## Executive Summary — Pakistan EFF-supported program review (1pakea2021001) ## Source details **Canonical URL:** [Executive Summary — Pakistan EFF-supported program review (1pakea2021001)](https://www.imf.org/-/media/files/publications/cr/2021/english/1pakea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1pakea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1pakea2021001.pdf.json) --- ### Context and pandemic impact - Covid-19 temporarily disrupted Pakistan’s progress under the IMF’s Extended Fund Facility (EFF); authorities’ policies supported the economy and lives. - Policy response included a temporary fiscal stimulus, expansion of social safety nets, monetary policy easing, and targeted financial initiatives. - Sizeable emergency financing from the international community, including under an RFI, helped contain the first Covid-19 wave and economic impact. - Growth and health outcomes: - Real GDP contracted by -0.4 percent in FY 2020 (July–June) — first contraction since 1952. - Growth expected to recover to 1.5 percent in FY 2021. - A second Covid-19 wave is unfolding, creating exceptionally high uncertainty and downside risks. ### Program performance and implementation - EFF-supported program remained on track until March 2020; policy priorities shifted during the Covid-19 crisis. - Quantitative targets and structural measures: - Most quantitative targets were met through June 2020; several structural reforms implemented, including consolidating central bank autonomy, reforming corporate taxation, bolstering SOE management, improving cost recovery in the power sector, and vesting its regulator with more powers. - Between end-December 2019 and end-September 2020, several targets were met by large margins (net international reserves, net domestic assets of SBP, and no government borrowing from the SBP). - Missed targets: some pre-pandemic fiscal targets to make room for mitigation/support measures; target on government guarantees after previously omitted guarantees were uncovered. - Structural benchmarks: most of the twelve SBs due were achieved (many with delays); delays on GST and PIT reforms; FATF Immediate Outcomes 9 and 10 reset to end-June 2021; BISP database update reset to end-June 2021. - Two continuous SBs on avoiding further tax amnesties and new preferential tax treatments were missed after a temporary tax amnesty for construction in July 2020 (extended for one year in December 2020). ### Program focus, financing, and modalities - Policy mix recalibrated to balance supporting the economy and ensuring debt sustainability while sustaining fiscal discipline and protecting critical social spending. - Emphasis on safeguarding monetary and financial stability and maintaining a market-determined exchange rate. - New structural benchmarks target revenue mobilization, public financial management, energy sector viability, governance, and AML/CFT framework. - Staff supports completion of the reviews and rephasing of access; would make available SDR 350 million, bringing total access to SDR 1,394 million, and help anchor essential financing from other official partners and markets. - Program financing commitments and DSSI: - Gross external financing needs amounting to US$27 billion (9.9 percent of GDP) over the next twelve months. - Financing support includes China (US$10.8 billion), UAE (US$2 billion), World Bank (US$2.8 billion), ADB (US$1.1 billion), Islamic Development Bank (US$1 billion), and other bilateral support under G20 initiative (US$1.8 billion). - DSSI covers about US$2.5 billion falling due over May 2020–June 2021 (of which US$0.8 billion relate to the second round covering January–June 2021). ### Recent economic developments - Pre-pandemic reform gains helped reduce imbalances: market-determined exchange rate, fiscal reforms broadening tax base, expanded social spending, and energy tariff moves toward cost recovery. - Macroeconomic outcomes and financial sector: - Headline inflation: spiked at 14.6 percent (y-o-y) in January 2020, then fell to 5.7 percent in January 2021. - SBP policy rate: cut by a cumulative 625 basis points to 7.0 percent between March and June 2020. - SBP refinancing to commercial banks reached record levels; private credit growth recovered to 4.8 percent y-o-y in December 2020. - Banking sector: average CAR 18.6 percent (as of December 2020); gross NPLs increased to 9.2 percent of total loans; provisions covered 88.3 percent of NPLs (end-September 2020). - External position: current account deficit fell to 1.1 percent of GDP in FY 2020 and turned into a surplus of 0.4 percent of GDP in first half of FY 2021. - International reserves: US$13.4 billion (end-December 2020). ### Fiscal performance and social response - Fiscal outcomes: - Primary deficit narrowed to 1.8 percent of GDP in FY 2020, implying a fiscal effort of 1.8 percent of GDP. - Authorities absorbed a Covid-19 drop in tax revenues of 1.4 percent of GDP and adopted targeted fiscal measures of 1.7 percent of GDP in the last quarter of FY 2020. - First half of FY 2021 delivered a primary surplus of 0.7 percent of GDP (exceeding projections by about 0.75 percent of GDP). - Public debt: grew by 2 percentage points of GDP over FY 2020 and stood at 92.8 percent of GDP. - Government refrained from SBP borrowing since the EFF-supported program started. - Social protection: - Ehsaas Emergency Cash (EEC) provided one-time support to almost 15 million households (covering about 90 million people or more than 40 percent of the population). - FY 2021 BISP allocation increased by almost 80 percent over FY 2020 execution (excluding one-off Covid spending); BISP stipends increased by 20 percent. ### Outlook, projections, and key risks - Staff macro projections (selected): - Real GDP growth: -0.4 percent (FY 2020); 1.5 percent (FY 2021); 4 percent (FY 2022); medium-term potential of 5 percent reached in FY 2024. - Average CPI inflation: 8.7 percent (FY 2021); 8 percent (FY 2022). - Current account balance: -1.1 percent of GDP (FY 2020); surplus 0.4 percent of GDP (first half FY 2021); projected -1.5 percent of GDP (FY 2021); gradually toward -3 percent over medium term. - Reserves: gross official reserves projections include 14.4 (billions of US$) for 2020/21 and 17.8 (billions of US$) for 2021/22; reserve cover expected to strengthen to over 3½ months of imports by FY 2025. - Public debt: 92.8 percent of GDP (end-FY 2020); projected to fall toward 70 percent by FY 2026. - Total external debt: projected below 40 percent of GDP by FY 2024. - Risks: - Four broad groups: (i) pandemic-related uncertainty (second wave, new strains, vaccine rollout); (ii) policy slippages (fiscal area, provincial under-delivery); (iii) program failures (AML/CFT, FATF compliance) affecting external financing; (iv) geopolitical tensions (higher oil prices, adverse investor sentiment). - Upside political window: senate election in March 2021 offers scope to accelerate reforms until general elections in August 2023. - DSA finding: public debt remains sustainable with strong policies but vulnerable to policy slippages and contingent liabilities. ### Key policy pillars and prioritized reforms - Five program pillars: - (i) sustain fiscal discipline anchored on medium-term consolidation while mobilizing revenues and controlling spending; - (ii) ensure disinflation through adequate monetary policy stance; - (iii) preserve market-determined exchange rate and rebuild external buffers; - (iv) restore financial viability of the energy sector; - (v) advance structural reforms including AML/CFT, SOE governance, and business climate improvements. - Fiscal reform priorities: - FY 2021 underlying primary deficit target: 0.5 percent of GDP (excluding grants and one-off spending). - Authorities’ medium-term strategy: increase tax revenues by 3–4 percentage points of GDP. - FY 2022 tax reform package (~0.7 percent of GDP): GST reform (eliminate non-standard preferential rates, harmonize service sales tax, unify federal-provincial fragmentation) and PIT reform (simplify, increase progressivity, halve most tax credits/allowances, special procedures for very small taxpayers). - Strengthen tax administration: centralized risk-based compliance, IT modernization, single filing portal, track-and-trace for tobacco by end-June 2021. - PFM improvements: TSA-1 by end-May 2021; tighten supplementary grant procedures; disclose fiscal risks and contingent liabilities. - Debt management: fully implement MTDS; establish central Debt Management Office with parliamentary approval by end-June 2021 and migration of functions by end-December 2021. - Transparency on Covid spending: publish awarded contracts and beneficial ownership (end-April 2021); ex-post audit by Auditor General (end-April 2021). ### Monetary and financial sector guidance - SBP actions: - Cut policy rate by 625 basis points to 7 percent; expanded refinancing facilities; record refinancing of PRs 1,013 billion at end-October 2020. - Introduced temporary regulatory measures and a housing lending target (5 percent of private lending by December 2021). - Staff recommendations: - Maintain accommodative stance while significant slack remains; proceed with measured and gradual rate tightening once recovery is entrenched to achieve mildly positive real interest rates. - Phase out temporary Covid measures when crisis abates; avoid persistent expansion of refinancing facilities. - Unwind housing package and prefer targeted budget subsidies. - Prepare to phase out regulatory forbearance; intensify monitoring to manage NPL risks. - Strengthen SBP governance: adopt amendments to SBP Act promptly to enshrine price stability as primary objective and prohibit direct credits to government. ### Energy sector reforms and circular debt - Power sector deterioration: - Stock of arrears surged to 5.2 percent of GDP at end-FY 2020 — a 1.3 percent of GDP increase in the year. - Each month of delaying an adjustment of PRs 1 per kWh adds about PRs 8½ billion to the stock of arrears. - Policy measures and commitments: - Cabinet approved updated Circular Debt Management Plan (CDMP) in March 2021. - Tariff adjustments: FY 2021 AR estimated PRs 3.34 per kWh; first-step AR of PRs 1.95 per kWh notified January 2021; QTAs of PRs 1.63 per kWh for Q2–Q3 FY 2020 completed December 2020; second-step AR due June 1, 2021 (new SB). - Adjusted tariff now recovers about 90 percent of power cost (excluding subsidies). - Renegotiated PPAs with more than 45 private IPPs yielding cost savings about 1.8 percent of GDP over next two decades; government to settle outstanding arrears with specified tranches (up to PRs 180 billion payment by end-May 2021). - PHPL arrears about 2.2 percent of GDP at end-December 2020; ten-year plan to absorb costly PHPL debt gradually, assuming up to 0.2 percent of GDP this FY. - Gas sector: arrears 0.5 percent of GDP in FY 2020; projected to rise by 0.1 percent of GDP by end-FY 2021; gas sale prices hiked in September 2020 by weighted average of 5 percent. ### Structural reforms, SOEs, and governance - SOE governance: - New SOE law submitted to parliament in March 2021; triage of SOEs published March 2021 to classify SOEs to hold, privatize, or liquidate. - Divestments advanced for two LNG power plants and two small public banks. - Audits published for Pakistan Railways (March 2020), Pakistan International Airlines (January 2020), Pakistan Steel Mills (July 2020); external audit of Utility Stores Corporation scheduled end-April 2021. - Business environment and green transition: - Companies Law amended May 2020 to foster startups. - National Electric Vehicle Policy targets: electric cars to reach 30 percent of new sales by 2030; 2- and 3-wheelers and electric buses to reach 50 percent of new sales. - Focus on simplifying regulations, improving customs efficiency, implementing automated paying-taxes system, and boosting ICT adoption. - Governance and anti-corruption: - Asset declaration system for high-level officials to be established by end-June 2021 (new SB). - Continued work on AML/CFT: 24 of 27 items completed; Immediate Outcomes 9 and 10 reset to end-June 2021. ### Program conditionality, monitoring, and reviews - Conditionality instruments: - Prior actions (PAs), quantitative performance criteria (PCs), indicative targets (ITs), structural benchmarks (SBs), and continuous performance criteria defined in MEFP and TMU. - New PCs set for end-March and end-June 2021; new ITs for end-September and end-December 2021. - New IT on cumulative gross issuance of PIBs, Sukuks, and Eurobonds to support debt maturity profile. - Adjusters for primary deficit PC to account for CPPA arrears clearance, PHPL repayment, and Covid-19 expenditures. - Review schedule and access: - Retain quarterly reviews until end-2021; rephase remaining program access with combined disbursement for second–fifth reviews adjusted to temporarily lower-than-expected BOP need. - Staff supports completion of second, third, fourth, and fifth reviews; supported SDR 350 million disbursement (March 5, 2021). - Exchange restrictions and MCP: - Staff supports authorities’ request under Article VIII for temporary retention of existing exchange restrictions, given easing progress and commitment to full removal when BOP conditions permit within program period. ### Monitoring, data, and reporting requirements (selected) - Key program exchange rate: PRs 141.3172 per U.S. dollar. - TMU definitions: NIR, NDA, ceilings, and adjustment mechanisms clearly specified; NIR floor and NDA ceilings adjusted by cumulative excess/shortfall in external inflows and related items. - Reporting frequency examples: - SBP balance sheet summary: Weekly. - International reserves: Daily (following working day). - Monetary survey: Monthly (within first 30 days). - Banking sector FSIs: Quarterly (within 45 days). - BISP targeted cash transfers: Quarterly (within 30 days). ### Selected exact figures and projections (excerpted) - Growth: -0.4 percent (FY 2020); 1.5 percent (FY 2021); 4 percent (FY 2022); 5 percent (FY 2024 potential). - Inflation (period average): 8.7 percent (FY 2021); 8 percent (FY 2022). - Public debt: 92.8 percent of GDP (end-FY 2020); projected toward 70 percent by FY 2026. - Current account balance: -1.1 percent of GDP (FY 2020); surplus 0.4 percent of GDP (first half FY 2021); projected -1.5 percent of GDP (FY 2021). - International reserves: US$13.4 billion (end-December 2020); GIR projections: 14.4 (billions of US$) for 2020/21 and 17.8 (billions of US$) for 2021/22. - SBP policy rate cut: cumulative 625 basis points to 7.0 percent between March and June 2020. - Credit growth: 4.8 percent y-o-y (December 2020). - Banking sector: CAR 18.6 percent (December 2020); gross NPLs 9.2 percent of total loans; NPL provisioning 88.3 percent (end-September 2020). - Fiscal measures and impacts: tax revenue drop of 1.4 percent of GDP absorbed; targeted fiscal measures of 1.7 percent of GDP in last quarter FY 2020; primary deficit narrowed to 1.8 percent of GDP (FY 2020); primary surplus 0.7 percent of GDP (first half FY 2021). - IMF financing: proposed SDR 350 million, total access SDR 1,394 million. - Program total purchases: 4,268 Millions of SDRs; 210 Percent of Quota. - Gross external financing requirements (selected): 27,013 (2020/21, millions of U.S. dollars); 23,643 (2021/22, millions of U.S. dollars). - Gross official reserves (stock, US$ billions): 9.87 (2017/18); 7.27 (2018/19); 12.17 (2019/20); 14.36 (2020/21); 17.79 (2021/22). - Remittances (current transfers: credit): 19,914 (2017/18); 21,740 (2018/19); 23,131 (2019/20); 24,667 (2020/21); 26,179 (2021/22). - Cumulative cash transfers: 14.8 million families and disbursed PRs 179 billion (meeting end-June indicative target). ### Staff appraisal and recommendations (summary) - Authorities’ pandemic response was timely and supportive; modest growth expected in FY 2021 after a mild recession in FY 2020. - Key priorities: - Steadfast fiscal implementation to meet FY 2021 primary deficit target and pursue revenue-based consolidation. - Complete GST and PIT harmonization in FY 2022 budget to improve tax system and place debt on a downward path while allowing social and development spending. - Maintain accommodative, data-driven monetary policy and phase out emergency measures once crisis abates. - Urgently complete remaining AML/CFT actions to exit FATF grey list and safeguard external financing. - Rigorously implement CDMP and power sector reforms to address circular debt and contingent liabilities. - Accelerate structural reforms: SOE governance, business environment, anticorruption measures, and human capital investment to unlock medium-term growth. - Program monitoring: close monitoring via quarterly reviews, reinforced conditionality, and focused technical assistance to mitigate elevated risks. *Source: IMF staff Executive Summary, Pakistan EFF-supported program review (March 9, 2021).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - Covid-19 temporarily disrupted Pakistan’s progress under the IMF’s Extended Fund Facility (EFF), but authorities’ policies were critical in supporting the economy and saving lives and livelihoods. - Policy response included a temporary fiscal stimulus, large expansion of social safety nets, monetary policy support, and targeted financial initiatives. - Sizeable emergency financing from the international community, including under an RFI, helped contain the first Covid-19 wave and economic impact. - Growth slowed to –0.4 percent in FY 2020 (July–June), and is expected to recover to 1.5 percent in FY 2021. - A second Covid-19 wave is unfolding, creating exceptionally high uncertainty and downside risks. ### Program performance - The EFF-supported program—last reviewed in December 2019—remained on track until March 2020; policy priorities shifted during the Covid-19 crisis. - Most quantitative targets were met through June 2020; several structural reforms were implemented (many with delays), including: - consolidating central bank autonomy, - reforming corporate taxation, - bolstering SOE management, - improving cost recovery in the power sector and vesting its regulator with more powers. - Between end-December 2019 and end-September 2020, authorities met several targets by large margins, including net international reserves, net domestic assets of the central bank, and no government borrowing from the SBP. - Targets missed: - some pre-pandemic fiscal targets to make room for essential mitigation/support measures, - the target on government guarantees after improvements uncovered previously omitted guarantees. - Structural benchmarks: - Most of the twelve SBs due during the review period were achieved, albeit with delays and supported by five prior actions (PAs). - Delays occurred on GST and PIT reforms; full implementation of FATF actions 9 and 10 (reset for end-June 2021); update of the BISP beneficiaries’ database (reset for end-June 2021). - Two continuous SBs on avoiding further tax amnesties and new preferential tax treatments were missed after a temporary tax amnesty for construction in July 2020 (extended for one year in December 2020). ### Program focus and financing - Policy mix recalibrated to balance supporting the economy and ensuring debt sustainability while sustaining fiscal discipline and protecting critical social spending. - Emphasis on safeguarding monetary and financial stability and maintaining a market-determined exchange rate. - New structural benchmarks target revenue mobilization, public financial management, energy sector viability, governance, and AML/CFT framework. - Staff supports completion of the reviews and rephasing of access; would make available SDR 350 million, bringing total access to SDR 1,394 million, and help anchor essential financing from other official partners and markets. ### Recent economic developments - Before Covid-19, policy and reform implementation under the EFF began reducing imbalances: market-determined exchange rate strengthened external position and attracted foreign participation in the domestic debt market; fiscal reforms broadened the tax base; social safety nets and health/social spending rose; energy tariffs moved closer to cost recovery. - Policy response to the pandemic was enabled by fiscal and monetary gains in first nine months of FY 2020; exchange rate acted as a shock absorber. - Economic and health outcomes: - First Covid-19 wave abated over the summer; a second wave peaked in December 2020 with lower cases and less severe lockdowns than peers. - Real GDP contracted by 0.4 percent in FY 2020—the first contraction since 1952—driven by drops in manufacturing and services. - High-frequency indicators suggest a rebound since the summer led by manufacturing, construction, and agriculture; services (over 60 percent of GDP) remained hampered. - Inflation and monetary policy: - Headline inflation spiked at 14.6 percent (y-o-y) in January 2020, then fell to 5.7 percent in January 2021. - Core inflation remained subdued; wages continued a downward trend amid spare labor market capacity. - State Bank of Pakistan cut policy rate by a cumulative 625 basis points to 7.0 percent between March and June 2020. - SBP refinancing to commercial banks reached record levels; credit recovery was 4.8 percent y-o-y in December 2020. - Banking sector and external position: - Banking sector well capitalized: average capital adequacy ratio (CAR) 18.6 percent (as of December 2020). - Gross non-performing loans (NPLs) increased to 9.2 percent of total loans; provisions covered 88.3 percent of NPLs at end-September 2020. - Current account deficit fell to 1.1 percent of GDP in FY 2020 and turned into a surplus of 0.4 percent of GDP in the first half of FY 2021. - Drivers: lower oil prices, higher remittances, import compression, mild export recovery (notably textiles). - International reserves grew to US$13.4 billion by end-December 2020. - Fiscal performance: - Primary deficit narrowed to 1.8 percent of GDP in FY 2020, implying a fiscal effort of 1.8 percent of GDP. - Authorities absorbed a Covid-19 drop in tax revenues of 1.4 percent of GDP and adopted targeted fiscal measures of 1.7 percent of GDP in the last quarter of FY 2020. - First half of FY 2021 delivered a primary surplus of 0.7 percent of GDP (exceeding projections by about 0.75 percent of GDP). - Tax revenues (net of refunds) grew by 12 percent y-o-y in first half FY 2021; primary spending strictly controlled. - Public debt grew by 2 percentage points of GDP over FY 2020 and stood at 92.8 percent of GDP. - Government relied on domestic bank and external financing and refrained from SBP borrowing since the EFF-supported program started. ### Outlook and risks - Growth projections broadly unchanged from the RFI request. - Staff macroeconomic projections (selected): - Real GDP growth: 1.5 percent in FY 2021; 4 percent in FY 2022; medium-term potential of 5 percent reached in FY 2024 (later than envisioned in first EFF review). - Average CPI inflation: 8.7 percent in FY 2021; 8 percent in FY 2022. - Current account balance: forecast to widen to 1.5 percent of GDP in FY 2021 and gradually toward 3 percent over the medium term. - Reserves: reserve cover expected to strengthen to over 3½ months of imports by FY 2025 with market-determined exchange rate and adequate monetary policy. - Public debt: projected to fall toward 70 percent by FY 2026. - Total external debt: projected below 40 percent of GDP by FY 2024. - Risks: - Exceptionally high uncertainty from the unfolding pandemic and downside risks to the recovery. - Recovery timing depends on course of the pandemic, vaccine rollout, confidence, and investment. - Continued fiscal adjustment may offset some stronger private sector growth effects on the overall economy. ### Key exact figures and projections (excerpted) - Growth: –0.4 percent (FY 2020); 1.5 percent (FY 2021); 4 percent (FY 2022); 5 percent (FY 2024 potential). - Inflation (period average): 8.7 percent (FY 2021); 8 percent (FY 2022). - Public debt: 92.8 percent of GDP (end-FY 2020); projected toward 70 percent by FY 2026. - Current account balance: –1.1 percent of GDP (FY 2020); surplus 0.4 percent of GDP (first half FY 2021); projected –1.5 percent of GDP (FY 2021). - International reserves: US$13.4 billion (end-December 2020); gross official reserves projections include 14.4 (billions of US$) for 2020/21 and 17.8 (billions of US$) for 2021/22 as per table. - SBP policy rate cut: cumulative 625 basis points to 7.0 percent between March and June 2020. - Credit growth: 4.8 percent y-o-y (December 2020). - Banking sector: CAR 18.6 percent (December 2020); gross NPLs 9.2 percent of total loans; NPL provisioning 88.3 percent (end-September 2020). - Fiscal measures and impacts: tax revenue drop of 1.4 percent of GDP absorbed; targeted fiscal measures of 1.7 percent of GDP in last quarter FY 2020; primary deficit narrowed to 1.8 percent of GDP (FY 2020); primary surplus 0.7 percent of GDP (first half FY 2021). - IMF financing: proposed SDR 350 million, total access SDR 1,394 million. *Source: IMF staff Executive Summary, Pakistan EFF-supported program review (March 9, 2021).* ### 6. Substantial risks cloud the outlook, amplified by the Covid-19 pandemic. These fall ### 6. Substantial risks cloud the outlook, amplified by the Covid-19 pandemic. These fall ### Risks to the outlook - Four broad groups of risks: - High uncertainty from the pandemic: second wave and emergence of new strains worldwide could reverse Pakistan’s progress and require additional mitigation efforts, especially if domestic vaccination efforts were to stall. This raises uncertainty around the global recovery and thus prospects for growth, trade, and remittances. - Policy slippages: weak implementation capacity and influential vested interests could amplify risks, particularly in the fiscal area and debt sustainability; provinces under-delivering on commitments to budget parameters is a specific risk. - Program failures: not meeting program objectives, including the authorities’ AML/CFT action plan with the Financial Action Task Force (FATF), could hamper external financing and investment. - Geopolitical tensions: could increase oil prices and trigger an adverse shift in investor sentiment affecting external financing. - Upside political window: with the senate election in March 2021, there is a window to accelerate reforms until the general elections scheduled for August 2023. - Debt Sustainability Analysis (DSA, Annex III) finding: public debt remains sustainable with strong policies but points to risks from policy slippages and contingent liabilities. ### Policy discussions — program pillars - IMF staff supported recalibration of the macroeconomic policy mix to balance support for the economy, debt sustainability, structural reforms, and social cohesion. - Program built on five pillars: - (i) sustaining fiscal discipline anchored on medium-term consolidation, while mobilizing revenues and controlling spending to make space for more infrastructure and social spending; - (ii) ensuring disinflation through an adequate monetary policy stance; - (iii) preserving the market-determined exchange rate and continuing rebuilding external buffers; - (iv) restoring the financial viability of the energy sector; - (v) advancing structural reforms, including addressing AML/CFT deficiencies, SOE governance, and the business climate. ### A. Fiscal Policies — Background - Key fiscal anchor: gradual improvement in the primary balance to ensure fiscal sustainability and build resilience. - Authorities’ medium-term strategy: increase tax revenues by 3–4 percentage points of GDP. - Note: revenues during the program period are expected to remain below projections at the first EFF review due to the Covid-19 shock and large revision to the growth outlook. ### A. Fiscal Policies — Policy Discussion - FY 2021 fiscal program target: underlying primary deficit of 0.5 percent of GDP (excluding grants and one-off spending). - Execution: broadly on track until end-December 2020. - Key aspects of the FY 2021 fiscal program: - Stronger revenues: expected increase by 0.5 percent of GDP from FY 2020 due to: - revenue measures, especially a hike in the petroleum levy on gasoline and diesel toward PRs 30/liter; - reinforced tax administration efforts; - automatic stabilizers. - Corporate Income Tax (CIT) reform: parliamentary adoption committed in March 2021 (PA); reform simplifies CIT by streamlining exemptions and aligning provisions with best international practices (including tax credits, accelerated deductions, exempted income, reduced tax rates, and tax liability reductions). - Reprioritizing and improving spending efficiency through: - gradual unwinding of crisis-related spending, notably withdrawal of exceptional support schemes to households and businesses; - rationalization of non-priority current spending and streamlining of subsidies; - recalibration of development spending to reflect Covid-related execution delays. - Social and health spending: program accommodates targeted and one-off increases — Benazir Income Support Program (BISP) expanded and health care spending increased by 80 and 31 percent respectively; includes a Covid-19 related spending adjuster (up to 0.5 percent of GDP). - Power sector support: facilitates clearance of arrears to independent power producers (IPPs) and assumption of a share of Power Holding Private Limited’s (PHPL) publicly-guaranteed debt to unlock medium-term cost savings. - Provincial contributions: provinces agreed via Memoranda of Understanding (MoU) to contribute to the federal fiscal strategy targeting a surplus of around 0.5 percent of GDP in FY 2021, conditional on FBR tax collection; provinces will increase tax revenues by at least 0.1 percent of their respective provincial GDPs relative to FY 2020 and constrain expenditure while protecting health and education spending. - FY 2022 tax reform plans: introduce a high-quality tax reform package of about 0.7 percent of GDP, building on two pillars (MEFP ¶8): - General sales tax (GST) reform: - eliminate non-standard preferential rates and tax exemptions, bringing those goods to the standard rate of 17 percent; - harmonize the service sales tax across provinces (in coordination with the World Bank); - unify fragmentation between services subject to provincial taxation and goods under federal taxation. - Personal income tax (PIT) reform: - simplify the system, increase progressivity, and support labor formalization; - reduce the number and decrease the size of current income slabs; - halve current tax credits and allowances (except for disabled and senior citizens, and Zakat receipts); - introduce special tax procedures for very small taxpayers; - bring additional taxpayers into the net. - Other fiscal framework reforms (MEFP ¶¶9–10): - Strengthening tax administration via IMF/World Bank TA: introduce centralized, risk-based compliance function; update IT and automation; use third-party data; simplify registration and filing; modernize audit practices; bolster the large taxpayer office (LTO); plan for a single filing, taxpayer, and return portal; reintroduce track-and-trace for tobacco products by end-FY 2021 (new end-June 2021 SB). - Enhancing Public Financial Management (PFM): mid-year budget reviews presented to the National Assembly in February 2020 and February 2021; created coordination mechanisms for cash and debt management; tightened supplementary grant procedures; disclosed fiscal risks and contingent liabilities in FY 2021 budget; aim for functional single treasury account (TSA-1) by May 2021 (new end-May 2021 SB) and move to TSA-2; improve annual and multi-annual commitments control systems with EU assistance. - Improving debt management: fully implement medium-term debt strategy and establish a central debt management office (Box 1); lengthen maturity profile of public debt to lower rollover risks while balancing financing costs. - Safeguarding quality and transparency of Covid-related spending: timely publication of awarded contracts and beneficial ownership information on the Public Procurement Regulatory Agency website (new end-April 2021 SB); ex-post audit by the Auditor General of Pakistan of Covid-related procurement and social payments (new end-April 2021 SB). ### Box 1. Debt Management — findings and actions - Progress made but institutional and technical capacity weaknesses remain; continued reliance on TA from IMF and World Bank. - Implementing the Medium-Term Debt Strategy (MTDS) for FY 2020–23 — six pillars: - (i) Lengthening the maturity profile of domestic debt: average time to maturity (ATM) of domestic debt held by the market stood at 2.6 years at end-2020, an increase of 0.6 years since July 2019. - (ii) Boosting transparency and investor relations: publication started of a monthly, 3-month forward-looking auction calendar and investor seminars; more active engagement of market participants is desirable. - (iii) Diversifying instruments and investor base: introduced 15-, 20-, and 30-year fixed-rate Pakistan Investment Bonds (PIBs) and 3- and 5-year floating-rate PIBs; scaled up Shariah-compliant instruments; ban on institutional investments in National Saving Schemes to enhance institutional participation. - (iv) Maintaining adequate cash buffers: budget reserves need to remain well-funded; commitment to zero borrowing from the State Bank of Pakistan (SBP); IMF TA highlights need to improve cash forecasting and coordinate debt and cash management. - (v) Garnering concessional external financing: favorable terms from multilateral and bilateral partners; participation in G20 Debt Service Suspension Initiative (DSSI) resulted in debt suspension through end of FY 2021 estimated at US$2.6 billion (0.9 percent of FY 2021 GDP). - (vi) Facilitating investment by non-residents: foreign participation increased in first half of FY 2020 but was reversed by Covid-19 and monetary response; continuing efforts to encourage participation and tap international capital markets would reduce reliance on domestic resources. - Establishing a central debt management office (DMO): - DMO will replace decentralized framework with duplication, weak coordination, and inconsistencies. - Planned actions and timelines: - seek parliamentary approval of requisite amendments by end-June 2021; - finalize setup of front-, middle- and back-offices of new DMO by end-June 2021; - complete staff recruitment by end-September 2021; - migrate functions to DMO by end-December 2021. - Interim steps: Finance Division assigned additional functions to Debt Policy and Coordination Office, approved an organogram for hiring additional staff, and established a Working Group in February 2021 to improve compilation and reporting of debt statistics. ### B. Poverty Reduction and Social Protection — Background - Authorities made important strides expanding social safety nets and poverty reduction policies; key to catching up to peers and building policy buy-in. - FY 2021 BISP allocation: increased by almost 80 percent over FY 2020 execution level (excluding one-off Covid-related spending). - BISP changes include a 20 percent increase in beneficiaries’ cash stipends. - Other measures: increased cash transfers for primary education (Waseela-e-Taleem) to boost girls’ enrollment; developed a nutrition program for mothers and children to reduce stunting. - Ehsaas Emergency Cash (EEC): provided immediate one-time financial support until end-September 2020 to almost 15 million households identified with provincial support. - NSER update delayed by Covid-19; target reset to end-June 2021. ### B. Poverty Reduction and Social Protection — Policy Discussion - Staff supported full execution of augmented BISP budget allocation to expand BISP coverage from 3.4 to 6 million households within current FY. - Staff recommended finalizing NSER update (end-June 2020 SB, reset to end-June 2021) to better target BISP expansion and design new programs. - Further recommendations: - increase BISP stipends and introduce adequate indexation of benefits; - better align educational cash transfers under BISP with actual child schooling costs to boost enrollment, attendance, and educational outcomes over the medium term. *International Monetary Fund — Pakistan report excerpt* ### 13. Preemptive monetary policy easing has been crucial in navigating the COVID-19 shock. ### 13. Preemptive monetary policy easing has been crucial in navigating the COVID-19 shock. ### Monetary policy actions and outcomes - The SBP (Annex I): - cut its policy rate by 625 basis points cumulatively since March 2020; - sizably expanded its refinancing facilities; - introduced temporary regulatory measures. - Consequences: - refinancing reached a record level of PRs 1,013 billion at end-October 2020; - private credit demand recovered to 4.8 percent y-o-y in December 2020. - Inflation pressures: - have waned well into early 2021 amid soft domestic demand, a delay of programmed energy price adjustments, improved food supply conditions, and the government’s strategic imports. ### Policy discussion — stance and near-term guidance - Current assessment: - The accommodative policy stance remains appropriate given considerable slack in the economy, the more constrained fiscal policy, and the absence of balance of payment pressures. - Monetary conditions expected to continue supporting the recovery in the near term, barring unforeseen developments. - Medium-term guidance: - Once recovery is more entrenched and the economy returns toward full capacity, measured and gradual adjustments in the policy rate should follow to help achieve mildly positive real interest rates. - Monetary policy should remain data-driven on a forward-looking basis to anchor inflation within the SBP’s target range of 5–7 percent over the medium term, with consideration of public policies’ price impact and tradeoffs. - Staff welcomed the introduction of forward guidance in the January 2021 monetary policy statement. ### Phasing out temporary COVID-19 measures — recommendations and concerns - General recommendation: - Once the crisis abates, authorities should phase out temporary Covid-19 response measures, particularly those sustaining economic activity (including targeted sectoral schemes) (Annex I). - Refinancing schemes (MEFP ¶15): - SBP had been expanding refinancing schemes prior to the crisis; since March 2020 it (i) established three new temporary facilities and (ii) extended existing ones. - SBP allocated over 1.8 percent of GDP to the facilities, of which banks drew about 0.5 percent of GDP through October 2020. - As of end-October 2020, refinancing facilities had increased by more than 60 percent since end-December 2019 and stood at 13.2 percent of the SBP’s net domestic assets and about 15 percent of private sector credit. - Staff cautioned that persistent expansion, if not temporary, risks undermining the SBP’s ability to credibly implement monetary policy and improve transmission. - Authorities viewed emergency measures as temporary but believed risks of too early withdrawal outweigh staff-highlighted risks; agreed to review terms of the three new facilities depending on the Covid-19 situation. - The amended SBP Act allows refinancing facilities only in pursuit of the SBP’s mandate, and without compromising price stability. - Housing package (MEFP ¶14): - July 2020: SBP introduced mandatory targets for banks to double to 5 percent the share of lending to housing and construction by December 2021; compliant banks allowed to lower reserve requirements. - Staff urged unwinding this measure due to financial stability and efficiency concerns, and recommended a direct, well-targeted budget subsidy program for the vulnerable. - Staff recommended stronger focus on addressing long-standing structural deficiencies to support private sector lending. - Regulatory measures (MEFP ¶17): - Staff encouraged preparing to phase out temporary regulatory measures (relaxation of lending standards, payment deferrals). - Due to regulatory forbearance, uncertainty exists around the full extent of potential losses when measures are unwound. ### SBP governance and autonomy reforms - Progress: - Authorities submitted amendments to the SBP Act to parliament in March 2021 (end-March 2020 SB; PA), prepared in consultation with IMF staff, aiming to (MEFP ¶16): - establish domestic price stability as the primary objective; - create the SBP’s functions to help achieve its objectives; - strengthen financial autonomy; - prohibit the extension of direct credits or guarantees to the general government; - lay the statutory basis for audits; - secure stronger protection of senior officials’ personal autonomy; - improve executive management decision making through collegial mechanisms; - provide stronger oversight by the Board; and - improve SBP accountability to the public vis-à-vis conduct of monetary policy and achievement of objectives. - Staff urged timely adoption of the amendments by parliament. ### Financial sector stability and development priorities - Maintaining financial sector soundness (MEFP ¶17) — staff recommendations: - Remain vigilant and intensify efforts when withdrawing crisis-response measures, especially as banks have increased exposure to power and construction sectors. - Continue to: - ensure all banks meet minimum capital requirements; - accurately measure NPLs and potential losses; - upgrade resolution and crisis management arrangements, including the deposit insurance scheme. - Preemptive supervisory measures warranted in the Covid-19 context, including intensive monitoring, continuous borrower creditworthiness assessments, collecting interest income accrued but not received, proactive follow-up with weaker banks, and preparation to tackle a rise in NPLs. - Authorities monitoring recapitalization of two non-systemic private banks and privatization of one public bank. - Bolstering AML/CFT effectiveness (MEFP ¶18): - Authorities satisfactorily completed 24 of the 27 items in their AML/CFT action plan; recognized by the February 2021 FATF plenary. - Remaining constraints relate to Immediate Outcome 9 (terrorism financing investigations) and Immediate Outcome 10 (targeted financial sanctions); full completion reset to end-June 2021. - Authorities addressing priority recommendations from the Asia Pacific Group on Money Laundering, including legal framework deficiencies. - Fostering financial development: - Late 2019: SBP launched draft policy "Banking on Equality: Policy to Reduce the Gender Gap in Financial Inclusion" for consultation. - 2020 initiatives: - Pakistan’s instant payments system (Raast) launched; expected full roll-out by 2022. - Digital bank accounts (Roshan) launched for non-resident Pakistanis; over US$500 million inflows in the first 5 months. - Staff recommended stronger focus on financial literacy, including digital literacy. - Note: low fixed and mobile broadband subscriptions in Pakistan could slow Fintech development. ### Exchange rate policy — background and policy discussion - Background: - Market-determined exchange rate provided two-sided rupee flexibility during the Covid-19 crisis, serving as an essential buffer to protect economic activity and open monetary space. - FX reserves strengthened to US$13.4 billion (2.8 months of prospective imports and about 65 percent of the IMF’s ARA metric) at end-2020. - On February 23, 2021 the FX spread between the interbank and open market rate against the US$ was PRs 0.02. - Policy discussion: - SBP committed to a market-determined exchange rate and further accumulating reserves to absorb external shocks, maintain competitiveness and current account sustainability, and build adequate reserve buffers. - Authorities will: - use purchases in the FX interbank market to rebuild reserve buffers amid favorable market conditions, but not to influence exchange rate trends; - limit sales to only offset disorderly market conditions. - Exchange restrictions and multiple currency practice (MCP): - Remaining measures include a 100 percent cash margin requirement on imports of certain goods (imposed in 2017) and limitations on advance payments for imports against LCs and without LCs (imposed in 2018). - Authorities have eased them but request more time to remove them fully when BOP conditions permit and within the program period. ### Energy sector — background, developments, and reform priorities - Background: - Long-standing deficiencies led to an unsustainable stock of arrears (circular debt) affecting power-gas/petroleum chain, financial sector, budget, and real economy. - Sectoral viability eroded during CY 2020 due to delayed price adjustments, deferred payments, and temporary subsidies. - Power sector: - Stock of arrears surged to 5.2 percent of GDP at end-FY 2020 — a 1.3 percent of GDP increase in the year and largely exceeds the 2019 IFI-supported Circular Debt Management Plan (CDMP). - Covid-19 shock directly caused a loss of about 0.3 percent of GDP to DISCOs from payment deferrals and a consumer mix change. - Additional 0.4 percent of GDP in new arrears accumulated until end-December 2020 despite partial collection of deferred payments. - Note: Each month of delaying an adjustment of PRs 1 per kWh adds about PRs 8½ billion to the stock of arrears. - Gas sector: - Stock of arrears grew by 0.1 percent of GDP to 0.5 percent of GDP in FY 2020. - Projected to rise by an additional 0.1 percent of GDP by end-FY 2021, driven by cost-revenue mismatches as more LNG diverted from high-price power sector to low-price domestic users. - Policy discussion — required reforms (MEFP ¶¶21–24): - Recalibrating the CDMP: - Authorities prepared an updated CDMP in consultation with the World Bank, ADB, and IMF staff; Cabinet approved it in March 2021 (PA). - CDMP includes a detailed action plan and monthly monitoring by Ministries of Finance and Energy. - Aligning power tariffs with cost recovery: - Cabinet approved timetable for outstanding power price adjustments, including FY 2021 annual rebasing (AR, estimated as a PRs 3.34 per kWh hike in the base tariff) and quarterly tariff adjustments (QTAs, estimated as PRs 1.63 per kWh). - First-step AR of PRs 1.95 per kWh notified in January 2021; Q2–Q3 FY 2020 QTAs of PRs 1.63 per kWh completed in December 2020; first tariff restructuring implemented in March 2021. - A second-step AR due in June (new June 1st, 2021 SB) and the Q4 FY 2020 QTA in September (new end-September 2021 SB). Q1 FY 2021 QTA falls in April 2021 and is expected to be timely implemented under automaticity of the amended NEPRA Act. - The adjusted tariff now recovers about 90 percent of the power cost (excluding subsidies). - Enacting NEPRA Act amendments: - Amendments committed to be adopted by parliament in March 2021 (PA) to ensure automaticity of QTAs and reintroduce option to levy surcharges if necessary. - Better targeting power subsidies: - Existing subsidies cover 93 percent of domestic users. - March 2021: tariff restructuring through adjusted eligibility criterion for subsidized slabs (based on maximum usage in previous 12 months) and expansion of lifeline tariff for small consumers. - Plan to finalize cross-subsidy reform in June, ahead of the FY 2022 budget (new end-June 2021 SB). - Subsequent efforts to rationalize subsidies by improving targeting, including to households and the agricultural sector, while protecting the most vulnerable. - Renegotiating PPAs with IPPs: - Authorities and more than 45 private IPPs signed renegotiated PPA terms yielding cost savings of about 1.8 percent of GDP over the next two decades of remaining life of these IPPs. - Terms include reducing capacity payments, converting guaranteed return on equity into domestic currency, sharing excess returns from contractual efficiencies. - Government agreed to settle outstanding arrears to these IPPs: two fifth scheduled by end-May 2021 and the remainder for August 2021. - Stock of CPPA-G payables to power producers will decline through a payment of up to PRs 180 billion by end-May 2021 (new SB for end-May 2021). - Other medium-term reforms: - Measures aim to (i) reduce commercial and technical losses, generation costs, and GHG emissions; (ii) improve governance; and (iii) introduce competition. - Staff stressed need for steadfast progress and addressing capacity constraints with international partners. - Addressing PHPL arrears: - Stock of publicly guaranteed PHPL arrears about 2.2 percent of GDP at end-December 2020. - Authorities devised a ten-year plan to gradually absorb costly PHPL debt into cheaper central government debt; will assume up to 0.2 percent of GDP this FY. - Proceeds from privatization of power sector assets and recoveries from receivables to be used to reduce circular debt stock. - Gas sector regulation and performance: - Authorities hiked gas sale prices in September 2020 by a weighted average of 5 percent for all consumers (sparing residentials and street food vendors). - For the first time going beyond OGRA-prescribed price, it covered FY 2021 AR and some arrears of one of two T&D companies. - Staff urged swift mid-year sale price revision to ensure cost recovery; to be ensured by amended OGRA Act once adopted by parliament (new end-June 2021 SB). - Two T&D companies stepped up measures to reduce UFG losses and publish quarterly monitoring reports to guide infrastructure improvements, networks rehabilitation, and theft control programs. - Staff noted unbundling T&D companies would further incentivize speedy UFG-reducing program implementation. _International Monetary Fund, Pakistan: selected policy discussion and reform priorities (extract)._ ### 23. Higher growth, investment, and job creation will crucially depend on addressing long- ### 23. Higher growth, investment, and job creation will crucially depend on addressing long-standing structural weaknesses ### Policy Discussion — structural reform priorities and recent achievements - Primary constraints: uneven playing field for SOEs and private companies; corruption; red tape (excessive regulations and licensing requirements, obstacles to paying taxes, difficulties trading across borders and registering property). - Authorities’ reform focus: bolstering governance, efficiency, and the business climate. - Enhancing SOEs’ governance, transparency, and efficiency (MEFP ¶26): - Submitted a new SOE law to parliament in March 2021 (end-September 2020 SB) aiming to (i) define a rationale for state ownership; (ii) ensure commercially sound SOE operations; and (iii) regulate oversight and ownership arrangements. IMF TA supported preparation of the law and now helps define a new ownership policy, amend several SOEs’ Acts, and operationalize a central monitoring unit within the Ministry of Finance (all by the end of summer 2021). - Performed a triage of the SOE sector and advanced divestments: in March 2021 and supported by World Bank TA, authorities published a classification of all federal SOEs into those remaining under state ownership and those for sale/liquidation (end-September 2020 SB). Divestment of two LNG power plants and two small public banks is at an advanced stage. - Published audits of key SOEs: Pakistan Railways (March 2020), Pakistan International Airways (January 2020), Pakistan Steel Mills (July 2020) (end-December 2019 SB). Next audit: Utility Stores Corporation (new end-April 2021 SB). - Boosting the business environment, job creation, and green development (MEFP ¶27): - Improve domestic and international competitiveness by simplifying processes to start businesses and approving FDI, reducing regulations, streamlining red tape, enhancing customs efficiency, and implementing a new simple and fully automated paying-taxes system. - Companies Law amended in May 2020 to foster startups and attract innovators, including from abroad. - To expand IT, digitalization, and outsourcing sectors: invest more in education and human capital, improve product market access, and increase ICT adoption. - Implement approved national tariff policy to reduce protection and input costs to promote competition, exports, and domestic production (“Made in Pakistan”). - Implement National Electric Vehicle Policy to achieve ambitious targets for electric car sales until 2030 to (i) reduce Pakistan’s GHG emissions and fuel import bill; and (ii) promote industrial growth and job creation. - Fostering governance and control of corruption (MEFP ¶28): - Strengthen anticorruption institutions: establish an asset declaration system focused on high-level public officials by end-June 2021 (new end-June 2021 SB); publish the second review cycle report under the UN Convention against Corruption (UNCAC); commission international expert review of institutional framework; enhance international anti-corruption cooperation and asset recovery efforts. - Enhance use of AML tools: supervise financial institutions on due diligence for politically exposed persons and suspicious transaction reporting; enhance effectiveness of Pakistan's financial intelligence unit and pursue membership in the Egmont Group. ### Program Modalities — conditionality, financing, and exchange restrictions - Quantitative targets: - New PCs for end-March and end-June 2021 and ITs for end-September and end-December 2021 to support fiscal deficit reduction, limit public debt via government guarantees, contain inflationary pressures through deceleration of base money growth and cap on government borrowing from the SBP, and support adequate reserve coverage (MEFP Table 1b). - New IT on cumulative gross issuance of PIBs, Sukuks, and Eurobonds to support public debt maturity profile (MEFP Table 1b). - Adjusters for the PC on the primary deficit will account for clearance of CPPA arrears to IPPs, repayment of PHPL debt, and Covid-19 related expenditures (¶8; TMU ¶20.g–h). - Adjustment of the PC on budget borrowing from the SBP for liability management operations is no longer needed (TMU ¶21). - Structural benchmarks (SBs): - Reset delayed SBs, merge two FATF-related SBs, and set eleven new SBs on critical reform steps (MEFP Table 2). New SBs include: - Establishment of the TSA-1 (end-May 2021). - Reintroduction of track-and-trace system for tobacco products (end-June 2021). - Publication of awarded Covid-spending related contracts and beneficial ownership on a centralized website (end-April 2021). - Publication of Auditor General’s ex-post audit of procurement of urgently needed medical supplies related to Covid-19 (end-April 2021). - Reduction in CPPA-G payables to power producers through a payment up to PRs 180 billion (end-May 2021). - Completion of FY 2021 annual rebasing of the electricity tariff (June 1, 2021). - Finalization of energy cross-subsidy reform for the FY 2022 budget (end-June 2021). - Notification of FY 2020 Q4 electricity tariff adjustments for capacity payments (end-September 2021). - Parliamentary adoption of OGRA Act amendments (end-June 2021). - Publication of external audit of the Utility Stores Corporation (USC) (end-April 2021). - Establishment of a robust asset declaration system (end-June 2021). - Review schedule and access: - Retain quarterly schedule of reviews until end-2021 to closely guide policy implementation, including critical tax policy reforms. - Rephase remaining program access from this review onwards as suggested in Table 9b, with combined disbursement for the second–fifth reviews adjusted to temporarily lower-than-expected BOP need. - Exchange restrictions and MCP: - Staff supports authorities’ request under Article VIII for temporary retention of existing exchange restrictions given progress in easing them and commitment to fully eliminate them when BOP conditions stabilize and by the end of the program (¶20). - Program financing: - Program remains fully financed: financing commitments and temporary suspension of debt service under the G20 DSSI initiative will cover gross external financing needs amounting to US$27 billion (9.9 percent of GDP) over the next twelve months (Table 3b). - Financing support includes China (US$10.8 billion), UAE (US$2 billion), World Bank (US$2.8 billion), Asian Development Bank (US$1.1 billion), Islamic Development Bank (US$1 billion), and other bilateral support under the G20 initiative (US$1.8 billion). The DSSI covers about US$2.5 billion falling due over May 2020–June 2021, of which US$0.8 billion relate to the second round of DSSI covering the January–June 2021 debt service. - Staff encourages all key bilateral creditors to maintain exposure to Pakistan in line with program commitments. - IMF exposure and repayment capacity: - IMF exposure reaches SDR 5,386.42 million (or 265 percent of quota and about 60 percent of gross reserves) with this review; with full purchases, it will peak at 344 percent of quota in 2022 (Table 7). - Elevated risks could jeopardize program objectives: delayed adoptions of reforms, high public debt and gross financing needs, low reserves, and uncertainty about global economic and financial conditions amid the Covid-19 pandemic. - Mitigation: reinforced program monitoring (quarterly reviews and updated conditionality), focused technical assistance (Annex II), and execution of existing financing commitments. - Safeguards assessment (2019): - Found a broadly strong safeguards framework at the SBP (financial reporting, external and internal audit mechanisms, enterprise-wide risk management). - Areas to strengthen: SBP legal framework (¶16) and phase-out of SBP involvement in quasi-fiscal activities in the medium term (¶15) via amendments to the SBP Act and program commitments. - Four out of eight non-executive director positions on the SBP Board have been vacant for a prolonged period and need to be filled urgently. ### Staff Appraisal — macro policy assessment, priorities, and risks - Assessment of pandemic response and policy stance: - Authorities’ policy response to Covid-19 included health containment measures, temporary fiscal stimulus, large expansion of social safety nets, monetary policy support, and targeted financial initiatives; supported by emergency financing. - After a mild recession in FY 2020, the economy is poised to achieve modest growth in FY 2021. - Authorities moved key reforms forward: timely adoption of FY 2021 budget (June 2020), MoUs with IPPs (August 2020), approval of 14 pieces of AML/CFT legislation over summer 2020, and recalibration of the EFF-supported program to balance support and debt sustainability. - Authorities need steadfast implementation to ensure a strong and sustainable recovery. - Fiscal strategy: - Anchored on gradual, revenue-based fiscal consolidation, creating space for higher social spending and Covid-related priority spending. - Meeting the FY 2021 primary deficit target requires careful spending management and envisaged revenue measures, including in provinces. - Recent reform of corporate taxation is a first step; staff urged completion and harmonization of general sales and personal income taxation in the FY 2022 budget to improve tax system and place debt on a downward path while allowing social and development spending. - Social protection and poverty: - Rapid rollout of emergency cash support to alleviate Covid-19 shock praised. - Ongoing efforts to expand social safety nets and reduce poverty, including expanding and timely updating BISP beneficiary base. - Revamped NSER database will support targeted scaling-up of social spending by better identifying vulnerable households. - Monetary and financial stability: - Current accommodative monetary stance remains appropriate to support nascent recovery; further policy rate steps should be data-driven to maintain stable and low inflation. - Introduction of forward guidance is welcome to anchor expectations. - Financial emergency facilities and regulatory measures should remain temporary to avoid deterioration of banks’ asset quality. - Banks’ housing lending targets could present risks to financial stability and misallocation of credit. - Parliamentary submission of amendments to the SBP Act is welcome and should be timely approved. - Enhancing effectiveness of AML/CFT framework remains urgent to complete the FATF action plan. - Exchange rate and reserves: - Preserving a market-determined exchange rate is crucial to absorb external shocks, maintain competitiveness, and rebuild international reserves. - Authorities encouraged to strengthen the central bank balance sheet, including building buffers. - Energy sector: - Addressing structural deficiencies is key to financial viability. - Need to rigorously follow through with the IFI-supported Circular Debt Management Plan (CDMP) to address soaring circular debt and repercussions on financial sector, budget, and real economy. - CDMP aims at financial viability through management improvements, cost reductions, tariff adjustments, and improved targeting of subsidies. - Structural reform imperative: - Unlocking growth potential requires accelerating structural reforms: (i) enhance SOEs’ governance, transparency, and efficiency; (ii) boost business environment by simplifying procedures for starting a business, approving FDI, preparing trade documentation, and paying taxes; (iii) foster governance and rule of law by bolstering anticorruption institutions. - Improve data recording and dissemination, including on public finances, and invest more in education and human capital to produce more complex goods. - Program risks: - Significant domestic and external risks: second Covid-19 wave, uncertainty around domestic recovery, trade, remittances, political tensions over reforms, geopolitical risks affecting oil prices, and adverse shifts in investor sentiment affecting external financing. - Mitigation: close program monitoring, interlinked technical assistance, and financing assurances from key lenders. *Source: IMF staff report content (1pakea2021001 - 23).* ### 37. Based on the performance under the very challenging circumstances and commitments ### Based on the performance under the very challenging circumstances and commitments ahead, staff supports the authorities’ request for the completion of the second, third, fourth, and fifth reviews under the EFF. It also supports: (i) setting new quantitative targets for end-March, end-June, end-September, and end-December 2021; (ii) rephasing access consistent with the modified review schedule; (iii) making all funds available for budget support; and (iv) extending the approval for the retention of the current existing exchange restrictions and MCP, because they are temporary, non-discriminatory, and needed for balance of payments reasons. ### Program approval, conditionality, and financing schedule - Staff supports completion of the second, third, fourth, and fifth reviews under the EFF. - Supported measures: - Setting new quantitative targets for end-March, end-June, end-September, and end-December 2021. - Rephasing access consistent with the modified review schedule. - Making all funds available for budget support. - Extending approval for retention of current existing exchange restrictions and MCP because they are temporary, non-discriminatory, and needed for balance of payments reasons. - Original and proposed schedules of reviews and purchases (selected figures): - Approval of arrangement: July 3, 2019 — 716 Millions of SDRs; 35 Percent of Quota. - First review and end-September 2019 performance/continuous criteria: December 6, 2019 — 328 Millions of SDRs; 16 Percent of Quota. - Under proposed rephasing: March 5, 2021 — 350 Millions of SDRs for Second, Third, Fourth, and Fifth reviews performance/continuous criteria 1/. - Total program purchases: 4,268 Millions of SDRs; 210 Percent of Quota. - Note: The purchases have become available on March 6, 2020, June 5, 2020, September 4, 2020, and March 5, 2021, respectively. ### Macroeconomic outlook and key indicators - Growth and inflation: - Real GDP at factor cost: 5.5 (2017/18), 1.9 (2018/19), -0.4 (2019/20), 1.5 (2020/21), 4.0 (2021/22) (Est./Proj. as presented in Table 2 and Table 1). - Consumer prices (period average): 3.9 (2017/18), 6.7 (2018/19), 10.7 (2019/20), 8.7 (2020/21), 8.0 (2021/22). - GDP deflator at factor cost: 2.4, 8.4, 9.1, 8.7, 8.0 (2017/18–2021/22 sequence). - External sector: - Current account balance (in percent of GDP): -6.1 (2017/18), -4.9 (2018/19), -1.1 (2019/20), -1.5 (2020/21), -1.8 (2021/22). - Gross international reserves (GIR, billions of U.S. dollars): 9.87 (2017/18), 7.27 (2018/19), 12.17 (2019/20), 14.36 (2020/21), 17.79 (2021/22). - Remittances: 19,914 (2017/18), 21,740 (2018/19), 23,131 (2019/20), 24,667 (2020/21), 26,179 (2021/22) (current transfers: credit). - Financing and reserves: - Gross external financing requirements (millions of U.S. dollars): 30,005 (2017/18), 25,552 (2018/19), 21,879 (2019/20), 27,013 (2020/21), 23,643 (2021/22). - Gross official reserves (stock, in US$ billions): 9.8 (2017/18), 7.3 (2018/19), 12.2 (2019/20), 14.4 (2020/21), 17.8 (2021/22). - GIR in months of next year's imports: 1.9, 1.7, 2.7, 2.9, 3.3 (2017/18–2021/22). ### Fiscal stance and public debt dynamics - Fiscal outcomes and projections (selected figures from Tables 1, 2, 4a, 4b): - Revenue and grants (percent of GDP): 15.2 (2017/18), 13.0 (2018/19), 15.1 (2019/20), 15.8 (2020/21), 17.0 (2021/22). - Expenditure (including statistical discrepancy, percent of GDP): 21.6, 22.0, 23.1, 22.9, 22.5 (2017/18–2021/22). - Budget balance (including grants, percent of GDP): -6.4 (2017/18), -9.0 (2018/19), -8.0 (2019/20), -7.1 (2020/21), -5.5 (2021/22). - Primary balance (excluding grants, percent of GDP): -2.2, -3.6, -1.8, -1.1, 0.3 (2017/18–2021/22). - Underlying primary balance (excluding grants) 3/: -2.2, -3.6, -1.8, -0.5, 0.8 (2017/18–2021/22). - Debt levels: - Total general government debt excl. IMF obligations: 69.9, 83.2, 84.1, 84.4, 79.9 (2017/18–2021/22 — percent values as presented). - General government debt incl. IMF obligations: 72.1, 85.6, 87.2, 87.7, 83.3 (2017/18–2021/22). - General government and government guaranteed debt (incl. IMF): 76.2, 90.7, 92.8, 92.9, 88.2 (2017/18–2021/22). - Nominal GDP (market prices, billions of Pakistani rupees): 34,616 (2017/18), 37,972 (2018/19), 41,727 (2019/20), 45,778 (2020/21), 52,057 (2021/22). ### Banking, financial sector, and monetary policy - Monetary aggregates and central bank balance sheet (selected figures from Table 5): - Broad money (percent change): 9.7 (2017/18), 11.3 (2018/19), 17.5 (2019/20), 16.0 (2020/21), 13.2 (2021/22). - Reserve money (percent change): 12.7, 19.9, 16.8, 16.5, 13.3 (2017/18–2021/22). - Private credit (percent change): 14.9, 11.9, 3.0, 7.0, 14.2 (2017/18–2021/22). - Net foreign assets, banking system (in percent of broad money): -5.6, -8.1, 5.6, 5.8, 3.7 (selected years). - Banking sector soundness (selected figures from Figures and Table 6): - NPLs to gross loans: 13.3 (2013), 12.3 (2014), 11.4 (2015), 10.1 (2016), 8.4 (2017), 8.0 (2018), 8.2 (2019), 8.8 (2019; multiple quarterly entries), 9.7 (2020). - Regulatory capital to risk-weighted assets: 14.9 (2013), 17.1 (2014), 17.3 (2015), 16.2 (2016), 15.8 (2017), 16.2 (2018), 16.1 (2019), 17.2 (2020) (table reports multiple date-specific observations). - Return on assets (after tax): 1.1 (2013), 1.5 (2014), 1.5 (2015), 1.3 (2016), 0.9 (2017), 0.8 (2018), 0.8 (2019), 0.8–1.1 (2019–2020 entries). - Monetary policy response: - The SBP has proactively loosened monetary policy in response to the Covid-19 shock; market rates have moved down in line with the policy rate (figures and charts presented for 2014M12–2020M12 and 2010–2020 interest rates). ### Balance of payments, external financing, and vulnerabilities - Balance of payments (selected figures from Table 3a and 3b): - Current account (millions of U.S. dollars): -19,195 (2017/18), -13,434 (2018/19), -2,970 (2019/20), -4,154 (2020/21), -5,419 (2021/22). - Balance on goods (millions of U.S. dollars): -30,903 (2017/18), -27,612 (2018/19), -19,910 (2019/20), -22,533 (2020/21), -25,253 (2021/22). - Exports, f.o.b. (millions of U.S. dollars): 24,768 (2017/18), 24,257 (2018/19), 22,507 (2019/20), 23,635 (2020/21), 24,937 (2021/22). - Imports, f.o.b. (millions of U.S. dollars): 55,671 (2017/18), 51,869 (2018/19), 42,417 (2019/20), 46,168 (2020/21), 50,190 (2021/22). - Gross external financing requirements and available financing (Table 3b highlights): - Gross External Financing Requirements (A, millions of U.S. dollars): 30,005 (2017/18), 25,552 (2018/19), 21,879 (2019/20), 27,013 (2020/21), 23,643 (2021/22). - Available Financing (B, millions of U.S. dollars): 23,873 (2017/18), 23,103 (2018/19), 23,955 (2019/20), 27,600 (2020/21), 24,939 (2021/22). - Remaining Financing Needs (C=A-B): 6,132; 2,449; -2,076; -587; -1,296 (2017/18–2021/22 sequence). - Borrowing from IMF (D): 0; 0; 2,825; 1,594; 2,146 (2017/18–2021/22 sequence as shown in Table 3b). - Reserve assets change (E=C-D): 6,132; 2,449; -4,901; -2,181; -3,442 (selected years). - Public external liabilities and amortization (Table 10, selected entries): - Total public external liabilities outstanding: 90,124 (Total as presented). - IMF exposure: 7,493 outstanding; amortization over EFF period: 741 (FY2019/20), 1,039 (FY2020/21), 1,068 (FY2021/22), 273 (FY2022/23 through Q1) — table reports breakdown across creditors and amortization. ### Key policy implications and recommendations (implied by supported actions and indicators) - Continue program engagement and complete reviews to maintain access to IMF financing and to support budget needs. - Maintain temporary, non-discriminatory exchange restrictions and MCP as needed for balance of payments management until external buffers strengthen. - Use IMF disbursements for budget support as planned to stabilize fiscal financing while pursuing measures to improve revenue and contain non-priority current expenditure (consistent with projected improvements in revenue and reduction in overall balance deficits). - Monitor external financing needs closely: gross external financing requirements and amortization pressures require ongoing engagement with official and private creditors to sustain reserve buffers. - Support financial sector resilience by continuing to monitor NPLs, capital adequacy, and bank liquidity while ensuring credit to private sector recovers as macroeconomic conditions improve. *Sources: Pakistani authorities; IMF World Economic Outlook Database; Bloomberg; State Bank of Pakistan; and IMF staff estimates, projections, and calculations as presented in the chapter.* ### Annex I. Policy Response to the Covid-19 Shock ### Annex I. Policy Response to the Covid-19 Shock ### Background - Covid-19 was reported for the first time on February 26, 2020. - Starting on March 23, both the federal and provincial governments implemented containment and mitigation measures, including selective quarantines, border closures, international and domestic travel restrictions, closure of educational institutions, banning of public events, social distancing, and varying levels of lockdown. - The number of new daily cases increased rapidly, hitting the peak of 6,000 in mid-June, before slowing down in July. - Between August and October, the number of daily new cases was consistently below 1,000 (reaching a low of 300 cases in early September). - A second wave of infections emerged starting in November as the positivity rate had been on an upward trend before moderating in mid-December and decreasing to less than the 5 percent mark in end-January. - Note: According to criteria published by WHO in May, a positive rate of less than 5% is one indicator that the epidemic is under control in a country. ### Reopening of the economy and additional containment efforts - Since mid-April, the federal government, in coordination with provinces, started to gradually ease lockdown arrangements. - By the end of summer, further lockdown restrictions were lifted, allowing educational institutions, recreational places, restaurants, malls, and retail outlets to reopen. - In the last months of CY 2020 some restrictions were partially re-imposed by better enforcing Standard Operating Procedures (SOPs) and mandating the use of face masks. - To mitigate the second wave, smart lockdown measures were re-imposed, along with a general ban on public meetings and rallies, and the closure of educational institutions and venues such as cinemas, theaters, and wedding halls. - Educational institutions began phased reopening from January 18. - Vaccination planning and procurement: - In early December, the government applied to the UN’s COVAX Facility which will cover priority groups—around 20 percent of the population. - Emergency use approval was given for three vaccines—the Oxford-AstraZeneca vaccine, Sinopharm, and Sputnik V. - Discussions are underway with other vaccine manufacturers and donors (notably the World Bank and Asian Development Bank) for procurement of extra vaccines funded with a US$ 250 million budget allocation. - The launch of the vaccination drive is expected in the second quarter of CY 2021. ### Key policy responses - The authorities took measures in three areas: fiscal; monetary and macro-financial; and exchange rate and balance of payments. Fiscal - A relief package worth PRs 1,200 billion (2.9 percent of GDP) was announced by the federal government on March 24, 2020 of which PRs 715 billion (1.7 percent of GDP) was executed in FY 2020. - Key fiscal measures included: - elimination of import duties on emergency health equipment (recently extended until December 2020); - cash transfers to 6.2 million daily wage workers (PRs 75 billion); - cash transfers to more than 12 million low-income families (PRs 50 billion); - accelerated tax refunds to exporters (PRs 100 billion); - support to SMEs and the agriculture sector (PRs 100 billion) in the form of power bill deferment, bank lending, as well as subsidies and tax incentives; - accelerated procurement of wheat (PRs 280 billion); - financial support to utility stores (PRs 50 billion); - a reduction in regulated fuel prices with a benefit for end consumers estimated at PRs 70 billion; - support for health and food supplies (PRs 15 billion); - electricity bill payments relief (PRs 110 billion); - an emergency contingency fund (PRs 100 billion); - transfer to the National Disaster Management Authority (NDMA) for the purchase of Covid-19 related equipment (PRs 25 billion). - The FY 2021 budget includes further increases in health and social spending, tariff and custom duty reductions on food items, an allocation for ‘Covid-19 Responsive and Other Natural Calamities Control Program' (PRs 70 billion), a housing package to subsidize mortgages (PRs 30 billion), and tax incentives to the construction sector (retail and cement companies) extended in the context of the second wave until the end of December 2021. - Provincial measures: - Punjab: PRs 18 billion tax relief package and a PRs 10 billion cash grants program. - Sindh: cash grant and ration distribution program of PRs 1.5 billion for low-income households. - FY 2021 provincial budgets provide tax relaxations and sizeable increases in expenditure allocations, especially on health services. Monetary and macro-financial - The State Bank of Pakistan (SBP) cut the policy rate by a cumulative 625 basis points to 7 percent since March 17, 2020. - SBP expanded existing refinancing facilities and introduced three new ones to: - support hospitals and medical centers to purchase COVID-19-related equipment (39 hospitals, PRs 8.36 billion, to date); - stimulate investment in new manufacturing plants and machinery, as well as modernization and expansion of existing projects (346 new projects, PRs 278 billion, until end-CY 2020); - incentivize businesses to avoid laying off their workers during the pandemic (2,958 firms, PRs 238 billion, to date). - These facilities have been extended beyond their original deadline of June 2021 to September or December 2021. - Temporary regulatory measures introduced by SBP include: - reducing the capital conservation buffer by 100 basis points to 1.5 percent; - increasing the regulatory limit on extension of credit to SMEs by 44 percent to PRs 180 million from PRs 120 million; - relaxing the debt burden ratio for consumer loans from 50 percent to 60 percent; - allowing banks to defer clients’ payment of principal on loan obligations by one year; - relaxing regulatory criteria for restructured/rescheduled loans for borrowers who require relief beyond the extension of principal repayment for one year; - reducing margin call requirements of 30 percent vis-à-vis banks’ financing against listed shares to 10 percent and allowing banks to take exposure on borrowers against the shares of their group companies. - As of January 22, 2021: - almost 1.7 million applications for principle deferral and loan restructuring under the debt relief scheme were received; - more than 96 percent of applications were approved, covering PRs 884 billion. - SBP housing program: mandatory targets for banks to ensure loans to construction activities account for at least 5 percent of the private sector portfolios by December 2021. Exchange rate and balance of payments - SBP introduced regulatory measures to facilitate import of COVID-19-related medical equipment and medicine: - lifting the limit on import advance payments and import on open account; - allowing banks to approve an Electronic Import Form (EIF) for the import of equipment donated by international donor agencies and foreign governments. - SBP relaxed the condition of the 100 percent cash margin requirement on the import of certain raw materials to support manufacturing and industrial sectors. ### Debt sustainability and public debt dynamics (Annex III summary) - Overall assessment: - Debt sustainability analysis (DSA) indicates that Pakistan’s public debt remains sustainable, especially as financing needs have decreased compared to the last DSA at the time of the Rapid Financing Instrument (RFI) in April 2020. - Improvement reflects multi-year efforts to lengthen debt maturities and a sizable debt relief in the context of the G20 Debt Service Suspension Initiative (DSSI) amounting to US$2.5 billion. - Gross financing needs (GFNs) are projected to continue to decline in the medium term on account of better cash and debt management. - Risks remain high in the short and medium term given elevated debt, although with the EFF-supported reforms public debt is projected to firmly decline over the medium term. Key findings and projections - Public debt developments: - Total debt increased by only 2.1 percent of GDP in FY 2020 to 92.8 percent of GDP. - Projected to decline from 92.9 percent of GDP at end-FY 2021 to 69.2 percent of GDP by end-FY 2026. - Maturity and financing needs: - FY 2020 GFN remained below the previously projected level due to a lower fiscal primary deficit than assumed in the RFI approval, and lower interest payments and amortizations resulting from the DSSI. - GFN is expected to further decrease in FY 2021 thanks to the extension of the DSSI and efforts to lengthen the maturity profile of domestic debt. - Average time to maturity (ATM) of domestic debt held by the market lengthened by 0.6 years to 2.6 years by end-FY 2020. - GFN fell from 36.7 percent of GDP in FY 2019 to an estimated 28.9 percent of GDP in FY 2021. - Projected further medium-term reduction in GFNs to 15.8 percent of GDP in FY 2026. - Key measures needed to lower GFNs: - fiscal discipline and revenue mobilization; - better cash flow management through a treasury single account; - establishment of a central Debt Management Office; - successful implementation of the Medium Term Debt Strategy, including lengthening the maturity profile of debt and diversifying instruments and the investor base (especially by scaling up Shariah-compliant instruments). Risks and contingent liabilities - Macro-fiscal shocks: - The most extreme shock to medium-term debt dynamics would emanate from a large and sustained real interest rate shock. - Under this stress test, debt levels and GFNs would still decelerate to 76 percent of GDP and 20 percent of GDP, respectively. - Contingent liabilities from loss-making SOEs: - Contingent liabilities from the circular debt stock in the power sector held by the Central Power Purchasing Authority’s (CPPA) worth about 1 percent of GDP have been recognized. - Remaining contingent liabilities from CPPA arrears amount to around 1.6 percent of GDP. - Contingent liabilities from other loss-making SOEs amount to about 2 percent of GDP. - These contingent liabilities are accounted for in the DSA through a stress test labelled a “non-financial sector contingent liability shock.” - The impact of both the financial and non-financial contingent liability shocks are less extreme on debt dynamics than the real interest rate shock. - Staff aims to continue strengthening transparency related to contingent liabilities from loss-making SOEs. *Source: Annex I. Policy Response to the Covid-19 Shock (IMF staff summary).* ### 5. The authorities have remained engaged with external creditors to secure financing to ### 1pakea2021001 - 5. The authorities have remained engaged with external creditors to secure financing to ### External financing and creditor engagement - China renewed (and augmenting) the CYN 30 billion (about US$4.6 billion) three-year bilateral currency swap (about US$3 billion at the time of EFF approval). - China renewed the maturing commercial loans as part of the program financing assurance commitment. - China provided an additional US$1bn deposit in July 2020, raising the State Administration of Foreign Exchange (SAFE) deposits to US$4bn. - Good prospects for financing remain for the remainder of the program. - The G20 Debt Service Suspension Initiative (DSSI) amounting to about US$2.5 billion (0.9 percent of FY 2021 GDP) has helped reduce gross financing needs in the near term. ### Pandemic impact and emergency measures - Confirmed Covid-19 cases: 592,100 and deaths: 13,227 as of March 8. - Real GDP in FY 2020 declined by 0.4 percent (the first economic contraction since FY 1952). - Growth is expected to remain subdued in FY 2021. - Emergency fiscal package worth about 1 percent of GDP in FY 2020—supported by emergency IMF financing under the Rapid Financing Instrument (RFI)—disbursed beginning in mid-April 2020. - Cumulative cuts in the policy rate by 625 basis points to support liquidity and credit conditions. - Ehsaas Emergency Cash (EEC) program provided one-time cash assistance to over 15 million families, covering about 90 million people or more than 40 percent of the population. ### Program implementation, targets, and shortfalls - Despite the Covid-19 shock, several indicative targets (ITs) were met by large margins, including net international reserves, net domestic assets, and government borrowing. - Missed end-June 2020 indicative targets set before the Covid crisis (MEFP Table 1a), due to: - Necessary fiscal response to the health and humanitarian crisis. - Dramatic deterioration in macroeconomic conditions in Q4 FY 2020. - Met the target on the cumulative floor on targeted cash transfers spending owing to one-time emergency assistance to 15 million families. - Missed the target on the ceiling on the stock of government guarantees because some previously excluded guarantees needed to be incorporated into figures. ### Progress on structural reforms and policy actions - Made good progress on structural reforms and program commitments; specific actions include: - (i) Approved a CIT reform to simplify the tax system and support fiscal objectives in March 2021 (PA for completion of the review). - (ii) Submitted the amendments to the State Bank of Pakistan Act (SBP) to parliament (end-March 2020 SB and PA for the completion of the review). - (iii) Approved the NEPRA Act reform that will strengthen the power sector strategy in March (PA for the completion of the review). - (iv) Contained the circular debt flow in the power sector with Cabinet approval of a timetable for outstanding adjustments, notifying the FY 2020 Q2 and Q3 quarterly tariff adjustments in a staggered way in October and December 2020 (end-January 2020 SB), and implementing the first half of the annual rebasing (AR) determined for FY 2021 in January 2021, accompanied by first energy subsidy reform steps (PA for completion of the review). - (v) Secured Cabinet approval of the updated Circular Debt Management Plan (CDMP) in March 2021 (PA for completion of the review). - (vi) Published a triage of the state-owned enterprise (SOE) portfolio in March 2021 (end-September 2020 SB). - (vii) Submitted a new SOE law to parliament in March 2021 (end-September 2020 SB). - Progress toward completion of the AML/CFT action plan to exit FATF’s grey list has been made, but two outstanding SBs require additional time due to capacity constraints: - Adoption of measures to effectively strengthen the AML/CFT framework (end-June 2020 SB, reset to end-June 2021). - Address terrorism financing consistent with FATF Immediate Outcomes 9 and 10 (end-March 2020 SB; subsumed under the end-June 2020 SB). - Finalization of the BISP beneficiaries’ database delayed as Covid-19 hindered field work (June 2020 SB, reset to end-June 2021). *Source: IMF staff.* ### 5. Based on the strong steps that we have already taken and our resolute commitments for the ### 1pakea2021001 - 5. Based on the strong steps that we have already taken and our resolute commitments for the ### Program requests, monitoring, and commitments - Request completion of the combined second, third, fourth, and fifth reviews under the EFF. - Request rephasing of access and modification of the review schedule due to delays in completing reviews and to better align them with reform implementation. - Program monitoring: - Continue through quarterly reviews; move to semi-annual reviews as track record strengthens. - Monitoring through quantitative and structural conditionality: PAs, quantitative performance criteria, indicative targets, and SBs as described in the attached MEFP and TMU. - Commitment to consult the IMF on additional measures and in advance of revisions to the policies in the MEFP, in accordance with IMF policies on such consultation. - Commitment to supply the IMF with timely and accurate data needed for program monitoring. - Consent to IMF publication of this letter, the MEFP, the TMU, and accompanying Executive Board documents. ### Recent economic developments and outlook - Impact of Covid-19: - Real GDP is provisionally estimated to have contracted by 0.4 percent in FY 2020 (first negative growth outturn since FY 1952). 1 - Current account deficit narrowed to 1.1 percent of GDP in FY 2020. - Recovery prospects and projections: - High frequency indicators in H1 FY 2021: cement production and exports showed strong monthly growth; car sales reached a two-year high in October; business sentiment and consumer confidence are recovering. - GDP growth projection for FY 2021: 1.5–2.5 percent. - Inflation projection for FY 2021: average of 9 percent. - Current account deficit projection for FY 2021: 0.5–1.5 percent. - Upside scenario: successful containment of the pandemic and vaccine deployment → stronger recovery. - Downside scenario: more unfavorable pandemic trajectory → policy adjustments may be needed to support the economy and the most vulnerable. 1 Based on provisional results published by the Pakistan Bureau of Statistics in May 2020. ### Fiscal policy stance and objectives - Strategic goals: - Centered on ambitious revenue mobilization to ensure debt sustainability and create space for social and development spending. - Gradually increase the tax-to-GDP ratio by more than 3 percent of GDP through FY 2023. - Cumulative fiscal primary adjustment of 3.3 percent of GDP. - Near-term fiscal space: - Create space for health, education, infrastructure, and targeted social protection. - Actions to reduce debt service, including requesting debt relief under the Debt Service Suspension Initiative (DSSI). - Transparency and quality of Covid-related spending: - Publish awarded contracts and beneficial ownership information of bidding and awarded legal persons in a centralized and publicly accessible website (new end-April 2021 SB). - Subject procurement of Covid-related supplies and social payments to an ex-post audit by the Auditor General of Pakistan; publish results on the Ministry of Finance website (new end-April 2021 SB). - Ensure FATF principles on voluntary tax compliance schemes for the temporary construction program (extended until end-December 2021) and monitor AML/CFT obligations related to construction sector investments. - Continuous SB: no further tax amnesties and avoid new preferential tax treatments or exemptions. ### FY 2020 outturn and FY 2021 budget specifics - FY 2020 fiscal outcomes: - General government primary deficit of 1.8 percent of GDP (improvement of 1.8 percent of GDP vs FY 2019). - H1 FY 2021 carryover: - General government registered a primary surplus of 0.7 percent of GDP (including provincial surplus of 0.6 percent of GDP), about 0.8 percent of GDP better than projected. - Tax revenues, net of refunds, grew 12 percent y-o-y. - Overall fiscal deficit contained at 2.5 percent of GDP. - FY 2021 budget (adopted June 29, 2020): - Targets a general government primary deficit of 0.5 percent of GDP—excluding additional Covid-19 related spending and payments related to clearance of outstanding arrears to some IPPs—which the authorities remain committed to achieving. - Expenditure measures: - Unwind Covid-crisis related economic stimulus spending measures (1.2 percent of GDP) and freeze non-priority spending while preserving health and social spending. - Nominal freeze of wages and pensions, decline in real military spending, and streamlining of subsidies. - Budgeted BISP social spending to PRs 200 billion (up by 77 percent relative to FY 2020 execution, excluding Covid-19 one-off spending of PRs 133 billion). - Almost doubled health sector spending relative to the FY 2020 budget allocation. - Revenue measures: - Original budget assumed 26 percent nominal growth of tax revenue; authorities recognize this is not attainable given the pandemic. - To achieve primary deficit target, rely on several one-off non-FBR tax measures and non-tax revenues, including increasing petroleum levy on gasoline and diesel toward PRs 30/liter and additional transfers of SBP dividends. - Agreement with provinces: - Formal written agreements on fiscal strategy and required provincial fiscal efforts, including revenue and fiscal surplus targets by province for FY 2021; agreements made public. ### Tax policy reforms - Corporate Income Tax (CIT): - Adopted comprehensive reform of CIT as first step (PA for completion of the review): modernization and streamlining of tax incentives (tax credits, accelerated deductions, exempt income, reduced tax rates, and tax liability reductions). - Planned GST and PIT reforms with FY 2022 budget (estimated yield 1.1 percent of GDP): - GST reforms (estimated yield 0.7 percent of GDP on an annualized basis): - Eliminate all zero-rated goods (Fifth Schedule), except on export and capital machinery goods, and move them to the standard sales tax rate. - Remove reduced rates under the Eight Schedule and bring those goods to the standard sales tax rate. - Eliminate exemptions (Sixth Schedule) excluding a small subset (basic food, medicines, live animals for human consumption, education and health-related goods); bring all others to the standard rate. - Remove the Ninth Schedule to replace a specific tax rate for cell phones with the standard rate. - Harmonize service sales tax across provincial jurisdictions with World Bank support, expected to be completed by end-June 2021. - PIT reforms (estimated yield 0.4 percent of GDP on an annualized basis): - Reduce the number of rates and income tax brackets from eleven to five and decrease the size of the income slabs. - Reduce tax credits and allowances by 50 percent (except for Zakat and those for disabled and senior citizens). - Introduce special tax procedures for very small taxpayers to prevent further tax base erosion and facilitate formalization. - Adopt a long-term strategy to reduce labor informality and bring additional taxpayers into the PIT net. ### Public financial management and tax administration reforms - PFM reforms: - Established a macro-fiscal unit in the MoF. - Presented mid-year budget review to the National Assembly in February 2020 (end-February 2020 SB) and February 2021. - Plans to establish a treasury single account (TSA-1): - Accounts level data shared with public sector entities in September 2020 for closure and transfer to TSA-1. - Functional TSA-1 target: end-May 2021 (new end-May 2021 SB). - Initiated work on TSA-2. - With EU assistance, develop guidelines related to annual and multi-annual commitments control system by end-March 2021. - Tax administration reforms: - Focus areas: introduce a centralized, risk-based compliance function; modernize IT and automation; use third-party data and strengthen data cross-checking and analysis; simplify registration and filing; modernize audit practices; strengthen large taxpayer approach and expand Large Taxpayer Office activities. - Specific targets and actions: - Implement single return and taxpayer portal by end-June 2021. - Launch Collectible Debt Campaign by end-March 2021. - Seek to reintroduce and roll out track-and-trace systems for tobacco products by end-June 2021 (new end-June 2021 SB) and consider introduction for other high-smuggling items (sugar, drinks, cement). - Establish single filing portal by September 2024 to support GST harmonization. ### Debt management and sustainability measures - Debt stock and trajectory: - Debt stood at 92.8 percent of GDP at end-FY 2020 (up by less than 3 percentage points compared to end-FY 2019). - Key measures to address debt vulnerabilities: a. DSSI relief: - Secured debt relief under DSSI reducing external debt service through end of FY 2021 by an estimated US$2.6 billion (0.9 percent of FY 2021 GDP) over and above assurances under the EFF. b. Lengthening domestic debt maturity: - Average Time to Maturity (ATM) of domestic debt held by the market increased from two years to 2.6 years over July 2019-December 2020. c. Medium-Term Debt Strategy (MTDS): - MTDS targets Gross Financing Needs (GFN) lower than 24 percent of GDP by FY 2023, down from more than 30 percent of GDP in FY 2020. - Steps taken: reintroduction of 15-, 20-, and 30-year fixed rate Pakistan Investment Bonds (PIBs); reintroduction of 5-year Shariah Compliant Sukuks; introduction of 3- and 5-year floating rate PIBs; ban on institutional investments in National Savings Schemes effective July 1, 2020 to enhance institutional participation in long-term debt markets. - Results: between April and December 2020 more than PRs 100 billion raised through 15–20 year instruments and PRs 562 billion raised from Sukuks. - Committed to a new IT on cumulative gross issuance of PIBs, Sukuks, and Eurobonds starting March 2021 (new Indicative Target). d. Debt Management Office (DMO): - Established DMO rules of business; in process of amending the Fiscal Responsibility and Debt Limitation Act (2005). - Draft Bill submitted to the Federal Cabinet Committee on Disposal of Legislative Cases (CCLC) in February 2021; expected submission to National Assembly and Senate by end-June 2021. - Interim measures: Finance Division assigned additional functions to existing Debt Policy and Coordination Office; approved organogram to hire additional staff. - Setup targets: front office/middle office/back office of new DMO completed by end-June 2021; recruitment of staff completed by end-September 2021 with some staff recruited by end-June 2021; migration of relevant functions to DMO completed by end-December 2021. - Enhanced cooperation with Economic Affairs Division for accurate debt-related statistics; new Working Group established in February 2021. *Memorandum on Economic and Financial Policies, Pakistan (Attachment I).* ### 11. We have swiftly provided significant emergency cash support to the most ### 11. We have swiftly provided significant emergency cash support to the most ### Emergency cash assistance and Ehsaas Emergency Cash (EEC) - On April 1, 2020, the Prime Minister launched the Ehsaas Emergency Cash (EEC) program to provide immediate one-time cash assistance (PRs 12,000 per beneficiary) to an eligible 17 million families—covering about one-half of all families and the two lowest income quintiles—identified jointly with the provinces and supported by a far-reaching communication campaign. - By end-June 2020: - Reached over 12.5 million households. - Disbursed PRs 133 billion coming from the fiscal stimulus package. - In Q1 FY 2021: - Reached an additional 2.3 million households. - Upon successful completion of the EEC program at end-September 2020, post-crisis social support reverted to regular BISP beneficiaries in October 2020, while efforts continue to permanently broaden scope of coverage. ### Expanding social safety nets and human development priorities - Pakistan has fallen behind regional peers on SDGs in health, education, and gender equality; corrective measures already adopted include: - Approving a significant increase in budgetary allocations for social programs. - Improving educational cash transfers to boost girl’s primary educational enrollment and narrow the gender gap. - Developing a nutrition program for mother and children to reduce stunting. - Additional initiatives under way: a. Ensuring timely disbursement of benefits and expanding beneficiaries: - Missed end-March target due to removal of more than 800,000 individuals from the program (update of the National Socio-Economic Registry (NSER)) and slower-than-expected enrollment in new bank accounts. - Met end-June target on BISP cash transfers aided by one-off EEC disbursement. - On track to expand BISP cash transfers to 6 million families during FY 2021 (up from about 4.3 million at end-FY 2020), and 7 million families over the medium term. b. Finalizing the NSER update and ensuring targeting: - As of end-December 2020, 55 percent of the update completed through door-to-door survey and desk-based self-registration. - Re-certification of surveyed beneficiaries proceeding, but all field activities stopped due to Covid-related lockdown measures. - Expect a one-year delay in completion of the registry update (end-June 2020 SB, reset to end-June 2021). - Update will support adequate targeting of BISP cash transfers and introduction of an adequate indexing scheme. c. Expanding BISP benefits: - Approved a 20 percent increase, to PRs 6,000 effective January 2020, in cash stipends to BISP beneficiaries to be disbursed monthly rather than quarterly. - Doubled stipends in the educational CCT program to PRs 1,500 for boys and PRs 2,000 for girls in August 2020 and expanded it in all 154 districts. - Exploring options to: - Further expand BISP cash benefits in the context of the FY 2022 budget. - Continue the roll out of the nutrition program based on pilot lessons. - Allow “never married” women to become eligible for BISP benefits. - Help beneficiaries open savings bank accounts to advance financial inclusion. - Note on definition: Within eligible households, BISP defines a family as an ever-married woman holding a valid computerized national identity card (CNIC); only she is eligible to receive the cash transfer. ### Monetary and exchange policies - Policy objectives: entrench monetary and financial stability by maintaining a market-determined exchange rate, lowering inflation, and building foreign exchange reserves. - Exchange rate and reserves: - Exchange rate depreciated by around 8 percent against the U.S. dollar between early-March and end-June 2020. - Appreciated by 5 percent in H1 FY 2021 and 1.7 percent between January 1 and March 5, 2021. - Net international reserves (NIR) buffers rebuilt by US$6 billion in FY 2020. - Reserve buffers increased by US$1.2 billion in H1 FY 2021. - Net short swap/forward foreign exchange position scaled back by more than US$2 billion in FY 2020 and further reduced by more than US$1 billion subsequently. - Monetary policy stance: - SBP cut policy rate by 625 basis points cumulatively to 7 percent by end-June 2020. - Stance remains accommodative to support recovery while vigilant on supply-driven inflation and inflation expectations. - FX interventions: Forex sales limited to preventing disorderly market conditions (DMCs) while not suppressing an underlying trend. ### Credit, refinancing schemes, and SBP measures - Housing and construction lending: - In July 2020 introduced mandatory targets: by December 2021 SBP will require banks to provide 5 percent of domestic private sector lending for financing housing and construction of buildings. - Banks meeting quarterly targets permitted to lower cash reserve requirements in the subsequent quarter. - Refinancing schemes (Covid response): - Since March 2020, SBP allocated PRs 707.9 billion to banks through end-November; PRs 234.2 billion has been disbursed. - Committed to review terms of temporary facilities depending on evolving Covid-19 situation. - SBP governance reforms: - Amendments to SBP Act aim to: - Establish domestic price stability as primary objective; financial stability and growth as secondary objectives. - Define SBP functions, strengthen financial autonomy (statutory recapitalization and profit retention), prohibit direct credits/guarantees to general government, establish statutory underpinnings for audits, protect personal autonomy of senior officials, strengthen collegial decision making, provide stronger Board oversight, and improve accountability on monetary policy. - MoF submitted amendments to parliament in March 2021 (end-March 2020 SB, PA for completion of the review); adoption by parliament expected by end-September 2021. ### Financial sector resilience and bank capitalization - Monitoring and normalization: - Will return to existing loan classification, provisioning rules, and pre-Covid-19 lending standards once situation normalizes. - Engaged with two non-systemic private sector banks and one public sector bank to ensure compliance with minimum capital requirements. - Deadlines to ensure compliance with capital requirements reset to end-September 2021 due to technical difficulties. - Public sector bank undergoing privatization expected to be completed by end-September 2021; if unsuccessful, other resolution options including liquidation will be considered. - Resolution framework improvements: - Need to address gaps in bank resolution and crisis management frameworks, including deposit insurance scheme. - Will complete a self-assessment of key attributes of an effective resolution regime for financial institutions by end-March 2021 and, with IMF technical assistance, plan to strengthen and modernize them by end-2021. ### AML/CFT Action Plan - Engagement with capacity development providers, including the IMF. - Progress by February 2021: - Satisfactory progress across 24 of the 27 action items noted at FATF February 2021 Plenary. - Pending action items related to terrorist financing investigations (Immediate Outcome 9) and targeted financial sanctions (Immediate Outcome 10) (end-March 2020 SB; subsumed under the end-June 2020 SB). - Additional time required to demonstrate effectiveness toward a substantial level of effectiveness in line with the AML/CFT Action Plan (end-June 2020 SB; reset to end-June 2021). - Actions taken: - Enacted amendments in 14 laws to address technical compliance and align with FATF standards. - Developed internal roadmap to phase-wise implement Mutual Evaluation Report recommended actions. - Formed dedicated teams for implementing recommended actions on all 11 Immediate Outcomes. ### Easing foreign exchange restrictions and administrative measures - Committed to refrain from introducing or intensifying exchange restrictions, multiple currency practices (MCPs), or import restrictions for balance of payment (BOP) measures; committed to phase out existing measures as BOP stabilizes and eliminate them by end of the program while seeking approval to retain exchange restrictions and MCP for a period of 12 months. - Steps taken to relax measures: - January 2020: Relaxed measures permitting: - Banks to make advance payments up to US$10,000 per invoice on behalf of manufacturing/industrial concerns and commercial importers for import of raw materials, spare parts, and machinery (already allowed for manufacturing concerns in November 2019). - Banks to make advance payment against irrevocable letter of credit up to 100 percent of the value of the letter of credit for import of plants, machinery, spare parts, and raw materials on behalf of manufacturing concerns for their own use. - March 2020: - Allowed banks to make advance payments up to US$25,000 per invoice on behalf of manufacturing, industrial concerns, and commercial importers for import of raw materials, spare parts, and machinery for ultimate use by manufacturing and industrial companies. - In context of combatting Covid-19, allowed all federal and provincial government departments, public and private sector hospitals, charitable organizations, and commercial importers to make Import Advance Payment, without limit, for import of medical equipment, medicine, and other ancillary items for treatment of Covid-19. - September 2020: Removed the 100 percent cash margin requirement on 106 HS Codes items relating to import of certain raw materials to support manufacturing and industrial sectors. ### Energy sector policies and circular debt management - Power sector deterioration and policy response: - Paused adjustments of tariffs for monthly fuel and quarterly capacity payments since January 2020 and introduced payment deferrals beginning in March 2020. - Resulted in significant accumulation of arrears: - PRs 538 billion of arrears accumulated during FY 2020. - Total stock of arrears reached PRs 2,150 billion at end-June 2020. - Additional PRs 102 billion accumulated during Q1 FY 2021 and PRs 50 billion during Q2 FY 2021. - Measures to restore power sector viability: a. NEPRA Act amendments (adopted by parliament in March 2021, PA for completion of the review) to: - Give regulator power to determine and notify quarterly tariffs. - Ensure timely submissions of quarterly and annual petitions by DISCOs. - Eliminate gap between regular annual tariff determination and notification by government. - Reinstate government power to levy surcharges over and above system revenue requirements under NEPRA Act. b. Power price adjustments and mitigation: - Cabinet approved timetable for determined but not yet notified electricity price adjustments, including two-staged implementation of FY 2021 annual rebasing (AR) determined as a 3.34 PRs/kWh increase in base tariff. - To mitigate impact, notified first increase of 1.95 PRs/kWh in January 2021 and completed notification of FY 2020 Q2 and Q3 quarterly tariff adjustments (QTAs) in December 2020 with accompanying social and sectoral mitigation measures. - First energy subsidy reform steps include expanded lifeline tariff definition and determination of subsidized tariff slab based on households’ maximum usage from previous 12-months rather than monthly consumption. - Public outreach campaign launched to explain reform need and strategy. - By end-May 2021 will reduce CPPA-G payables to power producers through a payment of up to PRs 180 billion with no more than one-third in cash and the remainder in debt instruments (new end-May 2021 SB). - Remaining AR step-increase scheduled to be completed by June 1, 2021. c. Medium-term cost-side measures: - Mid-August 2020 MoU with a group of private IPPs to lower and convert into domestic currency the guaranteed ROE and share excess returns; conversion to binding agreements contingent on settling PRs 403 billion outstanding arrears to those IPPs. - Arrears settlement plan in two tranches, each one-third in cash and two-thirds in 5- to 10-year debt instruments. - First tranche of PRs 161 billion due in March 2021; remainder due in August 2021. - Working to negotiate similar terms with other groups of power producers (including government-owned) to reduce capacity payments and need for tariff increases. d. Recalibrated Circular Debt Management Plan (CDMP): - Cabinet approved updated CDMP in March 2021 (PA for completion of the review) reflecting: - Timetable for determined but not yet notified electricity price adjustments and implementation of first-stage AR. - Notification of FY 2020 Q4 QTA by September 2021 (new end-September 2021 SB). - Amendments to the NEPRA Act. - Alignment of required subsidies in the FY 2021 budget and decisions on budgeted subsidies for FY 2022. - CDMP remains ambitious and incorporates later-part savings from measures to reduce transmission and distribution losses and cost of generation (cheaper renewable energy coming on stream, impact of renegotiated PPAs, and T&D loss improvements). *Source: Selected excerpts from the IMF country report chapter on Pakistan (text as provided).* ### 22. Going forward, we will take additional measures that are crucial for halting the ### 1pakea2021001 - 22. Going forward, we will take additional measures that are crucial for halting the ### Power sector: tariff, subsidy, and DISCO reforms - Updating power tariffs - Enactment of the NEPRA Act amendments will ensure automaticity of QTAs (beyond the already automatic monthly fuel price adjustments, FPAs). - Follow through on time with the remaining AR step-increase by June 1, 2021 (new June 1, 2021 SB, see ¶21.b). - Finalize cross-subsidy reform to underpin better targeting of energy subsidies in the FY 2022 budget (amongst others through the introduction of more tariff slabs for large consumers) (new end-June 2021 SB). - Renew public awareness campaign. - Streamlining of tariff adjustments - Preserve principle of automaticity of tariff adjustments embedded in the CDMP. - Consolidate tariff adjustments to significantly reduce the number of end-consumer tariff adjustments in FY 2022 while delivering required revenue. - Fuel price adjustment, quarterly adjustment for capacity payments, and annual rebasing of tariffs will continue but timing will be adjusted. - Ensure consolidation will not generate any new accumulation of power sector arrears. - Improving the targeting of subsidies - Existing system of subsidies covers 93 percent of domestic users. - For FY 2022 budget, finalize with World Bank support a comprehensive subsidy reform covering tariff restructuring and improved targeting (including households and the agricultural sector), while protecting the most vulnerable (new end-June 2021 SB, see ¶22.a). - Strengthening DISCOs governance - Initiated appointment of board members and CEOs in all DISCOs under competitive and transparent procedures. - Exploring options for phased privatization. ### Reducing stock of power sector arrears - Stock and risks - Stock of power sector arrears held by Power Holding Private Limited (PHPL) stands at over PRs 1,000 billion (about 2.2 percent of GDP) as of end-December 2020. - Represents a significant quasi-fiscal risk. - Strategy and actions - Working with international partners to design strategy to settle PHPL arrears while limiting impact on government finances and subject to progress implementing CDMP. - Economic Coordination Committee (ECC) issued notification allowing conversion of PHPL debt into public debt over a 10-year period. - Initial PRs 25.5 billion converted in December 2020. - Another PRs 47 billion will be cleared until the end of FY 2021 — with subsequent transfers on a semi-annual schedule, seeking to transfer the most expensive debt first and subject to satisfactory implementation of revised CDMP. - Raised PRs 200 billion through a Sukuk in May 2020, issued with government guarantee, to transfer costly CPPA payables to IPPs into the PHPL. ### Gas sector reforms and arrears reduction - Arrears and measures - Stock of arrears about PRs 199 billion at end-FY 2020, up from PRs 144 billion at end-FY 2019. - Timely updates of tariffs - Revised gas sales prices upwards by September 2020 to fully reflect projected annual revenue requirement of both Sui companies for FY 2021 and a part of Sui Sothern arrears. - Will consider OGRA determination on annual revenue requirement and further revise gas sale prices upwards in the second half of FY 2021. - Amending the OGRA Act - Council of Common Interests (CCI) adopted amendments in December 2019 to ensure recovery requirements are met timely. - Draft Bill submitted to CCLC in April 2020 and expected to be adopted by parliament before end-June 2021 (new end-June 2021 SB). - Reducing unaccounted for gas losses (UFG) - Two gas companies working to reduce UFG losses based on reduction plans approved by Cabinet. - Published first annual monitoring report covering FY 2020 in January 2021 and first quarterly report covering Q1 FY 2021 in February 2021. - Continue publishing reports quarterly including: (i) assessment of progress reducing UFGs against relevant benchmarks; (ii) quantitative analysis of impact of initiatives; (iii) assessment of contingency measures. ### Structural policies and SOE reforms - Objectives - Unleash potential of economy, create enabling environment for investment and job creation, strengthen SOEs’ productivity, and enhance trust in government. - Improving SOEs’ governance, transparency, and efficiency - Advancing privatization - Privatization of two LNG power plants expected to complete by end-February FY 2022; proceeds to be channeled to debt reduction and poverty programs. - Privatization of two small public banks expected to complete by end-December 2021. - Assessing options to divest PIA non-core assets (two hotel properties). - Increasing transparency - Completed and published audits of PIA and Pakistan Steel Mills in January 2020 and July 2020, respectively (end-December 2019 SB). - Auditor General of Pakistan completed special audit of Pakistan Railroads in March 2020 (based on FY 2019) and published in November 2020. - Will conduct and publish audit of Utility Stores Corporation (USC) based on FY 2020 financials (new end-April 2021 SB). - Strengthening monitoring of SOEs - Completed and published a triage of SOEs in March 2021 (end-September 2020 SB) with World Bank support. - Division of companies into: (i) maintain under state management; (ii) privatize; (iii) liquidate. - Next step: execution of included action plan. - Enhancing SOE legal and regulatory framework - Prepared a new SOE law and submitted to parliament in March 2021 (end-September 2020 SB). - Expect adoption by end-December 2021. - New SOE law will, inter alia: (i) define rationale for state ownership; (ii) ensure SOE operations are grounded on commercial footing, including by defining what constitutes a commercial SOE; (iii) regulate oversight and ownership arrangements. - Thereafter focus on: - (i) cabinet adoption of an SOE ownership policy by end-September 2021; - (ii) parliamentary submission of amendments of four SOEs’ Acts by end-August 2021 (chosen in November 2020 based on their debt levels); - (iii) operationalization of a Central Monitoring Unit (CMU) within the MoF by end-July 2021. ### Competitiveness, business environment, and green transition - Accelerate reforms to improve competitiveness and business environment to raise medium-term growth and support job creation. - Tariff policy and trade - Continue implementation of national tariff policy based on time-bound strategic, infant, and greenfield industry protection. - Rationalize tariffs to boost competitiveness for ‘Made in Pakistan’ products, including phasing out tariffs on capital goods, intermediate products, and raw materials. - Improving business environment - Simplify procedures to start a business and eliminate unnecessary regulations, including introduction of one portal for all business registrations and integration of federal and provincial entities. - Streamline approval process for foreign direct investment (FDI). - Improve trading across borders by reducing customs-related processing time and reducing hours to prepare import/export documentation. - Simplify and harmonize tax payment by introducing a simple and fully automated regime for paying taxes, contributions, and fees. - Launch a communication drive to disseminate information regarding reforms undertaken. - National Electric Vehicle Policy (NEVP) (2020-2025) - Main objectives: (i) mitigating climate change through reduction in CO2 emissions; (ii) strengthening external position by reducing oil import bill; (iii) pivot toward industrial growth and employment through new investments and technologies. - NEVP targets: electric cars to reach 30 percent of new sales by 2030; 2-and 3-wheelers and electric buses to reach 50 percent of new sales. ### Governance and anti-corruption measures - Strengthening anticorruption institutions - Establish robust asset declaration system focused on high-level public officials by end-June 2021 (new end-June 2021 SB). - Comprehensive in scope (e.g., assets beneficially owned or located abroad). - Filed with a central federal agency, electronically available to the public and searchable, and appropriately and effectively verified. - Undertaking second review cycle under UNCAC implementation mechanism and will publish full report including findings, analysis, and recommendations. - Task force with inputs from international experts and civil society to complete review of institutional framework of anticorruption institutions by end-December 2021 with proposals for legislative amendments as appropriate. - Continue capacity upgrades for law enforcement agencies (Federal Investigation Agency, National Accountability Bureau, provincial Counter Terrorism Departments) for financial investigations through training. - Mutual Legal Assistance Act of 2020 designated NAB as recipient and requesting authority for international cooperation in anti-corruption; NAB engaging with foreign law enforcement authorities to secure memoranda of understanding for information sharing. - Efforts continue to identify and recover stolen assets located abroad. - Enhancing use of AML tools - Support financial institutions and reporting institutions to improve capacities to identify politically exposed persons and apply enhanced due diligence. - Further outreach and enhanced risk-based supervision to improve quality of suspicious transaction reporting, particularly on corruption activities. - Commit to enhancing effectiveness of the Financial Monitoring Unit by ensuring fiscal autonomy and providing sufficient human and financial resources. - Application for membership in the Egmont Group of Financial Intelligence Units is under submission. ### Financing and program monitoring - Gross external financing needs projection - Current projections: gross external financing needs for April 2021-March 2022 will amount to US$25 billion, of which about US$17 billion is amortizations to multilateral and bilateral official and commercial creditors. - Secured financing commitments - China US$10.8 billion - UAE US$2 billion - World Bank US$2.8 billion - Asian Development Bank US$1.1 billion - Islamic Development Bank US$1 billion - Additional notes - Benefitted from temporary suspension of debt service to official bilateral creditors under G20 DSSI initiative covering US$2.5 billion falling due over May 2020-June 2021 (of which US$0.8 billion related to the second round of DSSI covering January-June 2021 debt service). - Key bilateral creditors have maintained exposure to Pakistan in line with program financing commitments. *Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1pakea2021001.pdf* ### 30. Implementation of the policies under the program will continue to be monitored ### 30. Implementation of the policies under the program will continue to be monitored ### Monitoring framework and program instruments - Implementation will be monitored through prior actions, quantitative performance criteria, indicative targets, continuous performance criteria, structural benchmarks, and schedule of reviews, as envisaged in the MEFPs dated June 19 and December 2, 2019, along with this MEFP. - The attached Technical Memorandum of Understanding (TMU) defines the quantitative performance criteria and indicative targets under the program. - The quantitative targets for end-March and end-June 2021, along with continuous quantitative performance criteria, and indicative targets for end-September and end-December 2021, are set out in Table 1b. - The prior actions and structural benchmarks are set out in Table 2. ### Key quantitative performance criteria and indicative targets (selected figures from Table 1b) - Floor on net international reserves of the SBP (millions of U.S. dollars): -8,841; -15,047; -10,966; -8,528; -10,238; -8,676; -8,518; -7,677. - Ceiling on net domestic assets of the SBP (stock, billions of Pakistani rupees): 8,529; 9,406; 9,080; 8,897; 9,655; 10,173; 9,947; 10,190. - Ceiling on SBP's stock of net foreign currency swaps/forward position (negative, millions of U.S. dollars): 7,305; ...; 5,778; 4,610; 5,200; 5,200; 4,900; 4,600. - Ceiling on general government primary budget deficit (cumulative, excluding grants, billions of Pakistani rupees): -58; -311; -253; -420; -230; 246; -130; -96. - Ceiling on net government budgetary borrowing from the SBP (stock, billions of Pakistani rupees): 7,187; ...; 6,089; 5,885; 6,908; 6,618; 6,333; 6,049. - Ceiling on the amount of government guarantees (stock, billions of Pakistani rupees): 1,922; ...; 2,843; 2,826; 2,715; 2,715; 2,735; 2,765. - Cumulative floor on Targeted Cash Transfers Spending (BISP) (billions of Pakistani rupees): 41; ...; 14; 67; 114; 199; 48; 102. - Cumulative floor on general government budgetary health and education spending (billions of Pakistani rupees): 121; ...; 289; 580; 975; 1,567; 356; 752. - Floor on net tax revenues collected by the FBR (cumulative, billions of Pakistani rupees): 1,324; ...; 1,011; 2,210; 3,394; 4,691; 1,181; 2,585. - Ceiling on net accumulation of tax refund arrears (billions of Pakistani rupees): -133; ...; 39; 65; 65; 65; 0.0; 0.0. - Ceiling on power sector payment arrears (cumulative flow, billions of Pakistani rupees): 27; ...; 102; 152; 319; 354; -166; -154. - The gross issuance of PIBs, Sukuks, and Eurobonds (cumulative, billions of Pakistani rupees): n.a.; n.a.; 1,268; 1,986. (Note: entries with "..." denote continuation or omitted intermediate table formatting as presented in the source.) ### Continuous performance criteria and indicative targets (definitions and examples) - Performance criteria (examples): - 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 Pakistani rupees). - Ceiling on net government budgetary borrowing from the SBP (including provincial governments) (stock, billions of Pakistani 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. - Other continuous performance criteria as specified in the TMU (see ¶25 in TMU). - 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). ### Structural conditionality (selected prior actions and benchmarks) - Prior actions (selected): - Adoption by parliament of a CIT reform in consultation with IMF staff to simplify the tax system and meet program targets. - Submission to parliament of the amendments to the State Bank of Pakistan Act in consultation with IMF staff. - Adoption by parliament of amendments to the NEPRA Act. - Electricity prices: Implementation of the first-stage of the FY 2021 annual rebasing (AR) of 1.95 PRs/kWh and notification of the FY 2020 Q2 and Q3 quarterly tariff adjustments (QTAs) of 1.62 PRs/kWh; accompanied by first energy subsidy reform steps aimed at reducing the regressive nature of the tariff structure. - Approval by the Cabinet of an updated Circular Debt Management Plan (CDMP) in line with international partners' advice. - Structural benchmarks (selected status and dates): - Commit to not grant further tax amnesties. Continuous — Not met. - Avoid the practice of issuing new preferential tax treatments or exemptions. Continuous — Not met. - Presentation of the federal government mid-year budget review report to the National Assembly in line with the PFM Act. end-Feb. 2020 — Met. - Adopt measures to strengthen the effectiveness of the AML/CFT framework to support exit from the FATF list. end-Jun. 2020; end-Jun. 2021 — Not met. Advanced stage. - Submit to parliament, in consultation with IMF staff, amendments to the State Bank of Pakistan Act to address recommendations of the 2019 Safeguards Assessment and 2016 Technical Assistance Report. end-Mar. 2020 — Not met. Proposed as PA #2. - Submit to parliament amendments to the NEPRA Act. end-Dec. 2019 — Not met. Submitted in January 2020. - Conduct and publish new audits by reputable international auditors of Pakistan International Airlines (PIA) and Pakistan Steel Mills (PSM). end-Dec. 2019 — Not met. PIA and PSM audits published in January and July 2020, respectively. - Conduct a triage of all SOEs, dividing them into companies to maintain under state management, privatize, or liquidate. end-Sep. 2020 — Not met. Published in March 2021. - Finalization or reintroduction of several administrative and transparency measures (TSA-1, track-and-trace for tobacco, publication of Covid-spending contracts, ex-post audits, CPPA-G payment reduction, completion of FY 2021 AR, energy cross-subsidy reform, notification of FY 2020 Q4 capacity payment adjustments, adoption of OGRA amendments, external audit of the Utility Stores Corporation, establishment of asset declaration system) with specified end-Apr./end-May/end-Jun./end-Sep. 2021 and Jun. 1, 2021 dates. ### Technical Memorandum of Understanding (TMU) — exchange rates, definitions, and adjustments - The TMU sets out definitions of quantitative performance criteria, their adjustment mechanisms, indicative targets, prior actions and structural benchmarks; and the reporting requirements used to monitor developments under the Extended Arrangement under the Extended Fund Facility (EFF). - Program exchange rate: PRs 141.3172 per U.S. dollar. - All assets and liabilities denominated in SDRs or currencies other than the U.S. dollar are converted into U.S. dollars at the program exchange rate. Net external budget financing and external cash grants are converted into Pakistani rupees (PRs) at the program exchange rate. - Text Table 1: Program exchange rates (units of currency per U.S. dollar) — selected rates as of specified dates: - 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: As of May 3, 2019 except for: JPY and CNY (as of April 30, 2019), and CAD (as of May 2, 2019).) ### Definitions and notable benchmark figures - General government: defined as the central (federal) government and local (provincial) governments, excluding state-owned enterprises; includes new funds or special budgetary/extra-budgetary entities as per IMF's Manual on Government Finance Statistics 2001. - Net international reserves (stock) of the SBP: U.S. dollar value of usable gross international reserve assets minus reserve-related liabilities, evaluated at program exchange rates. - On April 16, 2019, the NIR of SBP are estimated at negative US$15,557 million. - Usable gross international reserves: holdings of foreign currencies, holdings of SDRs, the reserve position in the IMF, and holdings of fixed and variable income instruments; excludes claims on residents, assets in nonconvertible currencies, precious metals, illiquid assets, pledged or collateralized assets, assets not readily available for intervention, and balances at foreign branches of non-investment rated domestic banks. - Reserve-related liabilities: foreign exchange liabilities to residents (except general government) or nonresidents with remaining maturity of one year or less; foreign exchange liabilities arising from derivatives on a net outstanding basis; outstanding IMF credits to Pakistan; foreign exchange deposits with the SBP of foreign governments, foreign central banks, foreign deposit money banks (excluding regulatory capital deposits), 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 forwards and futures in foreign currencies of the SBP and general government vis-à-vis the domestic currency (including the forward leg of currency swaps). - At end-April 2019, the SBP's aggregate net derivative position was negative US$8,055 million. - Gross sale of foreign exchange: outright and swap sales of foreign exchange by the SBP to banks in the foreign exchange interbank market using market intervention; swap sales and forward maturities measured net daily. - Net purchase of foreign exchange: outright and swap purchases minus outright and swap sales of foreign exchange by the SBP from/to banks in the foreign exchange market using market intervention; measured on a net daily basis. *Source: Attachment II. Technical Memorandum of Understanding; Memorandum of Economic and Financial Policies (MEFP); Tables 1 and 2, as provided in the content unit.* ### 11. The floor on NIR will be adjusted upward (downward) by the cumulative excess (shortfall) in: ### 11. The floor on NIR will be adjusted upward (downward) by the cumulative excess (shortfall) in: ### NIR adjustment: components and mechanics - The floor on NIR will be adjusted upward (downward) by the cumulative excess (shortfall) in: - cash inflows from multilateral and bilateral creditors, commercial borrowing, and bond issuance relative to the projected inflows (Table 1). Cumulative cash inflows are defined as external disbursements (including grants) from official multilateral creditors (including, but not limited to the 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, and USAID), external bond placements and other commercial borrowings that are usable for the financing of the central government budget; - the actual stock of NIR at end-June 2019 relative to the projected amount. The stock of NIR of SBP at end-June 2019 is projected at negative US$17,743 million; and - the use by the SBP of the foreign assets related to commercial consortium loan to make import payments relative to the amounts expected under the baseline (Text Table 2). - Text Table 2. Use by SBP of Foreign Assets Related to Commercial Consortium Loan (Cumulative flows from the start of the fiscal year; millions of Renminbi) - End-Mar 2021: 0 - End-Jun 2021: 0 - End-Sep 2021: 0 - End-Dec 2021: 0 ### Ceiling on Net Domestic Assets (NDA) of the SBP — definition and adjustment - Definition: - Net domestic assets (NDA) of the SBP are defined as reserve money minus the NIR of the SBP. - For the purposes of computing the NDA target, the NIR is valued at the program exchange rate and expressed in Pakistani rupee. - Reserve money (RM) is defined as the sum of: - (i) currency outside schedule banks (deposit money banks); - (ii) schedule banks' domestic cash in vaults; - (iii) schedule banks' required and excess rupee and foreign exchange deposits with the SBP; and - (iv) 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 mechanism: - The ceiling on the NDA will be adjusted downward (upward) by the cumulative excess (shortfall) in: - cash inflows from multilateral and bilateral creditors, and commercial borrowings and bond issuances relative to the projected inflows (Table 1) and evaluated at the program exchange rate; - the actual stock of NIR at end-June 2019 relative to the projected amount and evaluated at the program exchange rate; - the use by the SBP of the foreign assets related to commercial consortium loans to make import payments relative to the amounts expected under the baseline (Text Table 2) and evaluated at the program exchange rate. ### Ceilings on SBP FX derivative positions and related stock values - Stock of net foreign currency swap/forward positions: - Defined as aggregate net positions in forwards and futures in foreign currencies of the SBP vis-à-vis the domestic currency (including the forward leg of currency swaps). - Evaluated at the program exchange rate. - At end-April 2019, the SBP's aggregate net FX derivative position was negative US$8,055 million. - Stock of issued government guarantees: - The stock of issued guarantees at end-September 2019 was PRs 2,580 billion. - Beginning with the end-March 2021 test date, external government guarantees will be converted into Pakistani rupees at the program exchange rate. - This ceiling excludes guarantees issued by the Ministry of Finance for the SBP borrowing from the IMF. ### Ceiling on the General Government Primary Budget Deficit Excluding Grants — definitions - General government primary budget deficit (excluding grants) is monitored quarterly as the general government’s overall budget deficit, excluding: - (i) paid interest bill; and - (ii) received budget grants. - General government overall budget deficit (cash deficit from below the line) is the sum of: - a. net external budget financing, excluding valuation changes; - b. change in net domestic credit from the banking system (cash basis), excluding valuation changes from deposits denominated in foreign currency and government securities bought by foreigners (notably T-bills, Pakistan Investment bonds (PIBs), Naya Pakistan Certificates, and Banao Certificates); - c. change in the net domestic nonbank financing, excluding valuation changes (components (i)–(v) as listed in the source); and - d. total external grants to the federal and provincial governments (project grants, cash external grants for budgetary support, capital grants reflecting principal amounts of external debt cancellation or swaps, and other grants). - Budget grants can be in cash and in kind. ### Net external program financing — definition - Net external program financing (excluding valuation changes and all external financing counted as reserve liabilities of the SBP) is defined as the sum of: - a. external budget loans to the general government (including on-lent and emergency relief lending) comprising: - medium- and long-term maturity from official multilateral sources (including IMF budget support), official bilateral sources, and private sector sources (e.g., bonds and non-residents’ purchases of PIBs, Naya Pakistan Certificates, and Banao Certificates); - short-term maturity, net of foreign portfolio investment excluding non-residents’ purchases of Naya Pakistan Certificates and Banao Certificates but including non-residents’ purchases of domestic T-bills; - b. net external debt amortization flow of the general government, which is the change in its stock of external debt service arrears net of the debt amortization due on its external budget loans (accounting for rescheduled, relieved, or accelerated amortization, including debt swaps or cancellation recorded as capital grants). ### Adjustment mechanism for the primary budget deficit ceiling - The ceiling on general government primary budget deficit (excluding grants) will be adjusted cumulatively since the beginning of the fiscal year by: - a. downward (upward) by any shortfall (excess) in external project financing relative to program projections evaluated in Pakistani rupee terms at actual average exchange rates (see Table 1). External project financing = disbursements from bilateral and multilateral creditors to the general government for specific project expenditure; - b. downward by any underexecution in the targeted cash transfers (BISP) relative to their indicative program target. In FY 2019/20 it is also adjusted upward for any overexecution relative to their indicative program target of up to PRs 40 billion; - c. downward by any excess in the flow of power sector payment arrears above the respective indicative program targets, excluding non-recoveries and excess line losses (see Text Table 4); - d. downward by any increase in the stock of budgetary arrears on social payments accumulated since the beginning of the fiscal year; - e. downward by any excess in the flow of tax refund arrears relative to their respective indicative program targets; - f. for SBP profit transfers: - (i) until the amended SBP Act is approved and enacted by the National Assembly, downward (upward) for any excess (shortfall) in the actual interim SBP profit transfers to the general government budget relative to its programmed SBP level (Text Table 3); - (ii) after the amended SBP Act is approved and enacted by the National Assembly, upward by any shortfall in actual interim SBP profit transfer to the general government budget relative to its programmed level (Text Table 3); - g. downward by any shortfall in both the clearance of CPPA arrears to IPPs and repayment of PHPL debt relative to their respective programmed levels (Text Table 3); and - h. upward by up to PRs 200 billion for any supplementary grants issued by the federal government for the purpose of fighting COVID-19 (coronavirus) in FY 2020/21. - Text Table 3. Fiscal Program: Selected Projections (Cumulative flows from start of fiscal year; billions of Pakistani Rupees) - Clearance of CPPA arrears to IPPs: - End-Mar 2021: 180 - End-Jun 2021: 180 - End-Sep 2021: 270 - End-Dec 2021: 270 - Repayment of PHPL debt: - End-Mar 2021: 72.6 - End-Jun 2021: 72.6 - End-Sep 2021: 0 - End-Dec 2021: 0 - SBP profit transfers to the budget: - End-Mar 2021: 502.3 - End-Jun 2021: 650.6 - End-Sep 2021: 96 - End-Dec 2021: 217 ### Ceilings and continuous performance criteria on borrowing, arrears, and related items - Net government budgetary borrowing from the SBP: - Defined as SBP claims on the general government minus general government deposits with the SBP. Claims include government securities, treasury bills, treasury currency, and debtor balances; exclude accrued profits on government securities. Government deposits with the SBP exclude the Zakat Fund. - No new flow of SBP's credit to general government — continuous performance criterion: - No new flow of SBP's direct credit to the general government, including purchases of public debt securities on the primary market. Applies continuously throughout the program period. - Zero ceiling on accumulation of external payment arrears by the general government — continuous performance criterion: - External payment arrears = all unpaid debt-service obligations of the general government to nonresidents arising from public sector loans, debt contracted or guaranteed (including unpaid penalties or interest beyond 30 days after the due date). - Ceiling on accumulation of external payment arrears is set at zero. Applies continuously throughout the program period. - Other continuous performance criteria (during the program period, Pakistan will not): - a. impose or intensify restrictions on the making of payments and transfers for current international transactions; - b. introduce or modify multiple currency practices (MCPs) excluding MCPs arising from the introduction and/or modifications of the multiple-price foreign exchange auction system operating in line with IMF staff advice; - c. conclude bilateral payment agreements inconsistent with Article VIII of IMF Articles of Agreement; - d. impose or intensify import restrictions for balance of payments purposes. ### Indicative targets and arrears monitoring - Floor on Targeted Cash Transfers Spending (BISP) — indicative target: - Applies to cumulative targeted cash transfers spending by 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 FBR — indicative target: - Net tax revenues by FBR = sum of revenues 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 tax refunds. - Measured quarterly based on cumulative end-of-quarter data. - Ceiling on Net Accumulation of Tax Refund Arrears — indicative target: - Stock of tax refund arrears as of end-December 2020 was PRs 499 billion. - Ceiling on Power Sector Payment Arrears — indicative target: - Power sector payment arrears arise from items including non-recoveries, accrued markup from servicing of PHPL, line losses and non-collections not recognized by NEPRA, GST non-refunds, late payment surcharges, delays in subsidy payments, and delays in tariff determinations. - Monitoring: stock of payment arrears includes payables of PRs 2,150 billion (of which PRs 1,007 billion held at PHPL) as of end-December 2020. - Text Table 4 provides projected evolution of the stock and flow of payables and components (program values and operational parts shown in source). ### Key projected disbursements and budgetary stocks (selected figures) - Table 1. Pakistan: Projected Disbursements (Millions of U.S. dollars) - Sep‐Dec. 2020: Multilateral and bilateral disbursements 1,316 - Jan‐Mar 2021: 2,929 - Apr‐Jun 2021: 3,684 - Jul‐Sep 2021: 1,637 - Sep‐Dec 2021: 1,254 - of which: in cash 1/: - Sep‐Dec. 2020: 1,172 - Jan‐Mar 2021: 2,790 - Apr‐Jun 2021: 3,521 - Jul‐Sep 2021: 1,49 - Sep‐Dec 2021: 41,033 (as presented in source) - of which: Saudi oil facility and IDB commodity loans: - Sep‐Dec. 2020: 500 - Jan‐Mar 2021: 150 - Apr‐Jun 2021: 300 - Jul‐Sep 2021: 150 - Sep‐Dec 2021: 200 - of which: project support: - Sep‐Dec. 2020: 393 - Jan‐Mar 2021: 374 - Apr‐Jun 2021: 443 - Jul‐Sep 2021: 378 - Sep‐Dec 2021: 577 - International bond issuance (selected entries in source): 10 10 1,510 10 2,010 - Commercial borrowing (selected entries in source): 750 1,050 1,200 250 250 - Gross inflows: - Sep‐Dec. 2020: 2,076 - Jan‐Mar 2021: 3,989 - Apr‐Jun 2021: 6,394 - Jul‐Sep 2021: 1,897 - Sep‐Dec 2021: 3,514 - of which: in cash: - Sep‐Dec. 2020: 1,932 - Jan‐Mar 2021: 3,850 - Apr‐Jun 2021: 6,231 - Jul‐Sep 2021: 1,754 - Sep‐Dec 2021: 3,293 - Note: 1/ Assumes that 65 percent of project loans and 50 percent of project grants were received in cash. - Table 2. Pakistan: Government Sector (Budgetary Support) (End-of-period stocks, millions of Pakistani Rupees) — selected stock entries (as presented in source): - Central Government (selected dates and stocks): 12,586,952; 12,933,003; 13,118,407; 13,939,638; 14,972,589; 15,301,056; 15,650,396 - Scheduled Banks (selected): 5,753,677; 7,461,389; 6,697,593; 7,259,336; 8,222,465; 8,767,130; 9,254,690 - State Bank (selected): 6,833,275; 5,471,615; 6,420,814; 6,680,302; 6,750,124; 6,533,926; 6,395,706 - Net Govt. Budgetary Borrowings From Banking System (selected): 11,596,468; 11,752,456; 11,783,089; 12,562,925; 13,748,309; 14,033,507; 14,185,560 - Through SBP (selected): 6,691,870; 5,104,987; 5,951,360; 6,211,471; 6,538,797; 6,256,863; 5,952,896 - Through Scheduled Banks (selected): 4,904,598; 6,647,469; 5,831,730; 6,351,454; 7,209,512; 7,776,644; 8,232,664 *Source: IMF staff summary of program provisions and tables as provided in the source document.* ### 1. Accrued Profit on SBP & BSC holding of MRTBs & MTBs 2,912259,201109,341285,99783,618167,83468,278 ### 1pakea2021001 - 1. Accrued Profit on SBP & BSC holding of MRTBs & MTBs 2,912259,201109,341285,99783,618167,83468,278 ### Key financial figures and balances - "Accrued Profit on SBP & BSC holding of MRTBs & MTBs" 2,912259,201109,341285,99783,618167,83468,278 - Scheduled banks' deposits of Privitization Commission: -2,979 -2,516 -3,272 -2,289 -2,410 -2,438 -3,448 - Outstanding amount of MTBs (Primary market; discounted value): 4,363,090 5,243,197 4,259,110 4,803,332 4,956,617 4,497,227 4,429,945 ### Net government borrowings (cash basis) — from banking system - Net Govt. Borrowings (Cash basis) From Banking System: 11,545,893 11,422,889 11,587,632 12,147,705 13,471,051 13,721,969 14,022,001 - (i) From SBP: 6,688,958 4,845,786 5,842,019 5,925,475 6,455,179 6,089,030 5,884,619 - (ii) From Scheduled Banks: 4,856,935 6,577,103 5,745,614 6,222,230 7,015,872 7,632,939 8,137,383 ### SBP and financial sector reporting and monitoring requirements (summary of selected items) - SBP balance sheet Summary: Weekly — First Thursday of the following week - SBP balance sheet Summary at program exchange rates; and by official exchange rates: Monthly — Within 15 days of the end of each month - Monetary survey: Monthly — Within the first 30 days of each month - International reserves: Daily — The following working day - Foreign exchange market (rates, volumes): Daily/Monthly — Within one day/monthly within five working day - SBP foreign exchange operations and interventions (volume, spot vs forward): Daily — Within one day - SBP operations in swap/forwards (volumes and end-of-day positions): Daily — Within one day - Breakdown of swap/forward contracts by short/long/counterparts: Monthly — Third working day of the following month - Outstanding swap/forward positions by maturity buckets and counterparties: Monthly — Third working day of the following month - Net International Reserves at program exchange rates (TMU definition), including currency breakdown and nostro balances: Quarterly — Seventh working day after quarter end - External financing: Quarterly — Within 15 days of the end of each quarter - Interbank money market daily repo volume and interest rate of trades: Daily — Within one day - SBP operations (Repo/reverse repo, open market operations): Weekly — First Monday of the following week - Bank liquidity (excess reserves, local currency): Bi-weekly — With a lag of 15 days - T-bill and coupon bond financing auction data: Fortnightly — Last working day of the fortnight - Banking data (sectoral distribution of loans/deposits; by currency; rates): Monthly — Within 25 working days of the end of each month - Banking data (loan maturities): Quarterly — Within 45 days of the following quarter - Regularity capital deposit requirement deposits of foreign and domestic schedule banks with the SBP (account numbers 33052 and 330506): Monthly — Within 15 days of the end of each month - Core Financial Stability Indicators (FSIs), aggregate and bank-by-bank (without names): Quarterly — Within 45 days of the following quarter - Liquidity data and deferred/restructured loans: Weekly — Within 5 days of the end of each week - Banks’ net open foreign exchange positions (aggregate and bank-by-bank without names): Monthly — Within five days of the end of each month - Holdings of government securities – aggregate and bank-by-bank (without names): Monthly — Within 7 days of the end of each month - Banking sector stress tests results (exchange rate, liquidity, credit risk): Quarterly — Within 60 days - Workers’ remittances: Monthly — Within 25 days of the following month - SBP survey, ODCs and DCs published in IFS: Monthly — Within 45 days of the end of each month - SBP refinance schemes outstanding position (by program): Monthly — Within 25 days of the end of each month - Detailed balance of payments data (exports/imports): Monthly — Within 28 days of the end of each month - Privatization receipts (PC Fund account balances, gross inflows/outflows): Quarterly — Within seven days of the end of each quarter ### Ministry of Finance and other reporting (selected items) - External debt (disbursements and stock of outstanding short-term and medium-and long-term external debt; arrears; guarantees): Monthly — Within 25 days of the following month - Domestic debt composition: Monthly — Within 25 days of the end of each month - T-Bill and PIB Bid sheet from domestic debt auctions: Daily — Within 1 day of each T-Bill and PIB auction - Federal government state budget: Monthly — Within 30 days of the end of each month - Government guarantees (issued and executed) by entity and value: Quarterly — Within 15 days of the end of each quarter - Consolidated general government (federal and provincial) quarterly: Quarterly — Within 45 days of the end of each quarter - Consolidated general government (federal and provincial) annual: Annual — Within 180 days of the end of each year - Federal government fiscal financing sources: Monthly — One month in advance (detailed quarterly financing plan for coming 12 months) - Total general government budgetary spending on health and education (federal/provincial breakdown): Monthly — Within 15 days of the end of each month - Stock of government borrowing from the SBP: Quarterly — Within the first five days of each quarter ### Other statistical and agency reporting requirements (selected items) - Pakistan Bureau of Statistics: Detailed monthly price indices (SPI, CPI, WPI): 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: Total revenue collected by tax and customs administrations; tax arrears by category and type; all tax refund claims in arrears: Monthly — Within seven days of the end of each month - Automated GST refunds detailed data: Quarterly — Within seven days of the end of each month - Number/value/processing time of automated refunds: Quarterly — Within seven days of the end of each month - Large taxpayers unit (LTU) data: Quarterly — Within seven days of the end of each month - Import data (total value duty-paid recorded imports; number of transactions): Quarterly — Within 30 days of the end of each quarter ### Energy, utilities, social transfers and sectoral reporting (selected items) - Ministry of Water and Power: Key Power Sector Statistics (templates), Cumulative Monthly Subsidy Position (Rs. Billion), PEPCO month end payables/receivables (Rs. Billion), DISCO-wise receivables, CPPA/PEPCO cash flow, AT&C statistics, monthly TDS claims, Inter Corporate Circular Debt Sheet, DISCO consolidated income statement, net electrical output & power purchase price by source (GWh), generation/demand/shortfall for FY 2010 to date, plant and fuel-wise net electrical output (MkWh), working capital loans — Quarterly — Within 30 days / Quarterly quantitative targets for DISCOs — Within 30 days from quarter end - Domestic expenditure arrears; energy arrears (stock) and flow by source: Quarterly — Within 45 days of the end of each month for government arrears - Ministry of Petroleum and Natural Resources: Gas prices and gas sales by consumers — Quarterly on monthly frequency — Within 30 days from the end of the quarter; UFG losses: Quarterly — Within 30 days from the end of the quarter - BISP Targeted cash transfers (coverage and payments by conditional/unconditional transfers): Quarterly — Within 30 days from the end of the quarter - Ministry of Finance: Financial statements and operational indicators for Pakistan Railways, Pakistan Steel Mills and Pakistan International Airline: Quarterly — Within 30 days from the end of the quarter ### Program update, prior actions (PAs), and policy context (March 2021) - Status of prior actions for the reviews: The authorities have met three of the five PAs: - Central bank legislation: Following Cabinet approval on March 9, 2021, the government submitted amendments to the State Bank of Pakistan (SBP) Act to the National Assembly in line with IMF staff recommendations. - Circular debt: The Cabinet approved an updated Circular Debt Management Plan (CDMP) in line with international partners' advice on March 16, 2021. - Electricity tariff adjustment: Implemented first stage of FY 2021 annual rebasing of 1.95 PRs/kWh in January 2021; completed FY 2020 Q2 and Q3 quarterly tariff adjustments of 1.63 PRs/kWh in December 2020. Cabinet approved first steps to reform energy subsidies to reduce the regressive nature of the tariff structure on March 16, 2021. - Remaining two PAs (corporate income tax reforms and NEPRA Act amendments): Not met as legislated because the National Assembly was closed for two weeks due to a renewed surge in Covid-19 cases. The authorities enacted the reforms via presidential ordinance on March 22, 2021; staff view: program objectives would be achieved through presidential ordinance until parliamentary adoption when the Assembly reopens. - Staff recommendation: Continue to recommend completion of the reviews based on satisfactory program performance against extraordinary pandemic-related circumstances and authorities’ commitments in the March 2021 LOI, MEFP and TMU. ### Covid-19 context and policy response (selected figures and actions) - Covid-19 epidemiological data (as of March 18): 615,810 confirmed cases and 13,717 deaths. - Recent pandemic wave: Daily cases jumped to 3,495; positivity climbing to 7.8 percent. - Vaccination and procurement: Pakistan began a mass vaccination program; applied to UN’s COVAX Facility covering priority groups comprising around 20 percent of the population; approved multiple vaccines for emergency use; in discussions with donors for extra vaccines funded with a US$ 250 million budget allocation. - Emergency financing: Pakistan purchased US$ 1.386 billion under the Rapid Finance Instrument (RFI) in April 2020. - Fiscal package: A comprehensive fiscal package amounting to around 1 percent of GDP was rolled out with IMF support under the RFI, including emergency cash support under the Ehsaas Emergency Cash program. *Source: 1pakea2021001 (Pakistan — Supplementary Information; March 22–24, 2021).* ### 14.8 million families and disbursed PRs 179 billion, meeting the end-June indicative target for ### 1pakea2021001 - 14.8 million families and disbursed PRs 179 billion, meeting the end-June indicative target for ### Program implementation and fiscal support measures - Cumulative cash transfers: 14.8 million families and disbursed PRs 179 billion, meeting the end-June indicative target for cumulative cash transfers under the program. - Despite a 1.4 percent of GDP drop in government revenues, authorities adhered to: - the indicative ceiling on government budgetary borrowing from SBP; and - the continuous performance criterion of zero new flow of SBP credit to the government. - Social and health spending adjustments and targeting: - FY2021 budget allocation for BISP spending increased by almost 80 percent over its FY2020 execution level (excluding one-off Covid-related spending). - BISP beneficiaries’ cash stipends increased by 20 percent (January 2020). - Cash transfers for primary education (Waseela-e-Taleem) increased to boost girls’ enrollment. - A nutrition program for mother and children was developed to reduce stunting. - A revamped National Socio-Economic Registry database will support targeted scaling-up of social spending and timely updating of BISP beneficiaries. ### Monetary policy, SBP actions, and exchange rate flexibility - Exchange rate regime and external adjustment: - Flexible market-determined exchange rate functioned as a front-line shock absorber and supported sustained external adjustment and reserve accumulation. - Portfolio outflows during the second half of FY2020: 0.9 percent of GDP. - Rupee depreciation between end-February and end-June 2020: 8.2 percent. - Current account balance: surplus of US$ 0.9 billion during July-January FY2021, compared to a deficit of US$ 2.5 billion during the same period last year. - Rupee appreciation during July 2020-February 2021: 6.3 percent. - Gross international reserves should gradually strengthen to three months of imports coverage amid continued high official inflows. - SBP monetary and liquidity measures: - Policy rate cut: cumulative 625 bps during March-June 2020. - Regulatory measures to facilitate principal repayment extension and rescheduling of loans to sound borrowers. - Three well-targeted and time bound temporary refinancing facilities: - Rozgar (Employment) Scheme: financing wages and salaries of private businesses for six months from April to September 2020. - Refinance Facility for Combating Covid-19: aimed at enhancing the capacity of the health sector. - Temporary Economic Relief Facility: to support Balancing, Modernization and Replacement (BMR) and new investments. - Result: accommodative monetary stance, policy rate now slightly negative in real terms on a forward-looking basis. - SBP structural reforms and governance: - Continued progress on digitization, financial inclusion, and reducing gender disparities in financial access. - Amendments to the SBP Act finalized in close consultation with Fund staff and submitted to Parliament in March 2021 to further strengthen SBP autonomy and set price stability as a primary goal. ### Recent economic developments and outlook - Growth and activity: - GDP growth projected by authorities to recover to 1.5-2.5 percent in FY2021, well below Pakistan’s long-term average of around 5 percent. - Rebound in exports, manufacturing, and construction; services sector recovery remains slow and uncertain. - Inflation: - Average inflation for FY2021 expected to decline to close to the upper range of the previously announced forecast range of 7-9 percent. - Inflation pressures from higher food prices; core inflation remains soft; well-anchored inflation expectations and a negative output gap imply contained inflationary pressures. - Recent utility tariff adjustments may cause a transient uptick in inflation. - External sector: - Authorities expect a current account deficit of 0.5-1.5 percent of GDP in FY2021 as imports pick up, remittances remain strong, and exports recover. - Continued high official inflows expected to support reserves. ### Fiscal policy, debt sustainability, and revenue measures - Fiscal consolidation and targets: - FY2020: primary deficit reduced by 1.8 percent of GDP owing to strong revenue collections. - July-December FY2021: primary balance surplus of 0.7 percent of GDP. - Authorities aim for cumulative fiscal consolidation of 3.3 percent of GDP during the program period. - Tax revenues expected to increase by 3.3 percent of GDP by FY2023. - Planned GST and PIT reforms in FY2022 budget with an estimated yield of 1.1 percent of GDP in the first year. - Expenditure policies: - Unwinding of Covid crisis related economic stimulus spending measures: 1.2 percent of GDP. - Freezing non-priority spending while preserving space for health and social spending. - Measures include nominal freeze of wages and pensions, decline in real military spending, and streamlining of subsidies. - Nearly doubled health sector spending relative to the FY2020 budget allocation. - Debt management: - Public debt increased by only 2 percentage points of GDP in FY2020. - Narrower twin deficits and projected downward path for public debt consistent with medium-term objectives under the EFF. - External debt servicing reduced via DSSI debt relief. - Improved domestic debt maturity profile via liability management operations and fresh longer-maturity loans. - Authorities in process of amending the Fiscal Responsibility and Debt Limitation Act of 2005 in line with IMF and World Bank staff recommendations. ### Energy sector, SOEs, and AML/CFT progress - Energy sector reforms: - Covid-19 relief to power sector consumers increased circular debt and delayed some electricity sector policies. - Amendments to NEPRA Act empower NEPRA to determine and notify quarterly tariffs and reinstate government power to levy tariff surcharges (¶21 MEFP). - Memorandum of Understanding with 45 private IPPs in August 2020 with expected cost savings of about 1.8 percent of GDP over the next two decades of remaining life of these IPPs. - Initiatives to strengthen DISCO governance, update power tariffs, improve subsidy targeting, and planned OGRA Act amendments. - State-Owned Enterprises (SOEs): - Privatization delayed but transparency and monitoring improved. - New SOE law submitted to Parliament in March 2021 to define rationale for state ownership, ensure commercially sound SOE operations, and regulate oversight and ownership arrangements. - Special audits of Pakistan Railways, Pakistan Steel Mills, and Pakistan International Airlines finalized in 2020 and reports published. - Triaging of SOEs completed with World Bank assistance to expedite privatization post-crisis. - AML/CFT: - Amendments in 14 laws to meet FATF technical compliance requirements (¶18 FEFP). - FATF (February 2021) acknowledged significant progress in addressing deficiencies in 24 of the 27 action plan items and urged completion of remaining items by June 2021 to allow exit from the FATF grey list. ### Program monitoring, reviews, and policy requests - Authorities maintained continuous engagement with Fund staff throughout the crisis; Letter of Intent signed April 2020 expressed desire to resume the EFF program. - Despite Covid-19 fallout, all ITs were met, several by large margins, including those on net international reserves, net domestic assets, and government borrowing. - Staff-level agreement reached on four combined reviews; completion of program reviews expected to: - ensure balance of payments and fiscal financing needs are fully met; - support economic recovery; and - strengthen macroeconomic stability while protecting vulnerable segments of society. - Authorities request: - completion of the combined second, third, fourth, and fifth reviews under the EFF; - rephasing of access and modification of the review schedule due to delays and to better align with reform implementation. - Authorities emphasize strong ownership of reforms and view the program as a policy anchor for safeguarding macroeconomic stability, supporting recovery, facilitating inclusive growth, and protecting the poor. *Source: 1pakea2021001* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1pakea2021001.pdf_