of Pakistan International Airlines and Pakistan Steel Mills; Waseela-e-Taleem benefit structure updated in October.

### Outlook and risks (macroeconomic projections and risks)
- Macroeconomic projections:
  - Real GDP growth: 2.4 percent in FY 2020.
  - Growth projected: around 3 percent in FY 2021; 4.5–5 percent over the medium-term.
  - Average CPI inflation: projected deceleration to 11.8 percent in FY 2020.
  - Inflation expected to converge to SBP's 5–7 percent medium-term objective, hitting the midpoint by FY 2022.
  - Current account deficit: expected decline to 2.4 percent of GDP in FY 2020 and to around 1.8 percent of GDP over the medium-term.
- Risks:
  - Significant fiscal adjustment needed; risks from composition of adjustment and resistance from vested interests.
  - Potential legislative constraints due to absence of majority in the upper house.
  - Provinces may underdeliver on budget commitments.
  - Lukewarm progress on structural reforms could stall activity and reform benefits.
  - Failure to meet program objectives could jeopardize external financing.
  - Potential FATF blacklisting could freeze capital flows and lower investment.
  - Global economic headwinds could weaken activity and affect projections.
- Upside possibility: authorities' commitment and decisive policy and reform implementation could accelerate recovery.

### Fiscal policy discussions and revenue mobilization measures (ongoing and planned)
- Authorities committed to fiscal consolidation to place public debt on a downward path; staff cautioned against composition of adjustment relying on non-tax revenues.
- FY 2020 general government primary deficit target considered achievable, but revenue composition changed:
  - Tax revenue expected to be 0.5 percent of GDP lower than originally expected.
  - Domestic collection expected to grow by over 25 percent y-o-y over FY 2020.
  - Non-tax revenue expected to be 0.8 percent of GDP higher than originally expected due to one-offs and higher central bank profits.
  - Primary spending on track; reallocations include greater development spending and PRs 10 billion to facilitate subsidized financing for exports (within agreed budget envelope).
- Revenue mobilization and reform measures under way:
  - Issued licenses for track-and-trace system for excises on cigarettes in October (system rollout expected by end-March 2020).
  - Sales tax refunds expedited through Fully-Automated Sales Tax e-Refund (FASTER).
  - Staff recommended using part of government cash buffer to buy back up to PRs 30 billion of existing promissory notes to exporters issued in FY 2019 and FY 2020.
  - Provinces stepped up efforts: provincial tax revenue increased by 18 percent y-o-y in Q1; coordination meetings between provincial sales tax administrations commenced.
  - Plans to establish a new semi-independent national tax authority to facilitate coordination between Federal and provincial governments.
  - Groundwork for tax policy reforms in FY 2021 budget: simplify tax laws and regulations; simplify corporate income tax; streamline exemptions and preferential sales tax rates; create simpler distribution of tax bases between Federal and provinces.
  - Recommendation to establish a joint working group on GST tax harmonization to be approved by the Council of Common Interest (CCI) by end-March 2020.
  - Establishment of a Tax Policy Unit in the Ministry of Finance to build capacity.
  - Authorities agreed to avoid issuing new preferential tax treatments or exemptions (new continuous SB).

*Source: IMF staff report excerpt — "1. Recent Revenue Performance" (from supplied content).*

### 1. Recent Revenue Performance ___________________________________________________________________6

### 1. Recent Revenue Performance

### Recent economic developments
- Economic activity has softened as the economy adjusts to new policies after rapid but unbalanced growth in recent years.
- High-frequency indicators: weaker large-scale manufacturing, higher exports of food and textiles, stronger domestic cement production.
- Labor market: anecdotal evidence suggests unemployment is rising; underemployment in the informal sector may mask the trend.
- Exchange rate and reserves:
  - Rupee depreciated by about 15 percent in H2 FY 2019 to a peak of PRs/US$164 in late-June, then stabilized around PRs/US$155.
  - The State Bank of Pakistan (SBP) abstained from foreign exchange sales since program approval and occasionally purchased foreign exchange from the interbank market.
  - SBP gross reserves increased by more than US$1.8 billion between July 1 and November 29.
  - SBP reduced its net short swap/forward forex position by more than US$3 billion.
- Inflation and monetary policy:
  - Headline inflation stood at 12.3 percent y-o-y in November.
  - Core inflation was at 8.1 percent.
  - SBP policy rate has been kept at 13.25 percent since July 2019.
- External sector Q1 FY 2020:
  - Q1 FY 2020 current account deficit shrunk by almost two-thirds compared to Q1 FY 2019.
  - Total imports fell by 23 percent y-o-y in Q1 FY 2020.
  - Imports of machinery and equipment rose about 2 percent y-o-y.
  - Exports rose 2 percent y-o-y with 17 percent volume growth (driven by food and textiles).
  - Remittances are stagnating.
- Banking sector and credit:
  - At end-September, average capital adequacy ratio (CAR) moved to 17.1 percent from 16.2 percent at end-December 2018.
  - Private sector credit growth slowed to 9.3 percent y-o-y in September.
  - Gross non-performing loans (NPLs) increased to 8.8 percent of total loans, up from 8.0 percent at end-December 2018.
  - Banking sector exposure to energy sector: 17 percent of outstanding loans.
  - NPL provisioning: 80.5 percent at end-September.

### Fiscal outturn and recent performance
- FY 2019 fiscal outturn:
  - General government primary deficit: 3.5 percent of GDP.
  - General government overall deficit: 8.9 percent of GDP.
  - Targets were 1.8 percent (primary) and 7 percent (overall).
  - Federal revenue collection was 2 percent of GDP lower than expected.
  - Around ¾ of the revenue shortfall were due to one-off factors.
  - Shortfall components: delays in renewing telecom licenses, temporary delay in sale of state assets, weaker-than-expected tax amnesty proceeds (~1 percent of GDP), and shortfall in SBP profit transfers related to exchange rate depreciation (0.5 percent of GDP).
  - General government debt (including guarantees and IMF borrowing) rose to 88 percent of GDP.
- Q1 FY 2020 budget execution:
  - General government registered a primary surplus of 0.6 percent of GDP (measured from above-the-line).
  - Overall deficit of 0.6 percent of GDP, about 1 percent of GDP better than programmed.
  - Outperformance driven by stronger-than-expected non-tax revenues and double-digit growth in tax revenue net of refunds.
  - Customs receipts and external-sector related taxes up only 6 percent y-o-y.
  - Spending, including by provinces, remained prudent.
  - General government debt (including guarantees and IMF borrowing) fell to 84.7 percent of GDP at end-September.

### Box 1 — Recent Revenue Performance (Q1 FY 2020)
- Total revenue: 34 percent nominal growth compared to Q1 FY 2019; overperformed programmed projections by 0.2 percent of GDP.
- Tax revenue drivers:
  - Tax policy measures, import developments, and one-off events.
  - Domestic component of FBR-collected tax revenue grew 25 percent y-o-y due to measures including removal of tax exemptions and zero/reduced rates.
  - Import-stage taxes were impacted by import compression; more than 40 percent of total tax revenue is collected at the import stage.
  - Import-stage shortfall: —0.2 percent of GDP lower than programmed.
  - One-off tax inflows (around PRs 30 billion) from tax advances and tax amnesty receipts realized in Q1 FY 2020.
  - Provincial tax revenues increased by 18 percent y-o-y.
- Non-tax revenues:
  - Non-tax revenues almost tripled in Q1.
  - Reprofiling of government debt held by the SBP boosted SBP interim profit transfers.
  - One-off inflow of PRs 70 billion (0.2 percent of GDP) from delayed telecom license renewals.
  - Non-tax revenues reached 0.8 percent of GDP, about 0.4 percent of GDP higher than programmed.
- Selected Q1 tax revenue figures (FY 2018/19 to FY 2019/20; growth (%)):
  - Tax revenue: 975.2 → 1142.9; 17.2
  - Federal: 886.6 → 1038.4; 17.1
  - FBR: 832.2 → 964.4; 15.9
  - Domestic tax: 414.2 → 517.8; 25.0
  - Direct tax: 241.1 → 303.1; 25.7
  - Sales Tax (domestic): 134.6 → 168.9; 25.5
  - FED (domestic): 38.5 → 45.8; 19.0
  - Import tax: 418.1 → 446.6; 6.8
  - Direct tax (import): 57.4 → 52.6; ‐8.4
  - Sales Tax (import): 200.5 → 235.0; 17.2
  - FED (import): 3.6 → 3.4; ‐5.1
  - Custom: 156.6 → 155.6; ‐0.6
  - Other federal: 54.4 → 74.0; 36.2
  - Provincial: 88.6 → 104.5; 17.9

### Program performance and structural benchmarks
- Program status:
  - All end-September 2019 and continuous performance criteria (PCs) were observed.
  - Met by wide margins: floor on net international reserves (NIR); ceiling on net domestic assets (NDA); ceiling on SBP's stock of net foreign currency swaps/forwards; ceiling on net government budgetary borrowing from the SBP; ceiling on the general government primary budget deficit.
  - Ceiling on government guarantees observed; no external public payment arrears.
- Missed indicative targets (ITs) for end-September:
  - Five ITs missed: targeted cash transfers spending; net accumulation of tax refund arrears; power sector arrears; spending on health and education; net tax revenues collected by FBR.
  - Reasons: preliminary estimates for FY 2019 health and education turned out lower than expected; faster-than-expected external adjustment reduced customs receipts.
  - Revisions/new ITs aim to correct gaps by end-December.
- Structural benchmarks (SBs):
  - Most SBs implemented with delays.
  - Licenses for track-and-trace system for excises on cigarettes issued in October (end-September 2019 SB).
  - Finalization of BISP banking contracts and launch of financial inclusion strategy for women implemented end-October 2019.
  - Circular debt reduction plan completed in November (end-September 2019 SB).
  - Electricity tariff adjustments were notified on September 30; Q1 FY 2020 tariff adjustment implemented on November 29.
  - Continuous SB on not granting further tax amnesties observed.
  - Progress on strengthening AML/CFT framework incomplete (end-October 2019 SB).
  - End-December SBs progress: NEPRA Act amendments being prepared; international auditors selected for audits of Pakistan International Airlines and Pakistan Steel Mills; Waseela-e-Taleem benefit structure updated in October.

### Outlook and risks
- Macroeconomic projections:
  - Real GDP growth: 2.4 percent in FY 2020.
  - Growth projected to strengthen to around 3 percent in FY 2021, and 4.5–5 percent over the medium-term.
  - Average CPI inflation: projected deceleration to 11.8 percent in FY 2020.
  - Inflation expected to converge to SBP's 5–7 percent medium-term objective, hitting the midpoint by FY 2022.
  - Current account deficit: expected to decline to 2.4 percent of GDP in FY 2020 and to around 1.8 percent of GDP over the medium-term.
- Risks:
  - Significant fiscal adjustment needed; risks from composition of adjustment and resistance from vested interests.
  - Potential legislative constraints due to absence of majority in the upper house.
  - Provinces may underdeliver on budget commitments.
  - Lukewarm progress on structural reforms could stall activity and reform benefits.
  - Failure to meet program objectives could jeopardize external financing.
  - Potential FATF blacklisting could freeze capital flows and lower investment.
  - Global economic headwinds could weaken activity and affect projections.
- Upside possibility: authorities' commitment and decisive policy and reform implementation could accelerate recovery.

### Fiscal policy discussions and revenue mobilization measures
- Authorities committed to fiscal consolidation to place public debt on a downward path; staff cautioned on composition of adjustment relying on non-tax revenues.
- FY 2020 general government primary deficit target is considered achievable, but revenue composition changed:
  - Tax revenue now expected to be 0.5 percent of GDP lower than originally expected.
  - Domestic collection expected to grow by over 25 percent y-o-y over FY 2020.
  - Non-tax revenue expected to be 0.8 percent of GDP higher than originally expected due to one-offs and higher central bank profits.
  - Primary spending on track; some reallocations include greater development spending and PRs 10 billion to facilitate subsidized financing for exports (within agreed budget envelope).
- Revenue mobilization and reform measures under way:
  - Issued licenses for track-and-trace system for excises on cigarettes in October (system rollout expected by end-March 2020).
  - Sales tax refunds being expedited through fully-automated sales tax e-refund (FASTER).
  - Staff recommended using part of government cash buffer to buy back up to PRs 30 billion of existing promissory notes to exporters issued in FY 2019 and FY 2020.
  - Provinces stepped up efforts: provincial tax revenue increased by 18 percent y-o-y in Q1; coordination/consultation meetings between provincial sales tax administrations commenced.
  - Plans to establish a new semi-independent national tax authority to facilitate coordination between Federal and provincial governments.
  - Groundwork for tax policy reforms in FY 2021 budget: aim to simplify tax laws and regulations, simplify corporate income tax, streamline exemptions and preferential sales tax rates, and create simpler distribution of tax bases between Federal and provinces.
  - Recommendation to establish a joint working group on GST tax harmonization to be approved by the Council of Common Interest (CCI) by end-March 2020.
  - Establishment of a Tax Policy Unit in the Ministry of Finance to build capacity.
  - Authorities agreed to avoid issuing new preferential tax treatments or exemptions (new continuous SB).

*Source: IMF staff report excerpt — "1. Recent Revenue Performance" (from supplied content).*

### 13.      The authorities are also moving forward with PFM reforms, which will help instill

### 1pakea2019002 - 13.      The authorities are also moving forward with PFM reforms, which will help instill

### Public Financial Management (PFM) reforms
- Authorities will present a mid-year budget review report (new end-February 2020 SB) to provide budget and actual comparisons of revenue, expenditure, and financing during H1 FY 2020 as well as revised estimates for the budget year.
- Staff view the review as an opportunity to indicate corrective measures if fiscal risks to annual targets materialize.
- Short-term staff recommendations:
  - Prepare the first fiscal risk statement.
  - Approve and publish the budget manual.
  - Develop a PFM reform strategy.
  - Establish a macro-fiscal unit.
- New structural benchmark: presentation of the federal government mid-year budget review report to the National Assembly in line with the PFM Act (end-February 2020).

### Elevated cash buffers and debt/cash management
- Authorities built a sizable contingency cash buffer (government deposits held at the SBP).
- Cash buffer grew further in Q1 FY 2020 to around 8.5 percent of GDP at the Federal level as of end-September.
- In October the authorities used PRs 1.4 trillion (in net terms) to retire short-term government securities held by the private sector.
- Authorities' cash management actions:
  - Initiated work to introduce a single treasury account (TSA-1) by end-September 2020.
  - Will establish a dedicated Treasury and Debt Management wing by December 2020 to consolidate debt management functions and execute cashflow forecasting and management.
- To reduce rollover risks, authorities agreed to continue to extend maturities and aim to accept prevailing market rates so volumes issued in primary auctions are closer to previously announced targets.

### Debt sustainability
- Staff assesses that debt remains sustainable over the medium-term, given the broadly unchanged macroeconomic framework, policies to date, and authorities' policy commitments.
- Debt sustainability is subject to somewhat higher risks due to fiscal underperformance in FY 2019, a higher debt outturn, and higher financing needs (see ¶9 and DSA Annex).

### Poverty reduction and social protection
- Authorities remain committed to expanding social safety nets, reducing poverty, and narrowing the gender gap.
- Measures and developments:
  - An additional one-off disbursement of PRs 1,000 to existing Benazir Income Support Program (BISP) beneficiaries was made in August.
  - End-September IT on BISP spending was not met due to technical constraints; authorities committed to rectify the shortfall by end-December and reaffirmed that budgetary allocations to BISP were being scheduled.
  - BISP's banking contracts were finalized and the financial inclusion strategy for women ("one woman one account") was launched in October (end-October 2019 SB).
  - Waseela-e-Taleem (WeT) modified in October to provide a girl bonus of PRs 250 on a quarterly basis (end-December 2019 SB).
  - New Mother and Child Nutrition Program under BISP aims to bring the stunting rate down from 40 percent to less than 30 percent; quarterly cash stipends of PRs 2,000 for girls and PRs 1,500 for boys up to age two will be provided.
  - Affordable housing programs administered by Ehsaas will be scaled up, with a budget reallocation of PRs 20-30 billion in FY 2020 to channel funds directly to Ehsaas beneficiaries and cover the 10 percent down payment on affordable housing.
- Note on BISP re-enrollment: time needed by beneficiaries to enroll in new bank accounts; re-enrollment expected to be completed by Q2 FY 2020.

### Monetary and financial sector policies
- Exchange rate policy:
  - SBP confirmed commitment to a flexible, market-determined exchange rate, using interventions only for disorderly market conditions.
- Monetary policy stance:
  - Staff and SBP agreed stance is appropriate and should remain tight until inflation shows a clear declining trend on a forward-looking basis.
  - Monetary policy under the program guided by SBP’s medium-term inflation objective, supported by a positive policy rate in real terms, and monetary aggregate targets met and expected to enable inflation to decline to the 5–7 percent range over the next two years.
  - Headline and core inflation remain high and are expected to decline only gradually; upcoming energy tariff adjustments and pass-through from volatile international oil prices put upward pressure on inflation.
  - Authorities committed to keep the monetary policy stance consistent with a policy interest rate that is positive in real terms.
- SBP financing and debt reprofiling:
  - Since program approval the SBP has not financed the budget deficit.
  - Prior to program approval, SBP and the government reprofiled PRs 7,756 billion of short-term government debt held by SBP into tradable instruments carrying market interest rates in tenors of one, three, five, and ten years.
  - Maturing debt held by the SBP will not be rolled over while authorities will seek to amortize existing long-term instruments to avoid financing pressures.
- SBP governance and safeguards:
  - SBP preparing amendments to the SBP Act to address recommendations of the 2019 Safeguards Assessment Report; proposed amendments would, inter alia:
    - establish domestic price stability as SBP's primary objective;
    - prohibit monetary financing of the public sector debt;
    - remove quasi-fiscal operations following a phase-out period;
    - introduce statutory mechanisms for sufficient capitalization and profit retention;
    - secure stronger protection of personal autonomy of senior officials;
    - statutory underpinnings for external auditors, audit committee, and internal audit function;
    - improve decision-making at executive management; and
    - provide stronger oversight by the Board.
  - Amendments to be forwarded by SBP to the Ministry of Finance by end-January 2020 and submitted to parliament by end-March 2020 (end-December 2019 SB; reset to end-March 2020 SB).

### Financial sector health and AML/CFT
- Two non-systemic banks are undercapitalized; they account for less than 1.5 percent of total banking assets.
- Authorities engaged with the two private sector banks to develop plans to meet minimum capital requirements by end-June 2020.
- One state-owned bank was liquidated in September; another state-owned bank was included in government's privatization list.
- Authorities committed to strengthen and modernize resolution frameworks and submit necessary legislation to Parliament by end-May.
- AML/CFT progress:
  - Pakistan remains included in FATF's list of jurisdictions with serious AML/CFT deficiencies.
  - Authorities addressing an AML/CFT action plan through an inter-agency working group.
  - Asia Pacific Group on Money Laundering noted existing efforts inconsistent with level of risks; greater effectiveness needs to be demonstrated.
  - Authorities committed, with capacity development assistance, to complete actions in the structural benchmark by end-June 2020 (end-October 2019 SB; reset to end-June 2020), with an improvement towards a substantial level of effectiveness to be achieved by end-March 2020 consistent with FATF Immediate Outcome 9 and Immediate Outcome 10 (new end-March 2020 SB).

### Exchange measures and balance of payments
- Authorities have not introduced new exchange restrictions, multiple currency practices, or import restrictions for balance of payments purposes and have not intensified any existing exchange measure (continuous PC).
- Authorities committed to phase out existing exchange measures when conditions permit and to eliminate them by the end of the program.
- As a first step, authorities allowed banks to make advance payments up to US$10,000 per invoice on behalf of manufacturing and industrial companies for the import of raw materials and spare parts beginning in early-November.

### Energy sector policies and arrears
- At end-September, the stock of power sector arrears stood at PRs 1,690 billion (about 4 percent of GDP), of which PRs 465 billion were accumulated in FY 2019.
- Main contributors to new arrears: technical and distribution losses, delays in updating tariffs, and provision of unbudgeted subsidies.
- Authorities’ steps to address arrears:
  - Investing in infrastructure to reduce technical losses.
  - Launching an antitheft drive and stepping up enforcement to increase collections.
  - Adjusting tariffs gradually (quarterly) to cost recovery levels, including:
    - on September 30 (end-September 2019 SB) by around 5 percent, largely to recover arrears accumulated over FY 2019;
    - on November 29, 2019 (prior action) by around 2 percent on account of Q1 FY 2020 capacity payments.
  - Budgeting or eliminating all power sector subsidies.
- Results and targets:
  - Accumulation of new arrears fell from about PRs 38 billion/month in FY 2019 to around PRs 10 billion/month in the first three months of FY 2020.
  - Authorities committed to bring the flow of power sector arrears to zero by end-2023.
- Circular debt reduction plan (adopted in November; end-September 2019 SB):
  - Aim: reduce annual flow of circular debt to around PRs 50–75 billion by FY 2023.
  - Key measures include timely updating tariffs, streamlining tariff procedures and reintroducing surcharges via amendments to the NEPRA Act (to be submitted to Parliament by end-December, modified end-December 2019 SB), improving efficiency and collection, and rightsizing subsidies.
  - Monitoring through implementation reports published by the Ministry of Energy.
  - New structural benchmark: Q2 FY 2020 tariff notification for capacity payments (end-January 2020).
- Stock-of-arrears strategy elements under development with IFIs:
  - Issuance of new government guarantees in the amount of PRs 200 billion to transfer costly system arrears into PHPL.
  - Absorption of PHPL into the general government to lower debt servicing costs.
  - Reduction of outstanding payables using power assets privatization proceeds, recoveries from receivables, existing debt servicing surcharge, and rightsizing of sector-related subsidies.
- Gas sector steps:
  - Tariff adjustment in July and upcoming adjustment by end-December 2019 based on regulator's mid-year decision on tariffs to stop flow of arrears.
  - Two gas companies prepared plans approved by the Economic Coordination Committee to significantly reduce unaccounted for gas (UFG) losses; plans include infrastructure improvements, rehabilitation of networks, and theft control.
  - Staff urged amendments to the OGRA Act to ensure timely notification of tariffs.

### Structural policies and governance
- SOE reforms and privatization:
  - Financial advisors appointed for privatization of two LNG fired power plants; transaction structure approved; expected to finalize process by end-FY 2020.
  - International auditors hired to conduct new audits of Pakistan International Airlines and Pakistan Steel Mills; work underway to complete and publish audits of the 2018 accounts by end-December (end-December 2019 SB).
  - IMF technical assistance underway to support development of a new State-Owned Enterprise Law (end-September 2020 SB).
  - Authorities designing strategy and criteria to classify SOEs into companies for sale, liquidation, or retention under state ownership (end-September 2020 SB).
- Business climate improvements:
  - Pakistan climbed from 136th to 108th place in the 2020 World Bank Doing Business Indicators; greatest improvements in access to electricity and construction permits.
  - Weaknesses remain in resolving insolvency, paying taxes, and enforcing contracts.
  - PRs 50,000 threshold on a tax identification number came into effect at end-October to increase formality.
  - Introduction of online portals for GST and CIT modules of tax payments and for new commercial electricity connections.
- Anti-corruption and governance measures:
  - Dedicated financial crimes unit in the Federal Investigation Agency established; capacities of law enforcement agencies for financial investigations upgraded.
  - Task force review of institutional framework of anti-corruption institutions to be completed by end-June 2020.
  - Establishment of a centralized asset declaration system for high-level public officials by end-October 2020.
  - Enhance fiscal autonomy and resources of the Financial Monitoring Unit to disseminate financial intelligence.

### Program modalities, conditionality, and benchmarks
- Prior action:
  - One prior action set on the notification of Q1 FY 2020 electricity tariff adjustment for capacity payments.
- Proposed modifications to end-December PCs:
  - Government guarantees to accommodate issuance of guarantees in the power sector in line with the circular debt reduction plan and to support investment in the energy sector.
  - Net international reserves and net domestic assets of SBP to lock-in overperformance achieved by end-September.
  - General government primary budget deficit to reflect better-than-expected end-September outturn.
- Proposed modifications to end-December ITs:
  - Budgetary health and education spending to reflect provincial spending plans.
  - Net tax collection by the FBR to recognize faster-than-expected external adjustment negatively impacting customs revenue.
  - Net accumulation of tax refund arrears to capture authorities' plans to reflect end-June stock of tax refund arrears.
  - Power sector payment arrears to reflect the end-September outturn.
- March PCs and ITs for March, June, and September proposed in line with updated quarterly projections.
- Additional adjustor proposed for the general government primary budget deficit on SBP profit transfers to the budget to ensure a rules-based approach (see TMU).
- Definition governing the PC on the stock of government guarantees proposed to be modified to measure the stock of issued or executed government guarantees to broaden coverage (see TMU).
- Reset and timing adjustments:
  - End-October 2019 SB for adoption of measures to strengthen the effectiveness of the AML/CFT framework reset to end-June 2020.
  - End-December 2019 SB for submission of amendments to the SBP Act reset to end-March 2020.
  - End-December SB for submission of amendments to the NEPRA Act to parliament modified to reinstate government power to levy surcharges above system revenue requirements under the NEPRA Act.
- New structural benchmarks proposed:
  - Avoid the practice of issuing new preferential tax treatments or exemptions (continuous).
  - Q2 FY 2020 tariff notification for capacity payments (end-January 2020).
  - Presentation of the federal government mid-year budget review report to the National Assembly in line with the PFM Act (end-February 2020).
  - Improve towards a substantial level the effectiveness in addressing terrorism financing, consistent with FATF Immediate Outcomes 9 and 10 (end-March 2020).

*Source: Excerpt from 1pakea2019002 PDF chapter content.*

### 32.      The program remains fully financed for the next 12 months and with good prospects

### 32.      The program remains fully financed for the next 12 months and with good prospects

### Financing status and commitments
- Financing assumptions remain in line with the forecasts at the time of the program request: fully financed with expected support from multilateral development banks and bilateral creditors.
- Committed amounts by creditor:
  - China US$5.2 billion
  - Saudi Arabia US$6.2 billion
  - UAE US$1 billion
  - the World Bank US$1.7 billion
  - the Asian Development Bank US$2.5 billion
  - the Islamic Development Bank US$1 billion
- Recent disbursements/extensions by key bilateral creditors (in line with program financing commitments):
  - New financing of US$700 million from China
  - New financing of US$3 billion from Saudi Arabia
  - These new amounts fully covered their matured loans.

### Repayment capacity and exposure to IMF
- As of end-November 2019:
  - IMF's exposure to Pakistan stood at SDR 4,659 million (229 percent of quota or 76.2 percent of gross reserves).
- Full purchases under the program will result in:
  - Outstanding purchases of SDR 6,146 million by September 2022 (41 percent of projected reserves or 303 percent of quota).
- Assessment:
  - Pakistan's capacity to repay its IMF obligations in a timely manner remains adequate, but subject to higher than usual risks.
  - Elevated risks arise from low reserves, delayed adoption of adjustment policies, higher public debt, and gross financing needs.
  - Adequate capacity to repay and debt sustainability will depend on strong policy implementation and adequate execution of existing financing commitments.

### Safeguards assessment of the State Bank of Pakistan (SBP)
- An updated safeguards assessment of the SBP is substantially completed.
- Findings:
  - SBP has maintained a broadly strong safeguards framework since the last assessment in 2013, except for its legal framework (autonomy and governance).
  - Financial reporting, external and internal audit mechanisms, and an enterprise-wide risk management framework highlight sound practices.
- Recommendations/needs:
  - Legislative reforms are necessary to strengthen SBP's autonomy and governance arrangements.
  - A medium-term strategy is required to phase out SBP involvement in quasi-fiscal activities.

### Staff appraisal — macroeconomic assessment and policy priorities
- Overall program status:
  - The authorities' program, supported by the EFF, is on track and already producing early results.
  - Past unsustainable policies led to large fiscal and current account deficits, debt accumulation, and imbalances that threatened financial stability.
  - External bilateral financing had delayed adjustment by supporting an overvalued exchange rate.
  - Policies under the program have begun to address these problems: the exchange rate overvaluation has been corrected; monetary policy has helped rein in inflationary pressures; fiscal adjustment has started to bring debt and debt service to more sustainable levels.
  - Significant challenges remain: fiscal position not yet strong enough, quasi-fiscal losses undermine public finances, growth has slowed as the economy adjusts, affecting social conditions.
  - The authorities need to implement the program decisively; prudent policies and structural reforms are the only sustainable option to increase resilience and restore strong and inclusive growth.

- Fiscal policy recommendations:
  - Fiscal reforms to support revenue mobilization and medium-term fiscal consolidation are necessary to place debt on a downward path.
  - Q1 domestic tax revenue growth rates were strong.
  - Focus on implementing high-quality tax measures, including elimination of tax exemptions and loopholes.
  - Avoid introduction of new exemptions, which would undermine base-broadening efforts and lead to a less equitable distribution of the adjustment.
  - Preparations for a wholesale tax policy reform envisaged as part of the FY 2021 budget need to start early to ensure timely implementation.

- Monetary and exchange rate policy recommendations:
  - The current monetary stance is appropriate.
  - The positive real policy rate is consistent with SBP's medium-term inflation objective.
  - Monetary easing should only be considered after data show disinflation is entrenched and inflation trends are consistent with the SBP medium-term objective.
  - Commitment to a flexible, market-determined exchange rate is welcomed; intervention should be limited to prevent disorderly market conditions.

- AML/CFT priorities:
  - Pakistan must decisively address its AML/CFT deficiencies.
  - Authorities have recently stepped up efforts with creation of a high-level inter-agency working group, but the bulk of measures in the structural benchmark remain outstanding.
  - Efforts should focus on effectiveness in addressing terrorism financing and improving financial integrity.

- Energy sector reforms and fiscal implications:
  - Energy sector linkages with the financial sector, budget, and real economy require addressing long-standing deficiencies.
  - A comprehensive plan developed with IFIs aims to improve collection, reduce losses, and enhance governance.
  - Issuance of new government guarantees should occur in the context of the comprehensive plan to avoid moral hazard.
  - Timely adjustment of energy tariffs will be required to prevent accumulation of new arrears.
  - Rationalization of existing subsidies is necessary to address the outstanding stock of arrears.

- Business environment and SOE reform:
  - Business environment is improving but significant impediments remain; efforts to enhance governance must continue.
  - Authorities need to ensure changes are perceived as permanent to instill confidence and rekindle private sector investment.
  - Reduce the footprint of the state in the productive economy via steadfast progress in reforming the SOE sector.
  - SOE reform can help put public finances on a sustainable path by reducing budget support and containing fiscal risks, while leveling the playing field and improving service provision.
  - Strengthening governance of core economic institutions is key to improving outcomes and fostering private-sector investment.

### Risks to the program
- Domestic risks:
  - Pushback on policy initiatives by vested interest groups.
  - Lack of majority by the ruling party in the upper house.
  - Fiscal slippages, including provinces' under-delivery on commitments to budget parameters, which could put debt sustainability at risk.
- External risks:
  - Potential blacklisting by FATF, which could result in a freeze of capital flows to Pakistan.
  - Slow progress in refinancing/reprofiling loans from major bilateral creditors.
  - Increasing headwinds from a weaker global economic backdrop.
- Risk mitigation:
  - Risks are ameliorated by close monitoring under the program and financing assurances.

*IMF staff appraisal and program assessment as presented in the source content.*

### 42.      Staff supports the authorities' request for the completion of the First Review under

### 1pakea2019002 - 42.      Staff supports the authorities' request for the completion of the First Review under

### Program assessment
- Staff supports the authorities' request for the completion of the First Review under the Extended Arrangement and modification of performance criteria, "given the program performance so far and the policy commitments going forward."

### Macroeconomic outlook and key indicators
- Real GDP growth (factor cost): recent years and projections include "5.2", "5.5", "3.3", "3.3", "2.4", "2.4", "3.0", "4.5", "5.0", "5.0" (as presented in Table 2 sequence).
- Consumer prices (period average) recorded and projected as "4.1", "3.9", "7.3", "13.0", "11.8", "8.3", "6.0", "5.0", "5.0" (Table 2).
- Real per capita GDP (percentage change) shown as "2.6", "3.2", "3.6", "1.4", "1.4", "0.5", "0.5" (Table 1).
- Per capita GDP (in U.S. dollars) noted: "US$1,463 (2016/17; provisional)" and historical series including "1,426.0", "1,529.6", "1,550.9", and projected "1,367.1" (Table 1).
- Figures highlight: "growth slowed down sharply in FY18/19" and "after the recent devaluation and bilateral financing assurances, foreign reserves have begun to recover."

### External sector and reserves
- Current account balance (in percent of GDP): historical and projected values include "-4.1", "-6.3", "-4.6", "-4.9", "-2.6", "-2.4", "-2.0", "-1.8", "-1.7", "-1.8" (Table 3a; Table 2).
- Gross international reserves (GIR; billions of U.S. dollars): "16.1", "9.8", "6.8", "6.8", "7.3", "11.2", "11.2", "14.9", "20.7", "30.6" (Table 3a; Table 2).
- End-period gross official reserves (millions of U.S. dollars): "16,141", "9,789", "6,824", "7,274", "11,187", "11,231" (Table 3a).
- Gross external financing requirements (in millions of U.S. dollars): "30,385", "25,363", "27,332", "26,696", "28,119", "26,684", "29,685" with corresponding percent of GDP "9.7", "9.0", "9.9", "9.0", "8.8", "7.7", "7.9" (Table 3b).
- Gross external debt (in percent of GDP) trajectory: "27.4", "30.3", "36.7", "37.6", "43.4", "41.2", "40.9", "40.1", "38.9", "36.8" (Table 2).

### Public finances and debt
- Revenue and grants (percent of GDP): reported as "15.5", "15.2", "15.0", "12.8", "16.3", "16.4", with projections up to "19.1", "19.7", "19.6" (Table 2; Table 4b).
- Expenditure (including statistical discrepancy; percent of GDP): "21.3", "21.6", "21.7", "21.6", "23.4", "23.9", projected "23.5", "23.0", "22.4", "22.2" (Table 2; Table 4b).
- Budget balance (including grants; percent of GDP) path: "-5.8", "-6.4", "-6.8", "-8.8", "-7.1", "-7.5", projected "-5.4", "-3.9", "-2.7", "-2.5" (Table 2).
- General government debt (incl. IMF obligations; percent of GDP): "67.6", "67.1", "71.6", "74.9", "83.5", "76.9", projected "80.5", "77.3", "73.4", "69.8" (Table 1; Table 2).
- Total general government debt excl. IMF obligations series: "65.5", "65.1", "69.5", "74.7", "81.2", "75.8", "77.7" (Table 1).
- Public sector gross financing requirement noted as "29.4", "31.7", "36.0", "39.3", "23.6", "26.1", "21.7", "19.8", "19.0", "16.3" (Table 8).

### Banking and financial sector
- Private sector credit growth (percent change) reported series: "11.1", "16.6", "14.9", "17.1", "11.6", "13.3", "15.5" (Table 1; Table 5).
- Nonperforming loans (NPLs) to gross loans: recent values include "8.4", "8.3", series shown around "8.0", "8.2", "8.8" with note "NPLs are rising as the economy slows" (Figure 3; Table 6).
- Capital adequacy: "Regulatory capital to risk-weighted assets" around "15.9", "16.1"; "Tier I capital to risk-weighted assets" around "12.9", "13.3", "14.2" (Table 6).
- Liquidity metrics: "Liquid assets to total assets" values include "54.0", "49.7", "51.1", "47.7", "48.7", "45.3", "48.0", "50.8"; "Liquid assets to total deposits" include "61.3", "64.5", "73.3", "72.1", "76.1", "65.6", "71.3", "63.6", "67.2", "59.8", "65.3", "73.5" (Table 6).
- Banking system described as "well capitalized" and "highly liquid" but "oriented toward providing credit to government," with Pakistan "behind its peers in terms of private credit relative to the size of economy."

### Financial markets and policy rates
- SBP paused its tightening cycle in September (Figure 2 caption).
- Interest rate indicators: lending rate, KIBOR (3-month), treasury bills (3-month), deposit rate tracked; six-month treasury bill rate (period average) noted as "6.3", "5.9", "6.0", and later "9.6" (Table 1).
- Emerging Market Bond Index spreads widened; Pakistan composite EMBI series and commentary: "Pakistan bond spreads have widened, reflecting ongoing uncertainty and tighter global conditions" (Figure 2).

### Structural conditionality and program performance criteria
- Prior Actions for the First Review: "Completed on November 29."
- Structural benchmarks: mixed status with examples:
  - Fiscal continuous benchmark: "Met."
  - A benchmark "end-September 2019" marked "Not met. Issued on October 28."
  - Monetary/Financial and SOE benchmarks show multiple resets and modifications (e.g., "Not met. Reset to end-June 2020"; "Reset to end-March 2020"; "Modified. Submit to parliament amendments to the NEPRA Act ...").
- Proposed new Structural Benchmarks include deadlines and actions such as:
  - "Notification of Q2 FY 2020 electricity tariff adjustment for capacity payments"
  - "Presentation of the federal government mid-year budget review report to the National Assembly in line with the PFM Act"
  - "Improve towards a substantial level the effectiveness in addressing terrorism financing consistent with FATF Immediate Outcomes 9 and 10"
  - "Prepare a comprehensive circular debt reduction plan in collaboration with international partners"
  - "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"
  - "Conduct and publish new audits by reputable international auditors of Pakistan International Airlines and Pakistan Steel Mills"
  - "Submit to Parliament a new State-Owned Enterprise law to improve governance and transparency"
  - Social protection actions: "Finalize BISP's banking contracts and launch financial inclusion strategy for women"; "Update the benefit structure of Waseela-e-Taleem (WeT) to narrow the educational gender gap"; "Finalize the update of the BISP beneficiaries' database (National Socio-Economic Registry)"

### Program financing, IMF engagement and schedule
- Extended Arrangement/EFF credit outstanding and projections (SDR): series includes "3,600.0", "4,393.0", "4,243.0", "4,867.0", "5,161.0", "5,548.8", "5,966.7", "5,234.5", "4,423.7", "3,726.8", "3,083.3", "2,372.0" (Table 7).
- Schedule of Reviews and Purchases: Approval and successive review purchase amounts include "July 3, 2019 716", "December 6, 2019 328", "March 6, 2020 328", "June 5, 2020 328", and subsequent scheduled purchases leading to "Total 4,268 210" (Table 9).

*Source: Pakistan — IMF staff report excerpts, figures, and tables as provided in the supplied content unit.*

### Annex I. Pakistan’s Power Sector and Circular Debt

### Annex I. Pakistan’s Power Sector and Circular Debt

### Power sector constraints and recent investment
- Over the past decade the sector featured a significant demand-supply gap, with frequent scheduled power outages: as recently as 2017, power outages averaged five hours a day in urban areas and 10 hours in rural areas.
- Pakistan identified around $50 billion worth of long-term investment projects in the power sector in 2017 (in the context of CPEC).
- New independent power producers (IPPs) entered the market and generation capacity increased by around 45 percent over 2015–18.
- Investment in transmission and distribution lagged, with increases in capacity by around 26 and 33 percent respectively, creating bottlenecks and inefficiencies.

### DISCO operational and commercial performance
- There are 10 public distribution companies (DISCOs) operating across Pakistan with varying efficiency; some operate in urban areas (e.g., IESCO, LESCO), others in more remote areas (e.g., PESCO, QESCO).
- Governance frameworks tend to be weak: Boards are exposed to political interference and management structures are inadequate, so operations are not run on a commercial basis.
- Measured by transmission and distribution losses, operational efficiency is weak, with energy losses in the range of 20–40 percent of the energy received.
- Collections from consumers in many DISCOs fall significantly short of amounts billed.
- The text highlights the need for comprehensive DISCO reform to improve collections and reduce transmission and distribution losses.

### Tariff setting, regulatory assumptions, and consequences
- End-consumer tariffs are determined by NEPRA based on PPAs between producers and the single buyer (CPPA); the tariff main elements include:
  - capacity payments (covering design/construction costs, return on equity, debt financing charges; indexed to exchange rate and domestic interest rates),
  - energy charges (mostly fuel costs),
  - distribution margins (for DISCOs’ O&M, salaries, depreciation, and rate of return).
- Deviations in fuel prices from regulator benchmarks are passed monthly as fuel price adjustments (FPA); DISCO distribution margins are adjusted in the annual tariff determination; authorities are moving to quarterly tariff determination for capacity payments.
- Critically, NEPRA assumes 100 percent collection and transmission and distribution losses at 15.5 percent when determining tariffs—assumptions not reflective of DISCO actual performance—implying tariffs are set below cost recovery and generate a structural revenue shortfall.

### Circular debt: definition and drivers
- Circular debt (per ECC definition, 2014) is “the amount of cash shortfall within the Central Power Purchasing Agency (CPPA) which it cannot pay to power supply companies,” resulting from:
  - the difference between actual cost and NEPRA-determined tariff (distribution losses above and collections below NEPRA allowances),
  - delayed or non-payment of subsidies by government,
  - delayed determination and notification of tariffs.
- Over FY 2019 the amount of new circular debt was PRs 465 billion, with around 1/3 of this amount coming from DISCO inefficiencies.
- Over 40 percent of the FY 2019 accumulation came from policy decisions related to unbudgeted subsidies, unpaid government-provided subsidies (no budget allocation), and delays in tariff notifications.
- The remaining accumulation stems from financial costs generated by the existing stock of circular debt, including significant late payment fees payable to producers.

### Stock and composition of circular debt
- Stock grew from around PRs 450 billion in FY 2013 to PRs 1,618 billion in FY 2019 (around 4.2 percent of GDP), with a pronounced increase over the past two years.
- Of PRs 1,618 billion, PRs 812 billion are accumulated in CPPA as payables to generators, which carry a late payment charge of about KIBOR+4 percent, or around PRs 80 billion annually.
- A similar amount of circular debt is accumulated in Power Holding Private Limited (PHPL), a government entity established to inject liquidity by borrowing (typically 5–7 year borrowing at KIBOR+2 percent) using government guarantees to reduce CPPA liabilities.
- Servicing of PHPL loans is partly made through a surcharge in the tariff, equivalent to around PRs 40 billion annually, that covers around ½ of the servicing costs; the remaining amount is covered by diverting power sector revenues, generating additional arrears.
- The document notes combined annual debt servicing costs from the stock of arrears exceed PRs 100 billion.

### Circular debt reduction plan and key measures
- Authorities prepared a comprehensive circular debt reduction plan (in consultation with IMF staff and partners) aiming to reduce the annual flow of circular debt to around PRs 50–75 billion by FY 2023 through:
  - improving collection and reducing losses;
  - streamlining tariff updates;
  - rationalizing subsidies.
- Monitoring will occur through implementation reports published by the Ministry of Energy.
- Key measures in the plan include:
  - Antitheft drive: government-led with law enforcement assistance to physically secure feeders in high-loss areas and run awareness campaigns about electricity theft.
  - Streamlining tariff procedures and reintroducing surcharges: amend the NEPRA Act to (i) give the regulator power to determine and notify quarterly tariffs; (ii) ensure timely submission of tariff petitions by DISCOs; (iii) streamline government notification of annual tariffs; and (iv) reintroduce government power to introduce tariff surcharges. Amendments to the NEPRA Act are expected to be submitted to parliament by end-December 2019.
  - Timely updating of tariffs: until quarterly adjustments are fully automatic, the government will notify tariffs for capacity payments on a quarterly basis shortly after the end of the preceding quarter (example: the Q2 FY 2020 adjustment will take place by end-January 2020).
  - Improving efficiency and collection: sign performance-based contracts with all DISCOs by end-January 2020, with KPIs for improvements in collection and reductions in losses; enforce legal procedures to initiate disconnections of non-paying consumers (running defaulters).
  - Reassess regulatory benchmarks—particularly the regulator's assumption of 100 percent recoveries—to address structural accumulation of circular debt embedded in the system.
  - Rightsizing of subsidies: revisit all government-provided power sector subsidies so the FY 2021 budget reflects better targeting to residential consumers, industrial sectors, and the agricultural sector.
  - Strengthening DISCO governance: appoint independent Boards of Directors on merit without political interference and fill senior management through competitive processes.

### Strategy to reduce the stock of arrears
- Authorities and partners are designing a strategy to settle the stock of arrears while limiting budgetary impact. The plan envisages:
  - issuing new guarantees to transfer costly CPPA payables to IPPs into the PHPL;
  - absorbing PHPL into the budget, fully recognizing PHPL liabilities as government debt and taking over servicing of PHPL loans;
  - reducing outstanding payables using power assets privatization proceeds, recoveries from outstanding receivables, the existing debt servicing surcharge, and rightsizing of sector-related subsidies.

*Prepared by Ricardo Llaudes.*

### 3.      The authorities have remained engaged with external creditors to secure financing

### 3.      The authorities have remained engaged with external creditors to secure financing

### External financing and creditor engagement
- The oil facility with Saudi Arabia (worth $3.2 billion) was activated in August and is providing support to the balance of payments.
- The authorities secured the roll-over of matured obligations to China Development Bank in September ($700 million).
- Saudi Arabia refinanced BOP support loans that matured in November ($1 billion).
- Official lenders are advancing disbursement plans, including the ADB planning to approve in December a new Special Policy-Based Loan of $1 billion, which would further strengthen the BOP.

### Public debt and risk assessment highlights
- Nominal gross public debt:
  - 2017: 63.3 (percent of GDP)
  - 2018: 70.0 (percent of GDP)
  - 2019: 75.2 (percent of GDP)
  - 2020: 87.8 (percent of GDP)
  - 2021: 84.7 (percent of GDP)
  - 2022: 81.4 (percent of GDP)
  - 2023: 77.6 (percent of GDP)
  - 2024: 73.6 (percent of GDP)
- Of which: guarantees (in percent of GDP)
  - 2017: 2.2
  - 2018: 2.9
  - 2019: 3.6
  - 2020: 4.4
  - 2021: 4.2
  - 2022: 4.2
  - 2023: 4.2
  - 2024: 4.1
- Public gross financing needs (in percent of GDP):
  - 2017: 27.2
  - 2018: 29.4
  - 2019: 33.7
  - 2020: 38.9
  - 2021: 28.8
  - 2022: 26.0
  - 2023: 22.6
  - 2024: 21.0
- Real GDP growth (in percent):
  - 2017: 3.5
  - 2018: 5.2
  - 2019: 5.5
  - 2020: 3.3
  - 2021: 2.4
  - 2022: 3.0
  - 2023: 4.5
  - 2024: 5.0
  - 2024 (alternative rows): 5.0
- Inflation (GDP deflator, in percent):
  - 2017: 9.9
  - 2018: 4.3
  - 2019: 2.8
  - 2020: 7.8
  - 2021: 12.3
  - 2022: 9.9
  - 2023: 7.0
  - 2024: 5.2
  - 2024 (alternative rows): 5.0
- Effective interest rate (in percent):
  - 2017: 8.6
  - 2018: 6.9
  - 2019: 7.0
  - 2020: 8.8
  - 2021: 8.5
  - 2022: 9.1
  - 2023: 8.8
  - 2024: 8.4
  - 2024 (alternative rows): 8.5
- Change in gross public sector debt (in percent of GDP):
  - 2017: 1.9
  - 2018: -0.1
  - 2019: 5.2
  - 2020: 12.6
  - 2021: -3.2
  - 2022: -3.3
  - 2023: -3.8
  - 2024: -4.0
  - cumulative: -3.8 and -5.4 (cumulative labels present)
- Identified debt-creating flows (in percent of GDP):
  - 2017: 1.3
  - 2018: -0.6
  - 2019: 4.4
  - 2020: 4.9
  - 2021: -5.0
  - 2022: -4.1
  - 2023: -4.3
  - 2024: -4.2
  - cumulative: -3.9 and -16.4
- Primary deficit (in percent of GDP):
  - 2017: 1.8
  - 2018: 1.5
  - 2019: 2.1
  - 2020: 3.4
  - 2021: 0.5
  - 2022: -1.0
  - 2023: -2.0
  - 2024: -2.7
  - cumulative: -2.7 and -4.5
- Primary (noninterest) revenue (in percent of GDP):
  - 2017: 14.1
  - 2018: 15.5
  - 2019: 15.2
  - 2020: 12.8
  - 2021: 16.4
  - 2022: 18.0
  - 2023: 19.1
  - 2024: 19.7
  - cumulative: 19.6 and 105.7
- Primary (noninterest) expenditure (in percent of GDP):
  - 2017: 16.0
  - 2018: 17.1
  - 2019: 17.3
  - 2020: 16.2
  - 2021: 16.9
  - 2022: 17.0
  - 2023: 17.1
  - 2024: 17.0
  - cumulative: 16.9 and 101.1
- Automatic debt dynamics (in percent of GDP):
  - 2017: -1.1
  - 2018: -1.8
  - 2019: 1.8
  - 2020: -1.8
  - 2021: -4.9
  - 2022: -3.1
  - 2023: -2.3
  - 2024: -1.5
  - cumulative: -1.2 and -14.7
- External financing and external debt indicators:
  - External debt (baseline, in percent of GDP): 2019: 37.6; 2020: 41.2; 2021: 40.9; 2022: 40.1; 2023: 38.8; 2024: 36.8
  - External debt-to-exports ratio (in percent): 2014: 215.2; 2015: 217.4; 2016: 269.8; 2017: 303.2; 2018: 317.6; 2019: 360.4; 2020: 357.8; 2021: 351.2; 2022: 347.4; 2023: 336.9; 2024: 319.8
  - Gross external financing need (in billions of US dollars): 2014: 10.8; 2015: 9.1; 2016: 11.4; 2017: 21.7; 2018: 28.8; 2019: 26.4; 2020: 21.9; 2021: 20.8; 2022: 21.9; 2023: 22.7; 2024: 22.7
  - Gross external financing need (in percent of GDP): 2014: 4.4; 2015: 3.4; 2016: 4.1; 2017: 7.1; 2018: 9.2; 2019: 9.3; 2020: 8.0; 2021: 7.1; 2022: 6.8; 2023: 6.6; 2024: 6.0

### DSA scenarios and stress tests
- Baseline, historical, and alternative scenarios reported with underlying assumptions including:
  - Baseline real GDP growth (selected years): 2019: 3.3; 2020: 2.4; 2021: 3.0; 2022: 4.5; 2023: 5.0; 2024: 5.0
  - Historical scenario real GDP growth (selected years): 2019: 3.3; 2020: 3.8; 2021: 3.8; 2022: 3.8; 2023: 3.8; 2024: 3.8
  - Constant Primary Balance scenario primary balance: -3.4 for 2019–2024 in scenario presentation
- Stress test highlights (gross nominal public debt, in percent of GDP, under shocks):
  - Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock, Contingent Liability Shock are modelled for 2019–2024.
  - Examples from stress tests:
    - EMBIG (average over last 3 months, 22-Aug-19 through 20-Nov-19): 458 bp (noted in heat map context).
    - Sovereign spreads: EMBIG (bp) 423; 5Y CDS (bp) 433 (in chart context).
  - Combined and contingent shocks drive increases in gross nominal public debt and public gross financing needs in simulation charts.

### Program implementation, commitments, and policy actions (from Letter of Intent)
- The authorities confirm commitment to policies and objectives under the Extended Fund Facility (EFF).
- Macroeconomic developments and policy actions:
  - State Bank of Pakistan (SBP) transitioned to a market-determined exchange rate and stepped up purchases in spot and forward markets to strengthen international reserves.
  - SBP has adjusted the policy rate to shore up confidence and anchor inflation expectations.
  - Tax collection growth: 17.2 percent in Q1 FY 2020.
  - Accumulation of new power sector arrears fell from about PRs 38 billion/month in FY 2019 to around PRs 10 billion/month in FY 2020.
  - Social spending increased and safety nets strengthened for vulnerable segments.
- Program performance and targets:
  - All end-September 2019 and continuous performance criteria (PCs) were observed, including floor on net international reserves (NIR), ceiling on net domestic assets (NDA), and the primary balance by wide margins.
  - Indicative targets (ITs) were missed by small margins; end-September IT on net tax revenues by FBR missed mainly due to lower customs receipts.
  - All but one structural benchmarks (SBs) through end-October implemented, some with delays.
  - Specific completed actions:
    - Finalized BISP’s banking contracts and launched financial inclusion strategy for women on October 10, 2019 (end-October 2019 SB).
    - Notified electricity tariff adjustment as determined by the regulator on September 30, 2019 and adjusted the Q1 FY 2020 tariff on November 29, 2019 (prior action).
    - Issued licenses for track-and-trace system for excises on cigarettes on October 28, 2019 (end-September 2019 SB).
    - Finalized circular debt reduction plan in consultation with international partners on November 8, 2019 (end-September 2019 SB).
  - AML/CFT: significant progress to strengthen the effectiveness of the AML/CFT framework, developed an inter-agency roadmap, engaged capacity development providers; request to reset the end-October SB to end-June 2020 with substantial milestones by end-March 2020.
  - Refrained from granting further tax amnesties.
- Requests to the IMF and program monitoring:
  - Request completion of the first review and a disbursement in the amount of SDR 328 million.
  - Request modification of end-December PCs on net international reserves, net domestic assets, and general government primary budget deficit to reflect program implementation.
  - Request modification of end-December PC on amount of government guarantees to accommodate issuance of guarantees in the power sector consistent with circular debt reduction plan.
  - Program to be monitored through quarterly reviews, prior actions, quantitative performance criteria, indicative targets, and structural benchmarks as described in attached MEFP and TMU.

*Source: IMF staff and Letter of Intent, as presented in the provided content unit.*

### 1. Economic activity has softened as expected. High frequency indicators, including the

### 1pakea2019002 - 1. Economic activity has softened as expected. High frequency indicators, including the

### Economic activity and inflation
- Large-scale manufacturing index down by 5.6 percent y-o-y in September 2019, indicating weakened activity.
- Recovery in agricultural output, increased production in import-competing industries, and volume growth of traditional export sectors.
- Growth expected at around 3.5 percent in FY 2020 driven by a greater contribution from net exports, with a pick-up in momentum thereafter.
- Annual headline inflation reached 11.1 percent y-o-y in October (Based on the old CPI base).
- Inflation projected to decelerate to around 10.5 percent by end FY 2020, supported by timely adjustments to the policy rate.

### Balance of payments and external position
- Transition to a market-determined exchange rate described as orderly; rupee strengthened to around PRs/US$156 after peaking at PRs/US$164 towards end-June.
- Current account deficit narrowed in July-October FY 2020 by almost ¾ from the same period last FY, driven by a 22.9 percent y-o-y decline in imports.
- Exports up 3.4 percent y-o-y for the same period and up 10.3 percent in volume terms.
- SBP reserves rebuilt: SBP not selling in the FX market; purchasing from interbank spot and forward markets; SBP reserves rose to about $8.7 billion as of November 22, 2019, from $7.1 billion at program approval.
- SBP scaled back its net short swap/forward foreign exchange position by around $2 billion by end-October since program adoption.

### Fiscal policy and recent outcomes
- FY 2019 outturn: Federal revenue collections 2 percent of GDP lower than projected at time of program request.
- Q1 FY 2020: general government registered a primary surplus of 0.6 percent of GDP (including provincial surplus of 0.4 percent of GDP), about 0.9 percent of GDP better than programmed.
- Domestic-oriented tax revenue jumping by 25 percent y-o-y.
- Customs receipts and other external sector-related revenues growing only by 6 percent y-o-y; Q1 FY 2020 indicative target on tax revenues was missed.
- Non-tax revenue mobilization strong, including one-off revenues such as renewal of telecom licenses.
- Interest expenses increased due to the extension of about 2 percent of GDP in SBP financing at market rates in Q4 FY 2019.

### Fiscal targets, measures, and policy actions
- Consolidation centered on limiting the primary deficit of the general government to no more than 0.6 percent of GDP for remainder of FY 2020.
- Expectation that larger than expected non-tax revenues (0.8 percent of GDP higher than originally expected) will compensate for lower trade-related tax revenues.
- No unbudgeted subsidies will be issued; timely disbursements for social spending to be ensured.
- Additional subsidies of PRs 10 billion to provide a 5p.p. mark-down on the interest charged by commercial banks to exporters, and devote additional subsidies of PRs 200 billion to stimulate lending to the exporting sector.
- Use existing cash buffers to buy back up to PRs 30 billion worth of existing promissory notes to exporters to address legacy arrears in GST refunds.
- Process refunds for exporters through the Fully Automated Sales Tax e-Refund (FASTER) system.

### Revenue, tax policy, and PFM reforms (planned actions and timelines)
- Roll out the track-and-trace system for excises on cigarettes: licenses issued in October (end-September SB); rollout by end-March 2020.
- Expedite sales tax refunds; buy back up to PRs 30 billion in promissory notes; use FASTER system for exporter refunds.
- Advance tax policy reforms with IMF TA: priorities include (i) Corporate Income Tax (CIT) reform; (ii) simplification of the sales tax on goods; (iii) harmonization of the service sales tax base and rates with provinces.
  - Establish a joint working group to provide recommendations on tax harmonization to be approved by the Council of Common Interest (CCI) by end-March 2020; approved recommendations to be incorporated in the FY 2021 budget.
- PFM reforms: prepare first fiscal risk statement; finalize budget manual by end-December 2019; develop PFM reform strategy.
  - Finalize inventory of government accounts by end-December 2019; establish TSA implementation team by end-December 2019; aim for TSA-1 system functioning by end-September 2020.
  - Prepare mid-year budget review and strategy paper by March 15, 2020; present budget review to parliament by end-February (new end-February 2020 SB).
- Strengthen tax policy and administration frameworks:
  - Build Tax Policy Unit in Ministry of Finance; establish macro-fiscal unit in MoF by end-September 2020.
  - Create a new semi-independent national tax authority for tax administration.
- Deepen fiscal coordination with provinces: launch quarterly Fiscal Coordination Committee meetings under National Finance Commission (NFC) auspices.
- Continuous structural benchmark: avoid issuing new preferential tax treatments or exemptions (does not apply to taxation under international treaties).

### Debt management
- Gross public and publicly guaranteed debt rose to 88 percent of GDP in FY 2019.
- General government debt-to-GDP ratio expected to decline to 84 percent in FY 2020 (including guarantees and IMF borrowing).
- Planned issuance of an additional PRs 200 billion in government guarantees over FY 2020 as part of strategy to tackle circular debt in the power sector.
- Measures taken: lengthening average maturity, lowering cost of domestic debt, reprofiling government debt held by SBP into long-term securities, securing ample financing in longer-term domestic government securities, some foreign participation in domestic government securities.
- Create a cash buffer to smooth short-term cashflow mismatches; size varies with short-term liquidity needs and to be kept within prudent limits.
- Establish cash management committee at the Finance Division by end-November 2019.
- Create a dedicated Treasury and Debt Management Wing by end-December 2020 to consolidate debt management and execute cashflow forecasting and management.
- Request technical assistance on debt management matters.

### Poverty reduction and social protection measures
- Allocation of PRs 180 billion in the FY 2020 budget to expand existing social assistance programs.
- Deliverables already provided:
  - Additional one-off disbursement of PRs 1,000 to existing Benazir Income Support Program (BISP) beneficiaries at end-August.
  - Timely transfer budgetary allocations to BISP to expand existing programs and develop new ones.
  - Budget subsidies to protect over 70 percent of consumers from the impact of power tariff adjustments.
- Financial inclusion: finalized new banking contracts for BISP stipend disbursements; launched “one woman one account” financial inclusion strategy for women in October (end-October SB).
- Program initiatives and targets:
  a. Waseela-e-Taleem (WeT) modification: provide a girl bonus of PRs 250 disbursed quarterly (end-December 2019 SB).
  b. NSER update: 35 percent of estimated household caseload surveyed, quality assured and validated with NADRA database by end-December 2019; finalize NSER updating by end-June 2020 (end-June 2020 SB); thereafter expand BISP cash transfer coverage under a progressive design.
  c. Mother and Child Nutrition Program: aim to reduce stunting rate from 40 percent to less than 30 percent; quarterly cash stipend of PRs 2,000 for girls and PRs 1,500 for boys up to two years of age; pilot in 8 districts with gradual national rollout.
  d. Scaling up affordable housing through Ehsaas:
    - Budgetary reallocation of PRs 20–30 billion in FY 2020 to cover 10 percent down payment on affordable housing for Ehsaas beneficiaries.
    - Incentives to construction companies: tax credits equal to 10 percent of project-related expenses for first two years of construction; a tax credit equivalent to half of the difference between the sale price and the actual market price.

### Monetary policy, exchange rate, and reserves actions
- Continued commitment to a market-determined exchange rate; SBP interventions to be guided by market conditions and program reserves targets, limiting FX interventions to prevent overshooting or disorderly market conditions (DMCs).
- Rebuilding reserves: SBP reserves about $8.7 billion as of November 22, 2019, up from $7.1 billion at program approval; net short swap/forward position scaled back by around $2 billion by end-October.
- Adequately tight monetary policy: proactive adjustments to the policy rate to shore up confidence and anchor inflation; met end-September NDA target comfortably.
- SBP monetary policy stance to remain consistent with medium-term inflation objective while maintaining a positive policy interest rate in real terms on a forward-looking basis; aim to bring growth of broad money down.
- No central bank financing of the budget deficit: maturing debt held by SBP will not be rolled over; seek to amortize existing long-term instruments.

### SBP autonomy, governance, and safeguards-related actions
- Preparing amendments to the SBP Act in line with 2019 Safeguards Assessment recommendations to:
  - Set domestic price stability as a primary objective.
  - Prohibit monetary financing of the public sector debt.
  - Remove quasi-fiscal operations following a phase-out period.
  - Provide statutory mechanisms for sufficient capitalization and profit retention.
  - Secure stronger protection of personal autonomy of senior officials.
  - Provide statutory underpinnings for external auditors, audit committee, and internal audit function.
  - Enhance collegial decision-making at executive management.
  - Provide stronger oversight by the Board.
- Requested IMF-provided technical assistance for preparation of the legislation.
- Timeline: amendments forwarded by SBP to Ministry of Finance by end-January 2020; submitted to cabinet; submitted to parliament by end-March 2020 (new deadline reset from end-December 2019).

### Financial sector resilience and resolution framework
- Liquidation of one small state-owned bank in September 2019; another small state-owned bank included in privatization list.
- Ensure remaining two private sector banks meet minimum capital requirements by end-June 2020.
- Address gaps in bank resolution and crisis management frameworks, including the deposit insurance scheme.
- Submit legislation to parliament by end-May 2020, supported by IMF technical assistance, to strengthen and modernize resolution frameworks.

### AML/CFT commitments and timelines
- Established National Coordination Committee and FATF secretariat to complete AML/CFT action plan agreed with FATF.
- With technical assistance, complete the action plan by end-June 2020 (resetting end-October 2019 structural benchmark), covering risk-based AML/CFT supervision, terrorist financing investigations of designated entities, confiscation (cross-border currency controls), and targeted financial sanctions.
- By end-March 2020, improve AML/CFT measures for:
  - FATF Immediate Outcome 9 (pursuing investigations and prosecutions of terrorist financing by UN designated entities of concern).
  - FATF Immediate Outcome 10 (effective implementation of targeted financial sanctions against their assets), towards a substantial level of effectiveness, in line with the FATF assessment methodology (structural benchmark).
- Engage with capacity development providers to address deficiencies identified by the 2019 Mutual Evaluation Report of the Asia Pacific Group on Money laundering (APG).
- Develop a roadmap to prioritize key recommendations and pursue membership to the Egmont Group of financial intelligence units.

*Source: https://www.imf.org/-/media/files/publications/cr/2019/1pakea2019002.pdf*

### 13. We will ease foreign exchange restrictions and administrative measures as conditions

### 13. We will ease foreign exchange restrictions and administrative measures as conditions allow

### Foreign exchange measures
- Refrained from introducing or intensifying exchange restrictions, multiple currency practices, or import restrictions for balance of payment measures.
- Committed to phase out existing measures as the balance of payments stabilizes and to eliminate them by the end of the program.
- As a first step, allowed banks to make advance payments up to US$10,000 per invoice on behalf of manufacturing and industrial companies for the import of raw materials and spare parts in early November.

### Energy sector: circular debt and arrears — assessment and targets
- Stock of power sector arrears (circular debt): over PRs 1,600 billion (over 4 percent of GDP).
- New arrears accumulated in FY 2019: PRs 465 billion.
- Combined annual debt servicing costs from power sector arrears: exceeding PRs 100 billion.
- Accumulation of new arrears fell from about PRs 38 billion/month in FY 2019 to around PRs 10 billion/month in the first three months of FY 2020.
- Circular debt reduction plan aim: reduce the annual flow of circular debt to around PRs 50–75 billion by FY 2023.
- Plan salient features: annual improvements in collections by selected distribution companies in the range of 2–5 percent; annual reductions in losses by around 1 percent; rationalization of subsidy allocations.
- Ministry of Energy to publish first monitoring report by end-January 2020.

### Energy sector: near-term measures (selected)
- Quarterly notification of tariffs; increase in tariffs for capacity payments by around 2 percent effective Q1 FY 2020 (prior action); adjust Q2 FY 2020 tariffs for capacity payments by end-January 2020 (new SB).
- Recovery of Net Hydel Profits stock of arrears: tariff update of January 2020 will incorporate recovery from consumers of half the outstanding stock of remaining Net Hydel Profits arrears, equivalent to PRs 73 billion.
- Prepare and submit amendments to the NEPRA Act to: (i) give the regulator the power to determine and notify quarterly tariffs; (ii) ensure timely submissions of quarterly and annual petitions by the DISCOs; (iii) eliminate the gap between the regular annual tariff determination and notification by the government; and (iv) reinstate the power of the government to levy surcharges over and above the system’s revenue requirements. Submit these changes to parliament, in consultation with international partners, by end-December 2019 (a modified end-December SB).
- Ensure timely disbursement of power sector-related subsidies: by end-November 2019 the Ministry of Energy will streamline the required auditing procedures.
- Performance-based management of DISCOs: sign performance-based contracts with all DISCOs by end-January 2020; contracts to contain KPIs on collection, loss reduction, regulatory timelines; DISCOs to submit quarterly performance reports to NEPRA and publish them on NEPRA’s website.
- Start legal process against defaulters: abolish running defaulter categories and disconnect non-paying consumers; reconnections with higher security deposits and/or pre-paid meters; Ministry of Law to ensure legal compliance.
- Recovery of late payment charges: NEPRA will allow incorporation in the tariff by end-June 2020 of PRs 110.6 billion of late payment charges accumulated prior to FY 2016, so it can be incorporated in the tariff from FY 2021.
- Targeting of subsidies: before end-March 2020 revisit all government-provided power sector subsidies for streamlining and rationalization; in FY 2021 budget aim to better target subsidies to residential consumers, the industrial sectors, and the agricultural sector.
- Reassessing regulatory benchmarks: Ministry of Energy to propose to the CCI by end-December 2019 revisions to benchmarks and standards, including permission for write-offs, to address NEPRA’s assumption of 100 percent recoveries for all DISCOs.
- Introduction of surcharges as needed to meet circular debt reduction targets.

### Energy sector: medium-term measures (selected)
- Addressing tax refunds in the power sector: Ministry of Energy and FBR to submit proposals to the ECC by end-March 2020 for inclusion in the FY 2021 finance bill.
- Strengthening DISCOs governance: all DISCOs to appoint independent Boards of Directors on basis of merit; senior management to be appointed through competitive process.

### Steps to reduce stock of power sector arrears (subject to progress on circular debt plan)
- Government to issue new guarantees in the amount of PRs 200 billion to transfer costly CPPA payables to IPPs into the Power Holding Private Limited (PHPL).
- Government to absorb PHPL into its budget, fully recognizing the liabilities in PHPL as debt of the government of Pakistan and taking over servicing of the loans contained in PHPL.
- Reduce stock of outstanding payables through: power assets privatization proceeds, recoveries from outstanding receivables, the existing debt servicing surcharge, and rightsizing sector-related subsidies.

### Gas sector reforms and outcomes
- Timely update of tariffs: tariff adjustment on July 1 eliminated the flow of gas sector arrears; tariffs to be adjusted by end-December 2019 based on OGRA’s mid-year decision.
- Reducing unaccounted for gas losses (UFG): ECC approved 3-year UFG reduction plans for two gas companies envisaging annual 1–2 percent reductions; quarterly monitoring reports to be published by the regulator.
- Other initiatives: prepare amendments to the OGRA Act to ensure timely notification of tariffs; changes to petroleum policy to facilitate new explorations and streamline regulations.

### Structural policies: SOEs, business environment, and governance
- SOEs governance, transparency, efficiency actions:
  - Advanced privatization of two LNG power plants by appointing financial advisors and approving transaction structure; expect to finalize by end-FY 2020.
  - Hired international auditors to conduct new audits of Pakistan International Airlines (PIA) and Pakistan Steel Mills; complete and publish audits of the 2018 accounts by end-December 2019 (end-December SB).
  - Engaged IMF technical assistance to develop new State-Owned Enterprise Law (end-September 2020 SB); plan to classify SOEs into companies for sale, liquidation, or retaining under state ownership (end-September 2020 SB).
- Business environment improvements and indicators:
  - Improvement in 2020 World Bank Doing Business Indicators from 136th place to 108th place.
  - PRs 50,000 threshold on a tax identification number came into effect end-October.
  - Introduce online portals for GST and CIT tax modules and for new commercial electricity connections.
  - Adopt new national tariff policy by end-February 2020 developed jointly with the World Bank.
- Anti-corruption and AML/CFT measures:
  - Second review cycle under the UNCAC implementation mechanism; task force to complete by end-June 2020 a review of anticorruption institutional framework with proposals for legislative amendments as appropriate.
  - Support provinces to strengthen Provincial Anticorruption Establishments; establish dedicated AML unit in FIA; upgrade capacities of FIA and NAB for financial investigations through training.
  - Asset Recovery Unit at Prime Minister's Office and FBR's International Taxation Unit to continue identifying assets abroad owned by Pakistani residents.
  - Enhance use of AML tools leveraging computerized national identity card system to identify politically exposed persons and improve suspicious transaction reporting.
  - Grant fiscal autonomy and adequate resources to the Financial Monitoring Unit; establish robust asset declaration system for high-level public officials by end-October 2020 (comprehensive, filed with a central federal agency, electronically available to the public, searchable, and appropriately verified).
  - Register prize bonds and other bearer instruments to rein in their use for potential illegal activities/tax avoidance (note: outstanding stock about 20 percent of currency in circulation).

### Financing and program monitoring
- Financing needs for the next 12 months (the program period): $27.5 billion.
- Financing commitments secured from bilateral and multilateral partners:
  - China $5.2 billion
  - Saudi Arabia $6.2 billion
  - UAE $1 billion
  - World Bank $1.7 billion
  - Asian Development Bank $2.5 billion
  - Islamic Development Bank $1 billion
- In line with program financing commitments, key bilateral creditors extended new financing fully covering matured loans: China, $700 million; Saudi Arabia, $3 billion.
- Program monitoring through: prior actions, quantitative performance criteria, indicative targets, continuous performance criteria, structural benchmarks, and quarterly reviews as defined in the attached Technical Memorandum of Understanding (TMU).
- Quantitative targets and structural conditionality are set out in Tables 1 and 2 of the memorandum, covering fiscal and monetary performance criteria, ceilings on SBP and government balances, floors on targeted spending, and a zero new flow of SBP credit to general government.

*Source: 1pakea2019002 - 13. We will ease foreign exchange restrictions and administrative measures as conditions*

### 1. This memorandum sets out the understanding between the Pakistani authorities and the

### 1pakea2019002 - 1. This memorandum sets out the understanding between the Pakistani authorities and the

### Overview
- Memorandum of Understanding between the Pakistani authorities and IMF staff on definitions of quantitative performance criteria, indicative targets, and reporting requirements for the economic program under the Extended Arrangement (LOI dated June 19, 2019 and attached MEFP).
- Definitions in this TMU will be adjusted to reflect any changes in accounting classifications introduced during the program period.
- All assets, liabilities, and debt denominated in SDRs or currencies other than the U.S. dollar will be converted into U.S. dollars at program exchange rates; net external budget financing and external cash grants will be converted into Pakistani rupees at the program exchange rate.

### Exchange rates and conversions
- Program exchange rate: 141.3172 rupee per one U.S. dollar.
- Cross-exchange rates for other foreign currencies provided in Table 1 (in source).

### Quantitative targets (performance criteria, continuous, indicative)
- Performance Criteria:
  - Floor on the net international reserves (NIR) of the State Bank of Pakistan (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).

### Net International Reserves (NIR) — definition and adjustments
- Definition:
  - NIR (stock) of the SBP = dollar value of usable gross international reserve assets minus reserve-related liabilities, evaluated at program exchange rates.
  - Usable gross international reserves include: holdings of foreign currencies, holdings of SDRs, reserve position in the IMF, holdings of fixed and variable income instruments.
  - Exclusions from usable reserves include (inter alia): claims on residents; assets in nonconvertible currencies; precious metals; illiquid assets; pledged/collateralized assets; assets not readily available for intervention at book price; balances at foreign branches of non-investment rated domestic banks.
  - Reserve-related liabilities include: foreign currency liabilities (excluding liabilities to general government) with remaining maturity of one year or less; foreign exchange liabilities arising from derivatives positions (net outstanding basis); outstanding IMF credits to Pakistan; foreign exchange deposits with the SBP by foreign governments, foreign central banks, foreign deposit money banks (excluding regulatory capital deposits of foreign banks with the SBP), international organizations, foreign nonbank financial institutions, and domestic financial institutions (excluding regulatory capital deposits).
  - Aggregate net position in foreign exchange derivatives = aggregate net positions in forward and futures in foreign currencies of the SBP and general government vis-à-vis domestic currency (including forward leg of currency swaps).
- Key levels and historical values:
  - On April 16, 2019, the NIR of SBP are estimated at negative US$15,557 million.
  - At end-April 2019, the SBP's aggregate net derivative position was negative US$8,055 million.
  - Stock of NIR of SBP at end-June 2019 projected at negative US$17,743 million.
- Adjustment mechanisms for NIR floor:
  - Adjusted upward (downward) by cumulative excess (shortfall) of cash inflows from multilateral and bilateral creditors, commercial borrowing and bond issuance relative to projected inflows (Table 2).
  - Cumulative cash inflows defined as external disbursements (including grants) from official multilateral creditors (including, but not limited to Asian Development Bank, Islamic Development Bank, and World Bank), official bilateral creditors (including, but not limited to bilateral oil facilities, China, Saudi Arabia, UAE, DFID-UK, USAID), external bond placements and other commercial borrowing usable for financing the central government budget.
  - Adjusted upward (downward) by cumulative excess (shortfall) of actual stock of NIR at end-June 2019 relative to projected amount.
  - Adjusted upward (downward) by cumulative excess (shortfall) of SBP use of foreign assets related to commercial consortium loan to make import payments over (under) amounts expected under baseline projections (Table A).

- 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
  - End-Sep 2020: 7,000

### Net Domestic Assets (NDA) — definition and adjustments
- Definition:
  - NDA of the SBP = Reserve Money (RM) minus NIR of the SBP (NIR valued at program exchange rate and expressed in rupee).
  - Reserve money (RM) = currency outside scheduled banks (deposit money banks); schedule banks' domestic cash in vaults; schedule banks' required and excess rupee and foreign exchange deposits with the SBP; deposits of the rest of the economy with the SBP, excluding those held by the federal and provincial governments and the SBP staff retirement accounts.
- Adjustment mechanisms for NDA ceiling:
  - Adjusted downward (upward) by full amount of cumulative excess (shortfall) of cash inflows from multilateral and bilateral creditors and commercial borrowings and bond issuance relative to projected inflows (Table 2), evaluated at the program exchange rate.
  - Adjusted downward (upward) by cumulative excess (shortfall) of actual stock of NIR at end-June 2019 relative to projected amount, evaluated at the program exchange rate.
  - Adjusted downward (upward) by cumulative excess (shortfall) of SBP use of foreign assets related to commercial consortium loan to make import payments over (under) amounts expected under baseline projections (Table A), evaluated at the program exchange rate.
  - NDA targets for September 2019 and December 2019 will be adjusted upward (downward) by the full amount of the excess (shortfall) of actual stock of reserve money in end-June 2019 relative to the projected amount of 6,345 billion rupees.

### SBP net foreign currency swap/forward position — ceiling
- Definition:
  - Stock of net foreign currency swap/forward position = aggregate net positions in forward and futures in foreign currencies of the SBP vis-à-vis the domestic currency (including forward leg of currency swaps).
- Historical value:
  - At end-April 2019, the SBP's aggregate net FX derivative position was negative US$8,055 million.

### General government primary budget deficit excluding grants — definition and adjustments
- Definitions and measurement:
  - Overall general government budget deficit (excluding grants) monitored quarterly under cash balance of general government balance, excluding grants, including operations of local (provincial) governments financed from local funds.
  - Includes: net external budget financing (excluding valuation gains/losses); change in net domestic credit from banking system (cash basis); change in net domestic nonbank financing (including domestic privatization receipts transferred to budget; stock of issued government securities held outside general government and banking system, net of valuation changes; net deposits and reserves received by government (public accounts deposits); other government borrowing from domestic nonbank sources net of repayments, minus government deposits with nonbank financial institutions); total external grants (project grants, cash external grants for budgetary support, capital grants reflecting principal amounts of external debt cancellation or swaps, and other grants).
  - 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 and net external budget financing:
  - Net external program financing includes external privatization receipts; budget support grants; budget support loans from multilateral, official bilateral, and private sector sources; rescheduled government debt service and change in stock of external debt service arrears net of government debt amortization due on foreign loans; foreign loans on-lent to financial institutions and companies; emergency relief lending. Excludes external financing counted as reserve liabilities of the SBP.
  - Net external budget financing = net external program financing minus privatization receipts, minus budget support grants, plus other external loans for financing public projects or budget expenditures, plus transfers of external privatization receipts from privatization account to the budget.
- Adjustment mechanisms for ceiling on primary deficit (excluding grants):
  - Adjusted upward (downward) by cumulative excess (shortfall) in external project financing relative to program projections evaluated in rupee terms at actual exchange rates.
  - Adjusted downward for any shortfall in targeted cash transfers (BISP); adjusted upward for over performance in BISP spending up to PRs 40 billion in FY 2019/20 from their indicative targets.
  - In FY 2019/20, adjusted downward for any excess (cumulatively from July 1, 2019) in flow of power sector payment arrears above respective indicative program targets, excluding non-recoveries and excess line losses.
  - Adjusted downward by full amount of any increase in stock of budgetary arrears on social payments (wages, pensions, social benefits) accumulated since beginning of fiscal year.
  - Adjusted downward by full amount of any excess in cumulative flow of tax refund arrears above respective indicative program targets.
  - Adjusted upward (downward) for any shortfall (excess) in difference between actual interim SBP profit transfers to the budget and programmed SBP profit transfers (on a cumulative basis).

- Table B. Programmed SBP Profit Transfers to the Budget (Cumulative flows from start of fiscal year; billions of Rupees)
  - End-Sep 2019: 185
  - End-Dec 2019: 341
  - End-Mar 2020: 478
  - End-Jun 2020: 604
  - End-Sep 2020: 117

### Net government budgetary borrowing from SBP — definition and adjustment
- 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, debtor balances. Excludes accrued profits on government securities. Government deposits exclude the Zakat Fund.
- Liability management operation:
  - Will transform stock of government credit held by SBP into tradable instruments at 1, 3, 5 and 10-year maturities at interest rates close to market levels.
  - Expected amount of operation: 7,756 billion rupees.
  - 3-year and 5-year papers will be amortizing instruments; 1- and 10-year papers will be bullet bonds.
- Adjustment mechanism:
  - Ceiling adjusted upward (downward) by amount of cumulative excess (shortfall) in total amount of liability management operation relative to baseline projection.

### Ceiling on government guarantees
- Applies to stock of publicly guaranteed debt issued or executed by central government.
- Mark-to-market revaluation exchange rate applies to all foreign currency denominated guaranteed debt.
- Excludes guarantees issued by Ministry of Finance for SBP borrowing from the IMF.
- Stock of issued or executed guarantees at end-September 2019: 1,693 billion rupees.

### Continuous performance criteria and other safeguards
- No new flow of SBP's direct credit to general government, including purchases of public debt securities on the primary market — continuous.
- Zero ceiling on accumulation of external public debt payment arrears — continuous.
  - External public debt payment arrears defined as unpaid debt-service obligations of the general government (federal and provincial government, SBP, and state-owned enterprises) to nonresidents arising in respect of public sector loans, debt contracted or guaranteed, including unpaid penalties or interest charges beyond 30 days after due date.
  - Ceiling set at zero.
- Other continuous criteria:
  - Pakistan will not (i) impose or intensify restrictions on payments/transfers for current international transactions; (ii) introduce or modify multiple currency practices; (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.
  - Performance criterion on non-introduction/modification of multiple currency practices excludes MCPs arising from introduction/modifications of multiple-price foreign exchange auction system operating in line with IMF staff advice.

*Source: 1pakea2019002 - Memorandum of Understanding between the Pakistani authorities and IMF staff (text provided).*

### 39. The floor will apply to the cumulative targeted cash transfers spending by the Benazir

### 1pakea2019002 - 39. The floor will apply to the cumulative targeted cash transfers spending by the Benazir

### Program floors, ceilings, and definitions
- Floor on cumulative targeted cash transfers spending:
  - Applies to the Benazir Income Support Program (BISP).
- Floor on General Government Budgetary Health and Education Spending—Indicative Target:
  - Applies to cumulative budgetary spending on health and education by the federal and provincial governments.
- Floor on Net Tax Revenues Collected by the Federal Bureau of Revenue (FBR)—Indicative Target:
  - Net tax revenues collected by the FBR are defined as the sum of revenues collected from:
    - (i) general sales tax (GST) on goods, including GST on services collected in Islamabad Capital Territory;
    - (ii) customs duties, customs registration fees and levies;
    - (iii) excise duties on imported products;
    - (iv) excise duties on domestic products;
    - (v) levies (toll) on oil derivatives;
    - (vi) other proceeds and fees;
    - (vii) sales tax; and
    - (viii) unclassified revenues minus the tax refunds.
  - Net revenue collection will be defined, for each test date, as the cumulative sum of net revenues collected since the beginning of the current year.
  - The floor on the collection of gross revenues by the FBR will be measured quarterly on the basis of cumulative end-of-quarter data.
- Ceiling on Net Accumulation of Tax Refund Arrears—Indicative Target:
  - Applies to the cumulative flow of tax refund arrears.
  - Stock of tax refund arrears is defined as tax refund claims not settled (cash refund, netting out, government bond/promissory note, or official rejection) within a specified time period after submission to the FBR.
  - Stock of tax refund arrears as of June 30, 2019 was 235.5 billion rupees.
- Ceiling on Power Sector Payment Arrears—Indicative Target:
  - Power sector payment arrears defined as power sector payables in arrears arising from:
    - (i) non-recoveries from supply to AJ&K, industrial support package, other federal and provincial governments including FATA, private consumers, and Baluchistan Tube Wells;
    - (ii) accrued markup from the servicing of PHPL;
    - (iii) line losses and non-collections that are not recognized by NEPRA;
    - (iv) GST Non-Refund;
    - (v) late payment surcharges;
    - (vi) delay in subsidy payments; and
    - (vii) the delay in tariff determinations.
  - 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.

### Electricity tariff formulas, components, and notified tariffs
- Current notified uniform weighted average electricity tariff:
  - PRs 13.51/kWh for all classes of consumers and includes:
    - (i) weighted average tariff of PRs 11.95/kWh,
    - (ii) inter-disco tariff rationalization of PRs 1.03/kWh,
    - (iii) debt servicing surcharge (DSS) of PRs 0.43/kWh, and
    - (iv) Neelum-Jhelum Surcharge of PRs 0.1/kWh.
  - Current notified electricity tariffs for users at 0–50 kWh/month of PRs 2/kWh will be retained.
- Definition and decomposition:
  - Uniform Weighted Average Notified Tariff for electricity consumers is calculated as the weighted average of tariff rates by user category and DISCO estimated sales across categories (Industrial, Residential, Commercial, Single Point Supply for further distribution, AJ&K users, Agriculture Tube-wells, Other users) divided by DISCO’s total sales to the specified categories = PRs 11.95 kWh.
  - Inter-disco tariff Rationalization: PRs 1.03/kWh to maintain the uniform tariff across DISCOs after accounting for target subsidy to protected consumer categories.
  - Debt servicing surcharge (DSS): PRs 0.43/kWh to cover servicing the Syndicated Term Credit Financing obtained by PHPL to finance financing to power sector.
  - Neelum-Jhelum Surcharge: PRs 0.10/kWh on all classes of consumer except the lifeline consumption of 0–50 kWh/month.

### Key stocks and balances (selected)
- Tax refund arrears:
  - Stock as of June 30, 2019: 235.5 billion rupees.
- Power sector payables and PHPL stock:
  - Payables as of end-March 2019: PRs 762.4 billion.
  - Stock of PHPL as of end-March 2019: PRs 807 billion.
- Electricity tariff components:
  - Uniform weighted average tariff: PRs 13.51/kWh.
  - Weighted average tariff component: 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 tariff for 0–50 kWh/month: PRs 2/kWh.

### Monitoring and reporting framework — key agencies, data types, frequency, and timing (selected highlights)
- State Bank of Pakistan (SBP):
  - SBP balance sheet summary: Weekly — First Thursday of the following week.
  - SBP balance sheet summary at program and official exchange rates: Monthly — Within 15 days of the end of each month.
  - Monetary survey (summary banking system balance sheet): Monthly — Within the first 30 days of each month.
  - International reserves: Daily — The following working day.
  - Foreign exchange market: Daily/Monthly — Within one day/monthly within five working day(s).
  - Net International Reserves at program exchange rates (TMU definition): Quarterly — Seventh working day after quarter end.
  - Interbank money market: Daily — Within one day.
- Ministry of Finance (MOF):
  - External debt (disbursements and stock): Monthly — Within 25 days of the following month.
  - External financing projections and receipts: Quarterly — Within 15 days of the end of each quarter.
  - State budget (federal government): Monthly — Within 30 days of the end of each month.
  - Consolidated general government (federal and provincial): Quarterly — Within 45 days of the end of each quarter; Annual — Within 180 days of the end of each year.
  - Federal government fiscal financing sources: Monthly — One month in advance.
  - General government total budgetary spending on health and education (federal and provincial breakdown): Monthly — Within 15 days of the end of each month.
- Pakistan Bureau of Statistics (PBS):
  - SPI, CPI, WPI detailed monthly price indices: Monthly — Within five days of the following month.
  - CPI Index of core inflation: Monthly — Within 21 days of the end of each month.
- Federal Board of Revenue (FBR):
  - Revenue collection and tax credits; tax arrears; all tax refund claims in arrears: Monthly — Within seven days of the end of each month.
  - Automated GST refunds: Quarterly — Within seven days of the end of each month.
  - Large taxpayers (number and amount managed by LTUs): Quarterly — Within seven days of the end of each month.
- Ministry of Water and Power:
  - Key Power Sector Statistics and Cumulative Monthly Subsidy Position (Rs. Billion); PEPCO month end payables and receivables; DISCOs consolidated income statement; AT&C statistics; TDS claims by DISCOs: Monthly/Quarterly — reporting within 30–45 days as specified.
- Ministry of Petroleum and Natural Resources:
  - Gas supply, gas prices, gas sales by consumers: Quarterly on monthly frequency — Within 30 days from the end of the quarter.
- Benazir Income Support Program (BISP):
  - Targeted cash transfers coverage (number of beneficiaries paid) and payment by conditional and unconditional transfers: Quarterly — Within 30 days from the end of the quarter.

### Selected program exchange rates (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
- Note: JPY, CNY as of April 30, 2019; CAD as of May 2 2019

### Selected government sector (budgetary support) end-of-period stocks (PRs millions)
- A. Central Government:
  - 30-Jun-18: 10,191,037
  - 31-Dec-18: 11,115,217
  - 31-Mar-19: 11,305,701
  - 30-Jun-19: 12,586,952
  - 30-Sep-19: 12,933,003
- Components (selected):
  - Scheduled Banks (central government deposits/liabilities):
    - 30-Jun-18: 6,523,418
    - 31-Dec-18: 6,011,620
    - 31-Mar-19: 3,930,955
    - 30-Jun-19: 5,753,677
    - 30-Sep-19: 7,461,389
  - State Bank:
    - 30-Jun-18: 3,667,619
    - 31-Dec-18: 5,103,597
    - 31-Mar-19: 7,374,746
    - 30-Jun-19: 6,833,275
    - 30-Sep-19: 5,471,615
- B. Provincial Governments:
  - 30-Jun-18: -798,077
  - 31-Dec-18: -1,071,620
  - 31-Mar-19: -1,083,945
  - 30-Jun-19: -990,484
  - 30-Sep-19: -1,180,548

*International Monetary Fund — Pakistan program documentation (excerpts as provided)*

### 1. Scheduled Banks -743,864   -838,523   -767,505   -849,079   -813,920

### 1pakea2019002 - 1. Scheduled Banks -743,864   -838,523   -767,505   -849,079   -813,920

### Banking Sector Balances and Government Borrowing
- Scheduled Banks
  - Main line: -743,864   -838,523   -767,505   -849,079   -813,920
  - a) Advances to Punjab Government for Cooperatives 1,024 1,024 1,024 1,024 1,024
  - b) Government Deposits -744,888   -839,547   -768,529   -850,103   -814,944

- State Bank
  - Main line: -54,213   -233,097   -316,440   -141,405   -366,628
  - a) Debtor Balances (Excl. Zakat Fund) 5,515 0 0 0 0
  - b) Government Deposits (Excl.Zakat Fund) -59,728   -233,097   -316,440 -141,405   -366,628

- Net Govt. Budgetary Borrowings From Banking System  9,392,960 10,043,597 10,221,756 11,596,468 11,752,456
  - Through SBP 3,613,406  4,870,500  7,058,307  6,691,870  5,104,987
  - Through Scheduled Banks 5,779,554  5,173,097  3,163,450  4,904,598  6,647,469

### Memorandum Items (Selected)
- Accrued Profit on SBP & BSC holding of MRTBs & MTBs 73,953   133,626   129,658 2,912   259,201
- Scheduled banks' deposits of Privitization Commission -2,007 -3,741 -2,091 -2,979 -2,516
- Outstanding amount of MTBs (Primary market; discounted value) 4,743,836  4,673,434  2,453,412  4,363,090  5,243,197

- Net Govt. Borrowings (Cash basis) From Banking System 9,283,551  9,861,138 10,071,205 11,545,893 11,422,889
  - (i) From SBP 3,539,453  4,736,874  6,928,649  6,688,958  4,845,786
  - (ii) From Scheduled Banks 5,744,098  5,124,264  3,142,556  4,856,935  6,577,103

### Statement and Program Context
- Statement by Jafar Mojarrad, Executive Director for Pakistan and Cyrus Sassanpour, Senior Advisor to Executive Director, December 19, 2019.
- Pakistan’s authorities acknowledge support under a 39-month EFF arrangement, approved on July 3, 2019.
- Authorities request Board approval of the first review under the arrangement and modification of some performance criteria (PCs).

### Program Performance (Key Findings)
- All end-September performance criteria (PCs) were observed with significant margins.
- All structural benchmarks (SBs) through end-October were completed, with one exception.
- Exchange rate regime shift to a market-based system implemented smoothly without excessive overshooting.
- Foreign exchange market sentiment turned around and SBP significantly rebuilt reserves.
- Fiscal revenues grew strongly; government posted a primary surplus in the first quarter of the fiscal year.

### Recent Economic Developments and Outlook
- Current account posted a surplus in October 2019—the first monthly surplus in over four years.
- FBR tax revenues grew 18.2 percent in November 2019.
- Inflation has risen in recent months due to depreciation and temporary food price increases.
- Authorities expect inflationary pressures to begin to recede in the second half of the current fiscal year.
- Growth expected at 3-4 percent though with downside risks.

### Monetary and Exchange Rate Policies
- Transition to market-based exchange rate system viewed as key success.
- Since its low of PRs 164.1 to US$ in June 2019, rupee has appreciated about 6 percent.
- SBP increased its policy rate to maintain a positive real interest rate.
- Future monetary decisions to be guided primarily by the inflation outlook.
- Commitment: no central bank financing of the budget deficit; maturing debt held by the SBP will not be rolled over.
- Preparations to amend the SBP Act and submit amendments to parliament by end-March 2020.
- Legislation to strengthen and modernize bank resolution frameworks intended to be placed before parliament by end-May 2020.

### Fiscal Policy Reforms and Debt Sustainability
- Program guided by front loaded revenue mobilization: of the 6.1 percent of GDP adjustment in the primary balance (excluding grants) during FY2020-FY2024, about half expected in the first year.
- Fiscal outturn Q1 FY2020 (July-September 2019) over-performed the program target by 1 percent of GDP.
- FY2020 primary deficit target: 0.6 percent of GDP expected to be met comfortably.
- Domestic tax revenue performance expected strong this year (25 percent growth).
- Primary current spending expected to remain flat at around 7 ½ percent of GDP during the program period.
- Public sector development program targeted to rise modestly over the medium term.
- Public debt (including guarantees) rose to 88 percent of GDP by end-FY2019.
- Government aims to lower public debt ratio to 70 percent of GDP by end-FY2024.

### Poverty Reduction and Social Protection
- Benazir Income Support Program (BISP) serves as main channel for social protection.
- Cash transfers under BISP increased; bonuses for education of young girls (Waseela-e-Taleem); major mother and child nutrition program launched with higher allowances for girls.
- Affordable housing schemes promoted through Ehsaas program.
- Small electricity users (over 70 percent of consumers) exempted from tariff increases as part of power sector reforms.

### AML/CFT and FATF Compliance
- End-October 2019 SB related to AML/CFT actions reset to end-June 2020 due to implementation constraints.
- National Coordination Committee to work with FATF secretariat to complete action plan; IMF and other providers to supply technical assistance.
- Authorities intend to make significant progress by FATF plenary session in February 2020.
- New SB set for end-March 2020 on Immediate Outcome 9 and Immediate Outcome 10 toward substantial effectiveness.

### Energy Sector Reforms
- Power sector circular debt at 4 percent of GDP by end-September 2019; more than a quarter accrued in Q1 FY2020.
- Authorities aim to reduce accumulation of new arrears from PRs 450-500 billion in FY2019 to PRs 50-75 billion by FY2023 and eliminate all new arrears by end-2023.
- First report on plan implementation to be published by end-January 2020.
- Gas sector reforms progressing; July 2019 tariff adjustment eliminated flow of gas sector arrears; further tariff adjustments by end-December.

### SOE Reform
- International auditors expected to complete and publish 2018 audits of Pakistan Steel Mills and Pakistan International Airlines by end-December 2019.
- New SOE law in workstream with IMF technical support.
- Triage of SOEs to decide on sale, liquidation, or public retention under way.

### Business Environment and Governance
- Ease of doing business ranking improved from 136 to 108 in one year.
- Authorities aim to address informality and tax leakage through better documentation.
- Anti-corruption measures: second review cycle under UNCAC; dedicated AML unit established; financial intelligence unit to be granted more independence and fiscal autonomy.
- Assets declaration system for senior public officials to be established by end-October 2020.
- Automation and computerized national identity system to facilitate anti-corruption efforts.

### Concluding Remarks
- Program has had a strong start with significant progress in a short time.
- Quick and orderly stabilization of the foreign exchange market is highlighted as the most important achievement.
- SBP actions helped contain inflationary second-round effects of depreciation.
- Fiscal objectives on track due to strong domestic tax performance and federal-provincial fiscal accord.
- Structural benchmark related to FATF action plan reset due to implementation constraints but remains part of sustained effort.

*Source: Statement by Jafar Mojarrad and Cyrus Sassanpour, December 19, 2019, and accompanying data tables.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1pakea2019002.pdf_