## 1pakea2022001 ## Source details **Canonical URL:** [1pakea2022001](https://www.imf.org/-/media/files/publications/cr/2022/english/1pakea2022001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1pakea2022001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1pakea2022001.pdf.json) --- ### EXECUTIVE SUMMARY — Context, program performance, and priorities - Economic rebound driven by waning COVID-19 infections and expansionary fiscal and monetary policies; strong import growth and higher commodity prices led to marked external deterioration. - Consequences of external deterioration: - Current account deficit widened; rupee depreciated markedly; inflation persistently high. - Program implementation since April 2021: uneven with increasing fiscal expansion and reversal of several EFF commitments. - Missed performance criteria and benchmarks: - Missed end-June PC on the general government primary budget deficit. - Missed three continuous PCs on: non-intensification of exchange restrictions; non-modification of multiple currency practices (MCP); zero new flow of SBP credit to the government. - Several structural benchmarks not met (one SB met on time; five implemented with delay). - Corrective actions taken: supplementary budget to lock in key tax reforms; tighter monetary policy; electricity tariff adjustments; planned amendments to the central bank act to consolidate SBP operational independence. - Program priorities: - Restore fiscal discipline and debt sustainability while protecting social spending. - Safeguard monetary and financial stability. - Maintain a market-determined exchange rate. - Staff supports rephasing of access and completion of sixth review; review will make available SDR 750 million. ### OUTLOOK AND MAIN PROJECTIONS - Real GDP growth: - Projected 4 percent in FY 2022. - Medium-term potential of 5 percent with sustained policy and reform implementation. - Inflation and monetary outlook: - Average CPI inflation expected to average 9.4 percent in FY 2022; SBP’s 9–11 percent forecast range for next 12 months; medium-term slow to 6.5 percent. - External sector and reserves: - Current account deficit forecast to widen to 4 percent of GDP in FY 2022. - Under WEO baseline, current account converges toward 2.5 percent of GDP over the medium term. - SDR allocation and tighter monetary policy expected to strengthen reserve cover to some 2.8 months of imports by end of forecast horizon (up from less than 2 months at program onset). - Debt projections: - Public debt projected to fall toward 70 percent and total external debt to decline toward 35 percent of GDP by FY 2026. ### KEY STATISTICS (Selected Economic Indicators, FY 2017/18–25/26) - Real GDP growth (%): 5.5; 2.1; -0.5; 3.9; 4.0; 4.5; 5.0; 5.0; 5.0 - Consumer prices (period average, % change): 3.9; 6.7; 10.7; 8.9; 9.4; 7.8; 6.5; 6.5; 6.5 - Gen. gov. overall balance (incl. grants, %GDP): -6.4; -9.0; -8.0; -7.1; -6.9; -4.4; -4.4; -3.9; -3.5 - Gen. gov. primary balance (underlying, excl. grants, %GDP) 1/: -2.2; -3.6; -1.8; -0.6; 0.0; 1.2; 1.3; 1.4; 1.5 - Gen. gvt. debt (incl. guarantees and IMF obligations, %GDP): 76.2; 90.5; 93.2; 88.6; 86.7; 82.1; 78.1; 73.8; 70.4 - Current account balance (%GDP): -6.1; -4.9; -1.7; -0.6; -4.0; -3.5; -3.3; -3.0; -2.7 - External debt (%GDP): 30.0; 37.4; 41.6; 39.1; 40.6; 40.1; 39.1; 37.7; 35.2 - Gross official reserves (US$, billions): 9.8; 7.3; 12.2; 17.3; 21.2; 20.7; 20.1; 20.9; 23.1 - Gross official reserves (months of next year's GNFS imports): 1.9; 1.7; 2.4; 2.7; 3.2; 3.0; 2.8; 2.8; 2.8 - Gross official reserves (% IMF reserve adequacy metrics) 2/: 48.3; 35.0; 55.2; 73.8; 81.2; 72.3; 65.9; 64.4; 72.0 ### DOWNSIDE RISKS - Five broad risk groups: - Pandemic risk: still low vaccination coverage; localized restrictions expected; global uncertainty affecting growth, trade, remittances. - Policy slippages: weak capacity, vested interests, socio-political pressures (next general election mid-2023) could undermine fiscal adjustment. - Delays in structural reforms: governance and AML/CFT delays could hamper external financing. - Geopolitical tensions: especially related to Afghanistan—risk of migration, security, food price and exchange rate volatility. - Climate change risks: higher frequency/severity of climate-related disasters. ### FISCAL POLICY — recent performance and revised FY 2022 program - FY 2021 outturns: - Real GDP growth strengthened to 3.9 percent. - Inflation averaged 8.9 percent. - Current account deficit declined to 0.6 percent of GDP. - Gross international reserves rose to US$17.3 billion. - Public debt 88.6 percent of GDP at end-FY 2021. - FY 2022 approved budget (initial): implied adjusted primary deficit of 2 percent of GDP (fiscal loosening of 1.4 percentage points of GDP vs FY 2021). - Key policy reversals in FY 2022 budget included: zero-rate excise on fuel (PDL) set to zero and GST reductions that had a large revenue impact of almost 1 percent of GDP; reinstatement of zero-rated GST for some domestic industries; omission of PIT and GST reforms. - Revised FY 2022 supplementary finance bill (PA): - Target underlying primary balance: deficit of 0 percent of GDP (excluding adjustors). - Stronger revenues: tax revenues expected to increase by 1.2 percentage points of GDP vs FY 2021. - Main measures: GST reform to eliminate about 2/3 of GST tax expenditures; increase PDL by PRs 4 per liter, then further PRs 4 per liter monthly until PRs 30/liter. - Reprioritizing spending: limit increase to 1.1 percentage points of GDP above FY 2021 outturn; scale up BISP and health and education (spending on health and education increased by 27 percent). - BISP expansion: increase beneficiaries by 30 percent to 8 million families; monthly benefit levels up by 8 percent from January 2022. - Provinces to target a surplus of about 0.5 percent of GDP in FY 2022 and boost tax revenues by at least 0.1 percent of provincial GDPs. - Financing: reliance on market sources; use up to US$2 billion from SDR allocation (about US$2.75 billion) to complement vaccine finance and reduce T-Bill reliance. - Implementation risk: significant, especially if tax buoyancy declines with slowing imports; staff recommends bringing forward removal of exemptions on fertilizers and tractors (23 percent of current GST tax expenditures). ### TAX ADMINISTRATION, PFM, AND DEBT MANAGEMENT - Tax administration medium-term plans: centralized risk-based compliance, IT upgrades, third-party data, simplify registration/filing, modernize audit, bolster LTO. STA discouraged third-party audits in favor of compliance risk management. - PFM: TSA-1 operational in September; moving to TSA-2 and improving commitments control systems with EU assistance. - Debt management priorities: - Implement MTDS annually and publish; establish central Debt Management Office (DMO); amend Fiscal Responsibility and Debt Limitation Act. - Focus on lengthening maturity profile of public debt to lower rollover risks. ### SOCIAL PROTECTION, POVERTY REDUCTION, AND NEW PROGRAMS - Social context: stunting rates over 40 percent; gender gap rank 153 out of 156. - EEC and BISP: - EEC provided one-off transfers: PRs 41 billion in FY 2021; PRs 20 billion set aside for FY 2022. - NSER update covers about 33 million families; used to target BISP expansion. - FY 2022 BISP envelope PRs 250 billion; expand beneficiaries to 8 million families; monthly benefit +8 percent from January 2022. - New programs: - Kamyab Pakistan Program (KPP): pilot, highly subsidized loans with 50 percent government guarantee; aim reach up to 3 million households and provide cumulative financing PRs 1.63 trillion over three years. - New food subsidy program: monthly stipend to 20 million low-income households; estimated cost PRs 120 billion in FY 2022 shared with provinces. - Staff warns against launching new programs outside BISP that fragment the safety net; achieving SDGs estimated to require additional 16 percent of GDP in annual spending by 2030. ### MONETARY, EXCHANGE RATE, AND FINANCIAL SECTOR POLICIES - External pressures Q4 FY 2021: strong FX demand; rupee to PRs 175 per U.S. dollar in mid-November (historic low). - SBP actions: policy rate raised by 25 bps in October, 150 bps in November, and 100 bps in mid-December to 9.75 percent; CRR increased by 100 bps in November. - Banking sector indicators (end-June 2021 unless noted): - Capital adequacy ratio (CAR) 18.3 percent; regulatory minima total 11.5 percent. - NPLs 8.9 percent; provisioning 88.8 percent. - Banking sector exposures: energy and textile each 15 percent of outstanding loans; sovereign 70 percent of total credit. - Real credit growth 6.2 percent yoy in September. - CCB and CAR transition: CCB reduced from 2.5 percent to 1.5 percent in March 2020; will be restored to 2.5 percent effective January 1, 2023; thereafter CAR requirement revert to 12.5 percent. - SBP institutional reforms: amendments to SBP Act to establish domestic price stability as primary objective, strengthen autonomy, prohibit direct credit to government, and introduce collegial decision-making. - Policy advice: - Tighten monetary policy to support disinflation; scale back refinancing facilities; adopt forward guidance and 6-month MPC calendar; move to 8 meetings per year. - Limit FX sales to offset disorderly market conditions; use purchases to rebuild reserves but not to influence trend. ### FINANCIAL DEEPENING, REFINANCING SCHEMES, AND HOUSING MEASURES - SBP refinance schemes outstanding end-September 2021: PRs 1,225 billion (15.5 percent of private credit), of which PRs 322 billion related to temporary COVID-19 schemes. - Staff concern: persistent expansion of refinance schemes undermines monetary policy transmission. - Agreed actions: - MOF and SBP to design plan to establish an appropriate Development Finance Institution by end-April 2022 (new end-April 2022 SB). - Assess Export Refinancing Scheme by end-February 2022. - Housing measures: mandatory bank targets to raise housing lending to 5 percent by December 2021; risk-weight change to 100 percent for REIT investments; staff recommends unwinding these measures and favoring well-targeted budget subsidy. ### ENERGY SECTOR — circular debt, tariff adjustments, and reforms - Power sector circular debt: - CD flow 0.6 percent of GDP in FY 2021; CD stock 4.8 percent of GDP at end-FY 2021 (including 1.9 percent of GDP held by PHPL). - Each month of delaying PRs 1 per kWh adjustment adds about PRs 8½ billion to arrears. - Gas sector circular debt: stock >1 percent of GDP at end-June 2021; data cleanup ongoing. - Agreed energy actions: - Follow CDMP with monthly monitoring; implement tariff adjustments per formulas; FY 2021 annual rebasing notified November 5; FY 2022 AR on track to be notified by February 2022. - Better target power subsidies: reforms to reduce share of protected consumers from 93 to 46 percent via eligibility and slab changes; cabinet approval by end-January 2022 for removing previous slab benefit and increasing unprotected slabs by at least PRs 0.5 per kwh (new end-January 2022 SB met). - Implement renegotiated PPAs: first payment PRs 90 billion (0.2 percent of GDP) to settle IPP arrears; plan to settle another PRs 311 billion in CPPA-G payables in FY 2022 subject to fiscal space. - Medium-term reforms: reduce commercial and technical losses, improve DISCO governance, introduce competition, progress privatization. - Gas sector reforms: revise end-user prices; parliamentary adoption of OGRA Act by end-June 2022 (reset to end-June 2022). ### STATE-OWNED ENTERPRISES (SOEs), GOVERNANCE, AND TRADE - SOE footprint: non-financial commercial SOE assets 44 percent of GDP in 2019 (up from 31 percent in 2015); SOEs provide 0.7 percent of formal employment. - SOE challenges: one-third of SOEs consistently generate losses; weak governance creates fiscal risks and depresses private investment. - SOE reform actions: - Accelerate SOE law (parliamentary approval end-June 2022 SB). - Define ownership policy, amend SOE Acts, operationalize central monitoring unit in MOF. - Finalize divestment of two LNG-based power plants and two small public banks. - Trade and competitiveness: - Pakistan is a very closed economy; exports concentrated in textiles and low value-added products. - Policy recommendations: rationalize tariff structure; pursue high-standard FTAs; support new and small exporters; facilitate joining global supply chains. ### CLIMATE CHANGE — impacts, mitigation, and financing - Climate impacts: - 120 recorded events over two decades caused estimated US$22 billion in material damages; more than 55 million affected; 11 thousand killed. - Pakistan among top 10 countries in damages from climate-related disasters since 2000. - Emissions and targets: - Pakistan emits about 1 percent of global GHG. - 2021 NDC: cumulative GHG reduction target of 50 percent below projected 2030 BAU emissions (15 percent unconditional; 35 percent conditional requiring an estimated US$101 billion for energy transition). - Nature-based solutions and programs: - Ten Billion Trees Tsunami Program (TBTTP): sequestered 8.4 MtCO2e 2016–21; projected to sequester another 149 MtCO2e over next 10 years at estimated cost US$800 million. - Policy recommendations: - No-regret measures (early warning systems); energy price reform and subsidy targeting; consider carbon taxation (IMF staff estimates: US$25/ton yields 1.2 percent of GDP annually; US$75/ton yields 2.7 percent of GDP annually); mobilize external climate finance. ### EXTERNAL FINANCING, DEBT, AND PROGRAM CONDITIONALITY - Program financing and official commitments: - Aggregate FY 2022 official financing includes: China US$6.6 billion (including rollover of US$4 billion SAFE deposits); UAE rollover US$2 billion; World Bank US$2.4 billion; ADB US$1.2 billion; Islamic Development Bank US$1 billion; other bilateral support US$1 billion. - DSSI covers about US$3.8 billion due over May 2020–Dec 2021. - IMF exposure and safeguards: - IMF exposure reaches SDR 5,560.34 million (274 percent of quota and about 40 percent of gross reserves) with this review; with full purchases will peak at 344 percent of quota in 2022. - 2019 SBP safeguards assessment broadly strong; need to strengthen legal framework and phase out quasi-fiscal activities; four of eight non-executive director positions on SBP Board vacant. - Conditionality and adjustments: - New PCs for end-December 2021, end-March 2022, end-June 2022 to support fiscal deficit reduction, limit public guarantees, contain inflationary pressures, cap government borrowing from SBP, and support reserves. - Three adjusters to accommodate vaccine purchases, part use of SDR allocation for budget support, and changes in average CRR. - Structural benchmarks: reset three delayed SBs, drop two SBs, and set six new SBs on critical next steps (Table 2). - Staff supports waivers of nonobservance for missed continuous PCs and a waiver of applicability for end-December PCs where data unavailable. ### PROGRAM PERFORMANCE — selected quantitative outcomes and implementation status - End-FY 2021 quantitative performance: - Most PCs met; four PCs not met. Continuous PC on zero external public payment arrears observed. - Miss on general government primary budget deficit narrowly; large revenue shortfalls accommodated by spending underexecution. - Indicative targets: four of six ITs observed at end-June 2021; missed ITs: BISP cash transfer spending (missed by small margin due to PRs 5 billion reallocation) and gross issuance of longer-term debt instruments (PIBs, Sukuks, Eurobonds) fell short. - Structural benchmarks: - TSA-1 operational in September (end-May 2021 SB). - NSER update finalized in October (end-June 2021 SB). - Reduction in CPPA-G payables to IPPs in June (end-May 2021 SB). - Electricity tariff increases: FY 2021 annual rebasing notification on November 5 (June 1, 2021 SB) and notification of pending adjustments up to FY 2021-Q3 (end-September 2021 SB). - Two SBs dropped without corrective action due to capacity/data constraints: audit of Utility Stores Corporation (end-April 2021 SB) and track-and-trace system for tobacco products (end-June 2021 SB). ### RISK ASSESSMENT MATRIX — summary - External risks (selected entries with staff-assigned likelihood and impact): - Intensified geopolitical tensions (Afghanistan): Relative Likelihood: High; Time Horizon: Short Term; Expected Impact: High. - Uncontrolled COVID-19 local outbreaks: Relative Likelihood: High; Time Horizon: Short Term; Expected Impact: Medium. - Rising commodity prices amid volatility: Relative Likelihood: Medium; Time Horizon: Short to Medium Term; Expected Impact: Medium/ High. - Higher frequency/severity of natural disasters: Relative Likelihood: Medium; Time Horizon: Medium to Long Term; Expected Impact: Medium. - Domestic risks: - Slippages in policy implementation: Relative Likelihood: High; Time Horizon: Short to Medium Term; Expected Impact: High. - Deterioration in security conditions: Relative Likelihood: Medium; Time Horizon: Short to Medium Term; Expected Impact: Medium/ High. - Bottom line: balance of risks tilted to the downside. ### SELECTED DATA, MONITORING, AND TMU HIGHLIGHTS - Program exchange rate (TMU): PRs 141.3172 per U.S. dollar. - Selected cross rates (per U.S. dollar): EUR 0.896456; JPY 111.699717; CNY 6.741081; GBP 0.769292; SDR 0.723019. - Reporting and data requirements: detailed SBP, MOF, FBR, PBS, and other agency reporting schedules specified (daily/weekly/monthly/quarterly timing). - Net international reserves (NIR) and NDA definitions and adjustors enumerated in TMU (including cap on SBP on-lending of SDR allocation: adjustor cumulative cap PRs 457 billion for FY 2022). _Italic: IMF staff; sources: IMF staff report material and Pakistani authorities as presented in the provided content unit._ ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - Economic activity rebounded strongly on the back of waning COVID-19 infections and expansionary fiscal and monetary policies. - Strong import growth—fueled by the macroeconomic policy mix, higher international commodity prices, and credit growth—led to a marked deterioration of the external position. - Consequences of the external deterioration: - The current account deficit widened. - The rupee depreciated markedly. - Inflation remains persistently high. ### Program performance - Since the April 2021 reviews, program implementation was uneven; fiscal policy became increasingly expansionary and several key EFF commitments were reversed. - Missed performance criteria (PCs) and benchmarks: - Missed end-June PC on the general government primary budget deficit. - Missed three continuous PCs on: - Non-intensification of exchange restrictions. - Non-modification of multiple currency practices (MCP). - Zero new flow of SBP credit to the government. - Several structural benchmarks (SBs) were not met. - Corrective actions taken more recently: - Supplementary budget to lock in key tax reforms. - Tighter monetary policy. - Electricity tariff adjustments. - Planned amendments to the central bank act to consolidate SBP operational independence. ### Key policy recommendations - Sustain implementation of program policies and structural reforms to entrench macroeconomic stability and ensure sustainable growth. - Program priorities: - Restore fiscal discipline and debt sustainability while protecting social spending. - Safeguard monetary and financial stability. - Maintain a market-determined exchange rate. - New structural benchmarks to support: - Revenue mobilization. - Public financial management. - Energy sector viability. - Governance/anti-corruption. - AML/CFT framework. ### Staff views and program financing - Staff supports rephasing of access and completion of the sixth review based on strong corrective actions. - Program risks remain exceptionally high. - The review will make available SDR 750 million and help catalyze essential external financing. ### Recent economic developments (highlights) - The EFF program (approved July 2019) helped stabilize the economy after near currency and fiscal crisis and aided buffer rebuilding during the COVID-19 shock; however, Pakistan has a history of stop-and-go policies and weak implementation of structural reforms. - FY 2021 outcomes: - Real GDP growth strengthened to 3.9 percent. - Inflation averaged 8.9 percent (down from 10.4 percent in FY 2020). - The current account deficit declined to 0.6 percent of GDP, the smallest deficit in 10 years. - Gross international reserves rose to US$17.3 billion, the highest level in more than 4½ years. - SBP’s net short swap/forward forex position reduced to US$4.9 billion during FY 2021. - Early FY 2022 dynamics: - Buoyant domestic demand and terms of trade shock increased external imbalances. - Current account in the first quarter of FY 2022 widened to an annualized 4.2 percent of GDP. - Risks of repeating boom-bust patterns increased without policy correction. - COVID-19 developments: - Infection rate generally lower than peers; fourth wave waning with daily cases below 1,000 as of mid-November for more than one month and a positivity rate of about 1.5 percent. - Vaccine rollout: more than 124 million doses administered as of early-December; coverage of 38 percent of the population with at least one shot and 24 percent fully vaccinated. - Authorities aim to fully cover more than 78 million people by end-December. - Given large informality and agricultural employment, persistent scarring to supply capacity is likely limited. ### Program performance details - Quantitative performance: - Most PCs were met, but four PCs were not. End-June 2021 PCs on NIR, NDA, SBP net foreign currency swaps/forward position, no net government borrowing from SBP, and government guarantees were observed. - Continuous PC on zero external public payment arrears was observed. - Misses included narrow failure on general government primary budget deficit at end-June 2021 (large revenue shortfalls accommodated by spending underexecution) and three continuous PCs related to exchange restrictions/MCPs/SBP credit flows. - Indicative targets (ITs): - Four out of six ITs observed at end-June 2021: budgetary health and education spending, net FBR tax revenues, net accumulation of tax refund arrears, and flow of new power sector payment arrears. - Two ITs missed: - Targeted cash transfer spending (BISP) missed by a small margin due to PRs 5 billion reallocated to a different authority (Pakistan Poverty Alleviation and Social Safety Fund). - Gross issuance of longer-term debt instruments (PIBs, Sukuks, Eurobonds) fell short because of low investor appetite and issuance bottlenecks for Sukuks. - Structural benchmarks (SBs): - One SB met on time; five SBs implemented with delay. - Achievements include: - Treasury Single Account (TSA-1) operational in September (end-May 2021 SB). - Update of the National Socio-Economic Registry (NSER) finalized in October (end-June 2021 SB). - Reduction in CPPA-G payables to IPPs in June (end-May 2021 SB). - Increased tariffs toward cost recovery via FY 2021 annual rebasing notification on November 5 (June 1, 2021 SB) and notification of pending adjustments up to FY 2021-Q3 (end-September 2021 SB). - Continuous SB on no further tax amnesties observed; continuous SB on non-granting of new preferential tax treatments breached (most such measures to be reversed via upcoming supplementary finance bill). - Two SBs to be implemented through prior actions for the sixth review: publishing key information on all COVID-related awarded procurement contracts (end-April 2021 SB) and an ex-post audit of procurement of COVID-related medical supplies (end-April 2021 SB). - Three outstanding SBs to be reset; two missed SBs to be dropped without corrective action: - Dropped: audit of Utility Stores Corporation (end-April 2021 SB) and track-and-trace system for tobacco products (end-June 2021 SB) due to capacity/data constraints. *Source: IMF staff, discussions held October 4–November 18, 2021; document date December 22, 2021.* ### 6. The economy is set to continue recovering, but risks remain high in FY 2022 (Text Table ### 6. The economy is set to continue recovering, but risks remain high in FY 2022 (Text Table ### Outlook and main projections - Real GDP growth is projected at 4 percent in FY 2022—consistent with the forecasted course of the pandemic and vaccinations, global recovery, and commodity prices in the WEO baseline—as confidence and investment take hold, and all COVID-related restrictions have been lifted. - Assuming sustained policy and reform implementation, growth is expected to reach its medium-term potential of 5 percent. - Average CPI inflation is expected to temporarily increase in the coming months and average 9.4 percent in FY 2022 due to the recent terms of trade shock, continued energy price adjustments, and GST reforms. - CPI inflation is expected to be within the SBP’s 9–11 percent inflation range forecast in the next 12 months, before slowing to 6.5 percent over the medium term. - The current account deficit is forecast to widen to 4 percent of GDP in FY 2022, driven by strong import growth, fueled by strong domestic demand, higher commodity prices, and slightly receding remittances. - Under the WEO baseline, moderating commodity prices, export growth and stronger policies will help the current account deficit to converge toward 2.5 percent of GDP over the medium term. - The IMF’s recent SDR allocation and tighter monetary policy stance are expected to strengthen reserve cover to some 2.8 months of imports by the end of the forecast horizon, up from less than 2 months of imports at the onset of the program. - Debt levels are projected to continue their downward path with narrower twin deficits on the back of the planned fiscal adjustment and robust growth: public debt is projected to fall toward 70 percent and total external debt to decline toward 35 percent of GDP by FY 2026. ### Key statistics (Pakistan: Selected Economic Indicators, FY 2017/18–25/26) - Real GDP growth (%): 5.5; 2.1; -0.5; 3.9; 4.0; 4.5; 5.0; 5.0; 5.0 - Consumer prices (period average, % change): 3.9; 6.7; 10.7; 8.9; 9.4; 7.8; 6.5; 6.5; 6.5 - Gen. gov. overall balance (incl. grants, %GDP): -6.4; -9.0; -8.0; -7.1; -6.9; -4.4; -4.4; -3.9; -3.5 - Gen. gov. primary balance (underlying, excl. grants, %GDP) 1/: -2.2; -3.6; -1.8; -0.6; 0.0; 1.2; 1.3; 1.4; 1.5 - Gen. gvt. debt (incl. guarantees and IMF obligations, %GDP): 76.2; 90.5; 93.2; 88.6; 86.7; 82.1; 78.1; 73.8; 70.4 - Current account balance (%GDP): -6.1; -4.9; -1.7; -0.6; -4.0; -3.5; -3.3; -3.0; -2.7 - External debt (%GDP): 30.0; 37.4; 41.6; 39.1; 40.6; 40.1; 39.1; 37.7; 35.2 - Gross official reserves (billions of US$): 9.8; 7.3; 12.2; 17.3; 21.2; 20.7; 20.1; 20.9; 23.1 - Gross official reserves (months of next year's GNFS imports): 1.9; 1.7; 2.4; 2.7; 3.2; 3.0; 2.8; 2.8; 2.8 - Gross official reserves (% IMF reserve adequacy metrics) 2/: 48.3; 35.0; 55.2; 73.8; 81.2; 72.3; 65.9; 64.4; 72.0 ### Downside risks - Five broad groups of downside risks were identified: - Pandemic risk: With still low vaccination coverage, Pakistan remains vulnerable to a worsening of the pandemic trajectory; authorities expect localized restrictions rather than strict lockdowns but are concerned about high global uncertainty affecting global growth, trade, and remittances. - Policy slippages: Risks stem from weak capacity, powerful vested interests, socio-political pressures (with the next general election expected in mid-2023), and the absence of a majority in the upper house potentially hindering critical legislation—these could undermine fiscal adjustment and debt sustainability. - Delays in structural reforms: Further delays, especially on governance and the AML/CFT action plan with the FATF, could hamper external financing and investment and limit the recovery. - Geopolitical tensions: Especially related to Afghanistan—could cause disorderly migration, worsen security, and generate higher volatility in basic food prices and the exchange rate, and affect investor sentiment and external financing. - Climate change risks: Mounting risks, including a tendency for more frequent climate-related disasters. ### Policy discussions and priorities - Policy dialogue focused on near- and medium-term macroeconomic policies and structural reforms to address rapidly increasing economic imbalances and achieve the EFF’s objectives: entrenching macroeconomic stability; ensuring debt sustainability; and boosting resilient, strong, and sustainable growth. - Five policy areas for action: - Reinforcing fiscal discipline by mobilizing revenues and controlling current spending to make space for more infrastructure and social spending. - Ensuring disinflation through a tighter monetary policy stance. - Maintaining the market-determined exchange rate and building external buffers. - Restoring the financial viability of the energy sector. - Advancing structural reforms, including addressing deficiencies in the AML/CFT regime, SOE governance, and business climate, and stepping up to the challenges posed by climate change. ### Fiscal policies — background and recent performance - The EFF’s key fiscal anchor is a gradual improvement in the primary balance to ensure fiscal sustainability, entrench macroeconomic stability, and build resilience. - The authorities aimed for a medium-term increase in tax revenues by 3–4 percentage points of GDP, as set out at EFF program inception, but will fall short during the EFF program period due to the COVID-19 shock, revision to the growth path, and repeated policy delays. - FY 2021 outturn: underlying primary deficit (excluding grants and one-off expenditures) reached 0.6 percent of GDP, improving considerably over FY 2021, and missing only narrowly the target of 0.5 percent of GDP. - Public debt remained elevated at 88.6 percent of GDP at end-FY 2021. - Government refrained from SBP borrowing since the EFF-supported program started; domestic bank and external financing covered borrowing needs. ### FY 2022 budget and box on key policy reversals - The approved FY 2022 budget marked a departure from EFF objectives and contributed to rapidly increasing macroeconomic vulnerabilities, delivering a fiscal relaxation through large spending increases and unwinding several EFF tax revenue commitments. - The budget was on track to deliver an adjusted primary deficit of 2 percent of GDP, representing a fiscal loosening of 1.4 percent of GDP compared to the FY 2021 outturn. - Box 2: Key policy reversals in FY 2022 budget included: - Reduction of taxes: zero-rate excise on fuel (PDL) to zero and downward adjustment of the GST on petrol and diesel from 17 percent to 16.4 percent, with a large revenue impact of almost 1 percent of GDP. - Reinstatement of zero-rated GST for some domestic industries. - Omission of PIT and GST tax policy reforms from the budget. - Introduction of new preferential tax treatments for specific sectors, breaching the related continuous SB. - Omission of presenting all guarantees expected to be issued in FY 2022 with the budget. ### Revised FY 2022 fiscal program (supplementary finance bill / PA) - Authorities agreed to pass a supplementary finance bill for FY 2022 that targets an underlying primary balance (deficit of 0 percent of GDP, excluding grants and one-off spending subject to adjustors). - Key aspects (MEFP ¶7): - Stronger revenues: Tax revenues expected to increase by 1.2 percentage points of GDP from FY 2021, boosted by (i) revenue measures; (ii) reinforced tax administration efforts; and (iii) automatic stabilizers. - Main additional tax measures: - Implementing the reform of General Sales Taxes (GST): Parliament will adopt the GST reform as part of the supplementary budget (PA) to broaden the GST tax base and eliminate about 2/3 of the tax expenditures on GST by undoing FY 2022 Finance Act preferential treatments and moving many goods to the standard sales tax rate, eliminating exemptions for most goods excluding basic food, live animals for human consumption, and health- and education-related goods, and applying the standard rate to higher-end cellphone devices. - Increasing the Petroleum Development Levy (PDL): authorities started to gradually increase the PDL in gasoline and diesel by PRs 4 per liter, with a further PRs 4 per liter in December (PA) and will continue to increase the PDL by PRs 4 per liter per month until a maximum of PRs 30/liter is achieved. - Reprioritizing and improving spending efficiency: Limit increase in spending to 1.1 percentage points of GDP above the FY 2021 outturn by rationalizing non-priority current spending and streamlining non-targeted subsidies (notably energy), and recalibrating investment spending in line with realistic execution rates. - Supplementary budget supports scaling-up of development and social spending, including: - Expansion of the Benazir Income Support Program (BISP) by 50 percent (excluding COVID-related one-off spending). - Spending on health and education increased by 27 percent. - Newly launched Kamyab Pakistan Program (KPP) and a food subsidy program of 0.2 percent of GDP. - Program accommodates two spending items through adjusters of up to 0.6 percent of GDP each: (i) purchase of COVID-19 vaccine; and (ii) clearance of arrears to independent power producers (IPPs). - Provincial contributions: Provinces committed via Memoranda of Understanding (MoU) to target a surplus of about 0.5 percent of GDP in FY 2022, boosting tax revenues by at least 0.1 percent of their provincial GDPs relative to FY 2021 and constraining expenditures while protecting health and education spending. - Financing: Authorities committed to relying on market sources (external borrowing and the domestic banking system), seeking to lengthen maturities; intend to use up to US$2 billion from the recent SDR allocation (about US$2.75 billion) to complement vaccine finance and the remainder to reduce reliance on T-Bills. - Implementation risks are considerable, particularly if tax buoyancy declines in a scenario of slowing imports. Staff would recommend considering bringing forward plans to expand the number of removed exemptions to include fertilizers and tractors, which constitute 23 percent of current GST tax expenditures and whose removal is under consideration as a 2023 budget measure. ### Additional tax policy reforms and next steps - Additional reforms remain key to address the low revenue base and create fiscal space for infrastructure, education, healthcare, and social support. - Next reform steps: - Personal income tax (PIT): Authorities are drafting PIT legislation by end-February 2022 (new end-February 2022 SB) to come into effect on July 1, 2022 with the FY 2023 budget. Reform aims to: (i) reduce number of rates and brackets; (ii) reduce tax credits and allowances (except for disabled and senior citizens, and Zakat receipts); (iii) introduce special tax procedures for very small taxpayers; and (iv) bring additional taxpayers into the tax net. The reform preserves the current PIT threshold (almost 3 times income per capita). - GST base harmonization: Critical to improve competitiveness and business environment—current fragmentation (services taxed provincially, goods federally) undermines tax policy design and administration, causes cascading and double taxation, increases compliance costs, and harms competitiveness. *Source: IMF staff estimates and projections, Pakistani authorities (from the content unit "6. The economy is set to continue recovering, but risks remain high in FY 2022 (Text Table)")* ### 13. Other broad-based reforms will improve the fiscal framework. Specifically (MEFP ¶¶8–10): ### 13. Other broad-based reforms will improve the fiscal framework. Specifically (MEFP ¶¶8–10): ### Strengthening tax administration - Authorities plan over the medium term to: - introduce a centralized, risk-based compliance function; - update IT and automation; - use third-party data, cross-checks, and analysis; - simplify registration and filing processes; - modernize and target audit practices; - bolster the large taxpayer office (LTO). - IMF staff discouraged the use of third-party audits in favor of developing an adequate compliance risk management framework. - Efforts to establish a single filing, taxpayer, and return portal and to redress high outstanding tax arrears. - To contain smuggling, authorities are reintroducing the track-and-trace system for tobacco products but a full roll-out remains delayed on account of capacity constraints (end-June 2021 SB). - Tax collection context note: At only 2.1 percent of GDP in FY 2018, PIT collection is low due to: - only 1.9 percent of the labor force being active PIT taxpayers; - only incomes above 91 times per capita GDP p.c. paying the top marginal rate of 35 percent and 72 percent of taxpayers paying 5 percent or less; - generous tax expenditures, including exemptions and tax credits. ### Enhancing Public Financial Management (PFM) - With IMF TA, authorities have: - created new coordination mechanisms for cash and debt management; - tightened procedures for supplementary grants; - disclosed, for the first time, fiscal risks, and contingent liabilities in the FY 2021 budget. - Institutional improvements: - ramping up operations in the macro-fiscal unit in the Ministry of Finance to better monitor fiscal risks; - strengthening planning commission capacity to improve efficiency of public investment spending. - Treasury and commitments systems: - achieved a functional single treasury account (TSA-1) in September (end-May 2021 SB); - started to move to TSA-2 and improve annual and multi-annual commitments control systems with EU assistance. - Priority: improving the budget process to achieve greater spending efficiency and control. ### Safeguarding the quality and transparency of COVID-related spending - Authorities committed to timely publication of: - key information of all COVID-related awarded procurement contracts on the Public Procurement Regulatory Agency website (end-April 2021 SB, PA); - an ex-post audit by the Auditor General of Pakistan (AGP) of the procurement of COVID-related supplies and social payments in FY 2020 (end-April 2021 SB, PA). - Further efforts underway: - audit of all COVID-related spending and social payments for FY 2021; - rollout of an e-procurement system by end-2022 (supported by the World Bank); - issuance of regulations to collect and publish beneficial ownership information of companies awarded PRs 50 million and above public procurement contracts (new end-March 2022 SB). ### Improving debt management - Remaining priorities to address institutional and technical capacity weaknesses: - fully implementing the medium-term debt strategy (to be updated annually and published); - establishing a central debt management office (DMO); - amending the Fiscal Responsibility and Debt Limitation Act to support the DMO’s formal establishment and functioning. - Authorities continue to focus on lengthening the maturity profile of public debt to lower rollover risks while balancing the impact on financing costs. - Note on DMO amendments: amendments focus on establishing the central DMO, namely: - parliamentary approval over the proper rules of business; - setup of the front, middle, and back offices; - recruitment of staff; - migration of relevant functions to the new DMO from other government agencies. ### Poverty Reduction and Social Protection — Background - Pakistan lags peers’ levels of economic and human development, including higher poverty indicators and lower education and health outcomes. - Income inequality is relatively moderate but gaps in education and health outcomes between richest and poorest quintiles remain sizeable. - Gender inequality is pervasive; Pakistan ranked 153 out of 156 countries in the Gender Gap Index in 2021. - Progress in social areas will support social outcomes, unleash inclusive growth, and garner broad buy-in for reforms. - Reference: Accompanying Selected Issues Paper on “Spending Needs for Reaching the Sustainable Development Goals.” - Note: For instance, stunting rates among children of over 40 percent. ### Poverty Reduction and Social Protection — Policy Discussion and Measures - Reducing poverty and boosting social protection is a key pillar of the EFF (MEFP ¶¶11–12). - Transition from COVID response: - With the Ehsaas Emergency Cash (EEC) program coming to an end in FY 2022, authorities are refocusing on strengthening regular BISP programs. - EEC context: Launched in April 2020, it provided almost half of the population with a one-off transfer in FY 2021, at a budgetary cost of PRs 41 billion. Another PRs 20 billion is set aside for FY 2022. - Improving targeting: - Updated the National Socio-Economic Registry (NSER) in October (end-June 2021 SB), covering about 33 million families. - Registry used for targeted expansion of BISP beneficiary base and reassessment of poverty structure. - Boosting BISP spending: - Staff endorsed authorities’ budgeted envelope of PRs 250 billion for BISP in FY 2022 and called for full execution. - Allocation supports expansion of BISP regular cash transfer program: - increase number of beneficiaries by 30 percent to 8 million families by end-FY 2022; - increase monthly benefit levels by 8 percent from January 2022. - Staff encouraged: - regularly applying the mechanism for periodic inflation updates of all BISP cash transfers; - reviewing the value of educational cash transfers under BISP. - New programs outside BISP: - Kamyab Pakistan Program (KPP): - aims to promote SMEs, agriculture, and low-cost housing financing through highly subsidized loans backed by a 50 percent government guarantee (pari passu); - initially a pilot in poor areas, aims to reach up to 3 million households and provide cumulative financing of PRs 1.63 trillion over the next three years. - New food subsidy program: - seeks to provide a monthly stipend to 20 million low-income households (covering three products that account for about a quarter of their food layouts). - Fiscal financing notes: - fiscal baseline includes PRs 25 billion under subsidies for the KPP for FY 2022 to cover the subsidy interest rate component and guarantee provisions; - estimated cost of the food subsidy program is PRs 120 billion during FY 2022 and will be shared between the federal government and provinces. - Authorities agreed on the need to ensure full and transparent financing for, and execution of, these new schemes in a sound and transparent way. - Fiscal space for SDGs: - Staff estimates achieving the SDGs will require an additional 16 percent of GDP in annual spending by 2030. - Urgency to create fiscal space—e.g., by broadening the tax base—and to strengthen governance, capacity, and coordination. ### Monetary, Exchange Rate, and Financial Sector Policies — Background - External pressures increased rapidly in Q4 FY 2021 due to strong FX demand, accelerating imports, and a higher current account deficit that exceeded US$1 billion per month. - Exchange rate and SBP response: - SBP let the exchange rate depreciate gradually and intervened in the FX market, anticipating temporary spike in FX demand. - Pressures persisted and increased in early FY 2022, bringing the rupee to a historic low of PRs 175 per U.S. dollar in mid-November, notwithstanding FX intervention by the SBP. - Inflation and monetary stance: - Inflation persists at relatively high levels of around 8–9 percent. - SBP raised the policy rate by 25 bps in October, 150 bps in November, and 100 bps in mid-December to 9.75 percent. - SBP increased banks’ cash reserve requirement by 100 bps (in November). - Banking sector indicators (as of end-June 2021 unless otherwise noted): - capital adequacy ratio (CAR) was 18.3 percent; - regulatory minima including the 1.5 percent capital conservation buffer total 11.5 percent; - non-performing loans (NPLs) declined to 8.9 percent; - provisioning of NPLs stood at 88.8 percent; - banking sector exposures: energy and textile sectors each at 15 percent of outstanding loans; sovereign at 70 percent of total credit; - real credit growth reached 6.2 percent yoy in September. - Note on countercyclical capital buffer (CCB) and CAR transition: - In March 2020 the CCB was reduced from 2.5 percent to 1.5 percent. It will be restored to 2.5 percent effective January 1, 2023. Thereafter, the capital adequacy ratio (CAR) requirement will revert to 12.5 percent. - Three banks with 1.25 percent of banking sector assets (total) are below the regulatory minimum (¶26). ### Monetary, Exchange Rate, and Financial Sector Policies — Policy Discussion - Monetary policy: - Tight monetary policy is critical to support disinflation (MEFP ¶13). - Authorities and staff agreed to start tapering significant monetary stimulus to achieve real positive interest rates. - Monetary policy should remain data-driven and forward-looking to anchor inflation within SBP’s target range of 5–7 percent over the medium term. - Staff recommended scaling back refinancing facilities and reducing the interest rate subsidy vis-à-vis the policy interest rate. - Staff supported continued use of forward guidance, a 6-month forward-looking calendar for the monetary policy committee, and the move to 8 meetings per year to improve communication and transmission. - Exchange rate and reserves: - SBP remains committed to a market-determined exchange rate and building reserves. - Going forward (MEFP ¶13), authorities will: - limit FX sales to only offset disorderly market conditions (DMCs); - use purchases in the FX interbank market to rebuild reserve buffers amid favorable market conditions, but not to influence the exchange rate trend. - Staff cautioned that room for intervention is highly limited given still low level of reserves and the more permanent nature of the terms of trade adjustment. - External position assessment: - Staff’s assessment suggests the external position was broadly in line with fundamentals in FY 2021, though high uncertainty remains. - Improvements in reserves: import coverage up from 1.7 months to 3 months in June 2021. - Reserves remain below adequacy levels as suggested by the ARA metric (74 percent in June 2021). - Continued policy efforts remain crucial to strengthen the central bank balance sheet and external buffers. - Exchange restrictions and MCPs: - Pakistan maintains exchange restrictions and multiple currency practices (MCPs), including a 100-percent cash margin requirement (CMR) on imports of certain goods imposed in 2017 and extended to an additional 114 items in late-September. - Limitations on advance payments for imports against letters of credit (LCs) and advance payments up to the certain amount per invoice (without LCs) for import of eligible items (imposed in 2018) remain. - Authorities requested more time to eliminate these measures when BOP conditions permit during the next twelve months (MEFP ¶19). - Staff emphasized exchange rate flexibility should be given more prominence to address BOP pressures rather than administrative and exchange measures. - SBP institutional and operational reforms (MEFP ¶16): - Amendments to the SBP Act (submitted to parliament in March 2021) will, once adopted: - establish domestic price stability as the primary objective; - create the SBP's functions to help achieve its objectives; - strengthen financial autonomy; - prohibit extension of direct credit or guarantees to the general government; - lay the statutory basis for audits; - secure stronger protection of senior officials' personal autonomy; - introduce a collegial decision-making mechanism to improve executive management decision making; - provide stronger oversight by the Board; - improve the SBP's accountability to the public regarding conduct of monetary policy and achievement of objectives. - Upgrading the monetary policy framework: - As stability becomes entrenched and SBP independence is strengthened, SBP should gradually advance preparatory work to formally adopt an inflation target (IT) regime with a forward-looking and interest-rate-focused operating framework. - Additional efforts needed include: - modernizing SBP’s operational framework; - strengthening monetary transmission by increasing interest rates on refinancing facilities to reflect market developments and eventual phasing-out of such facilities; - bolstering the SBP’s analytical capacity, including systematic inflation expectations surveys and introduction of an inflation report; - further strengthening communication. - Authorities noted Vision 2020 lays out plans to enhance the effectiveness of monetary policy. *Italic: IMF staff summary of section 13 and related policy discussions from the provided content.* ### 25. Pakistan has embarked on a significant effort to close the gap with peers in financial ### Pakistan has embarked on a significant effort to close the gap with peers in financial development, which is hindering private sector growth ### Financial deepening, SBP refinancing schemes, and housing measures - Context and concern: - Authorities and staff agreed that further efforts at fostering financial deepening and inclusion were important to increase economic resilience, growth, and formalization of the economy, while also enhancing the credit channel of monetary policy. - Authorities’ current strategy includes suboptimal measures: providing highly subsidized lending through refinancing schemes from the SBP, setting bank-level sectoral lending targets, and expanding existing government schemes backed by guarantees. - SBP refinancing schemes (MEFP ¶15): - Since March 2020 SBP actions: (i) establishing three new temporary facilities, one of which is still disbursing; (ii) expanding existing ones, including in recent months; and (iii) introducing a new facility for SMEs. - As of end-September 2021, outstanding amount for all facilities was PRs 1,225 billion (15.5 percent of private credit), of which PRs 322 billion were related to temporary COVID-19 schemes. - Staff warning: if expansion is not temporary, it would undermine SBP’s ability to credibly implement monetary policy and improve transmission. - Agreed actions to support phasing-out: - Ministry of Finance and SBP to jointly design a plan, in consultation with other stakeholders, to establish an appropriate Development Finance Institution by end-April 2022 (new end-April 2022 SB) as a basis for transferring refinancing schemes to the government. - Assess the Export Refinancing Scheme (EFS) by end-February 2022 and take needed actions to improve its effectiveness. - Legal change: amended SBP Act allows refinancing facilities only in pursuit of the SBP’s mandate and without compromising price stability. - Housing and construction measures (MEFP ¶14): - SBP measures introduced: - July 2020: mandatory bank targets to double to 5 percent the share of domestic private sector lending portfolio to housing and construction by December 2021. - June 2021: amendments to capital adequacy regulations to lower risk weight to 100 percent (from 200 percent previously) on bank and DFI investments in real estate investment trusts. - Staff recommendation: unwind these measures due to financial stability concerns; favor a direct, well-targeted budget subsidy for vulnerable populations. - Structural focus recommended: address long-standing impediments to mortgages and housing finance. - Authorities will establish a working group of stakeholders to produce a strategy paper by end-February 2022 to address structural impediments in the housing and construction sector. ### Financial sector stability, governance, AML/CFT, and fintech - Maintaining financial sector soundness (MEFP ¶17): - Staff urged continued vigilance and intensified efforts to safeguard financial stability, including: - Ensure all banks meet minimum capital requirements and strongly urged two private sector banks to complete first-stage recapitalization (new end-May 2022 SB) and one public sector bank to proceed with privatization. - Accurately measure NPLs and potential losses; importance of implementing IFRS 9. - Upgrade resolution and crisis management frameworks (including deposit insurance) by submitting related draft amendments (prepared with IMF TA) to cabinet by end-January 2022. - Note on recapitalization: first-stage recapitalization requires completion of capital injections, with documentation submitted to, and accepted by, the SBP to fill 50 percent of the capital shortfall calculated as of September 30, 2021, resulting in banks achieving positive capital. - AML/CFT effectiveness (MEFP ¶18): - Progress: satisfactorily completed 26 of the 27 items in 2018 AML/CFT action plan (end-June 2021 SB; reset to end-March 2022). - Staff urged: - Complete last remaining item on effectiveness of terror financing (TF) investigations and prosecutions of senior leaders of UN-designated terrorist groups. - Promptly address deficiencies identified in Pakistan’s APG Mutual Evaluation Report under the 2021 AML/CFT action plan. - Review by end-June 2022 the implementation of AML/CFT controls by financial institutions with respect to the tax amnesty program for the construction sector. - Advancing the fintech environment: - Pandemic-driven fintech adoption: - Internet banking users increased by 32 percent yoy in FY 2021. - Mobile banking users increased by 29 percent yoy in FY 2021. - E-banking transaction volumes grew by 31 percent yoy in FY 2021. - More than 273,000 Roshan Digital Accounts opened (introduced in September 2020) as of end-October 2021, with US$2.6 billion received and more than half invested in government securities. - SBP launched first instant payment system (Raast) in 2020 and introduced digital cheque clearing and a unified QR code for payments in August 2021. - Staff note: need for enhanced supervisory and AML/CFT oversight and capacity as fintech grows, given strong cash preference and potential benefits for financial inclusion. ### Energy sector: background, circular debt, and policy priorities - Background on sector weakness: - Long-standing deficiencies produced an unsustainable stock of arrears (circular debt, CD) across the power-gas/petroleum chain, weighing on financial sector, budget, and real economy. - Sectoral viability eroded further during FY 2021 due to delayed price adjustments and temporary subsidies. - Power sector circular debt: - CD flow in power sector reached 0.6 percent of GDP in FY 2021. - CD stock grew to 4.8 percent of GDP at end-FY 2021. - Footnote: this includes 1.9 percent of GDP held by PHPL. - Drivers: delayed tariff adjustments, high debt costs, operational losses by DISCOs. - Sensitivity: Each month of delaying an adjustment of PRs 1 per kWh adds about PRs 8½ billion to the stock of arrears. - Gas sector: - Substantial CD stock of more than 1 percent of GDP has accumulated; data cleanup ongoing. - Main drivers: high unaccounted for gas losses (UFG), delayed sales price adjustments, uncovered subsidies (export and zero-rated industries), and collection shortfalls. - Policy discussion and agreed actions (MEFP ¶¶20–23): - Monitoring and Circular Debt Management Plan (CDMP): - Authorities guided by CDMP to achieve ambitious, sustained decline in power sector arrears. - Monthly monitoring scheme in place since spring 2021; CDMP assumptions and reform progress updated in consultation with World Bank, ADB, and IMF staff. - Aligning power tariffs with cost recovery: - Staff stressed regular implementation of tariff adjustments per established formulas to strengthen NEPRA credibility and halt arrears accumulation. - Authorities implemented pending adjustments in two steps: - FY 2020-Q4 quarterly tariff adjustment (QTA) on October 1 (end-September 2021 SB) along with NEPRA QTAs for FY 2021-Q1/2 in October and FY 2021-Q3 in November. - Remaining FY 2021 annual rebasing (AR) on November 5 (June 1, 2021 SB). - FY 2022 AR on track to be notified by February 2022 as per updated CDMP. - Note: implementing (i) the QTAs was almost tariff-neutral due to expiring QTAs from previous year; and (ii) the AR only increased the base tariff by 2 percent thanks to a concurrent sales-mix adjustment. - Better targeting power subsidies: - Authorities agreed subsidy reform needed to protect vulnerable, increase fairness, and reduce budget costs; key elements: smaller group of subsidized consumers and more progressive tariff structure. - September reforms implemented some changes but failed to reduce total net subsidies as previously envisaged in end-June 2021 SB. - Supported by World Bank, authorities to seek cabinet approval by end-January 2022 (new end-January 2022 SB) for: - Removing previous slab benefit. - Increasing effective tariff of unprotected slabs by at least PRs 0.5 per kwh. - Next step: NEPRA to approve new tariff structure by end-February 2022. - Details of September reforms: (i) eligibility criterion based on households’ maximum usage over previous 6-months rather than 12 months; (ii) lower threshold for protected slabs of 200 rather than 300 units per month (reducing share of protected consumers from 93 to 46 percent); (iii) breakdown of unprotected 301–700 units slabs into slabs of 100; (iv) expanded definition of lifeline consumers (residential consumers with 50–100 units per month). - Implementing renegotiated PPAs: - Government made first payment of PRs 90 billion (0.2 percent of GDP) to settle IPP arrears in early June (end-May 2021 SB), unlocking lower tariffs for covered IPPs. - Plans to settle another PR 311 billion in CPPA-G payables in FY 2022; any additional reduction depends on fiscal space and CDMP implementation progress. - Other medium-term reforms to reduce costs and CD: - Work with World Bank and ADB to: (i) reduce commercial and technical losses (smart metering, cut off delinquent consumers, scale up T&D); (ii) improve DISCO governance and accountability, introduce private participation, and progress phased privatization; (iii) introduce competition; (iv) seek PPA renegotiations with other groups including state-owned; (v) implement National Electricity Policy 2021. - Authorities agreed gradual absorption of maturing publicly-guaranteed PHPL debt into cheaper central government debt (such as the 0.1 percent of GDP through FY 2021) will depend on adequate fiscal space in FY 2022 and beyond. - Proceeds targeted to reduce CD stock: privatization proceeds from power sector assets and recoveries from outstanding receivables. - Gas sector turnaround: - Authorities revising end-user prices for first time since September 2020. - Staff reiterated importance of parliamentary adoption of OGRA Act by end-June 2022 (end-June 2021 SB; reset to end-June 2022) to support regular, full cost recovery. - Two T&D companies have stepped up measures to reduce UFG via infrastructure improvements, rehabilitation, theft control programs. - Staff noted unbundling T&D companies would further incentivize speedy implementation of UFG-reducing programs. - Recent regular UFG monitoring reports improve transparency; steadfast implementation of cost-reducing reforms and establishment of accountability and mitigation measures for missed UFG targets remain necessary. ### Structural policies: SOEs, governance, and trade - Need for structural transformation (MEFP ¶¶): - Pakistan requires resilient, sustainable, and strong growth to improve incomes, jobs, and social outcomes, particularly in context of COVID-19 and climate change. - Lifting growth requires removing impediments that hinder private sector development and high-quality job creation: uneven playing field with large inefficient SOE sector, corruption, and red tape. - Staff called for accelerated action to bolster governance, the business environment, and climate change policies. - State-Owned Enterprises (SOEs): - SOE footprint and performance: - Non-financial commercial SOEs held total assets amounting to 44 percent of GDP in 2019 (up from 31 percent of GDP in 2015). - SOEs provided about 0.7 percent of total formal employment. - Ministry of Finance triage report (snapshot as of end-FY 2019): 213 SOEs, of which 85 are commercial operations (18 financial and 67 non-financial). - Overall revenues of all non-financial commercial SOEs in FY 2019 were about PRs 5 trillion (14 percent of GDP). - One-third of SOEs consistently generate losses. - Implication: weak SOE governance and performance pose significant fiscal risks and depress private investment. - Governance and business environment: - Weak governance and government effectiveness discourage investment: inefficient bureaucracy, excessive regulations and licensing requirements, cumbersome tax payment processes, difficulties trading across borders and registering property — increasing corruption risks. - Result: low private firm and job creation and low investment relative to peers; Pakistan ranks among lowest quarter in global competitiveness reports. - Trade: - Pakistan is a very closed economy compared to other emerging and developing economies; openness quasi-stagnant since 1990s. - Net exports often act as a drag on growth. - Only a small number of firms export (primarily low value-added textile products). - Fiscal revenues continue to rely on import tariffs, undermining trade integration and weakening export competitiveness. *Source: IMF staff report content provided in the supplied PDF chapter excerpt.* ### 33. Pakistan is highly affected by climate change, while only contributing about 1 percent ### 33. Pakistan is highly affected by climate change, while only contributing about 1 percent of global greenhouse gas emissions (GHG) ### Climate impacts and key statistics - Pakistan has experienced a trend increase in temperatures, fluctuating levels of precipitation, and extreme climate shocks, placing it among the 10 countries worldwide with the largest damages from climate-related disasters since 2000 (Germanwatch 2021). - Over the past two decades: - 120 recorded events caused an estimated US$22 billion in material damages (EM-DAT 2021). - More than 55 million people were affected. - 11 thousand killed. - Relative to peers worldwide, Pakistan stands out in terms of frequency and material damages, while human losses are sizable. - Main hazards identified: - Hydrological hazards (e.g., floods and landslides) are a principal driver of damages. - Meteorological, biological, and climatological hazards are also present. - Projected main climate stressors going forward: - Extreme temperatures. - More erratic precipitation. - Rising sea levels (especially around Karachi). - Pakistan emits about 1 percent of global GHG, placing it among the group of 20 largest emitters worldwide on an absolute basis. ### Policy discussion — State-owned enterprises (SOEs) and governance - Stronger governance and a smaller state footprint in the SOE sector are crucial to boosting efficiency (MEFP ¶25). - Key recommendations and actions: - Accelerate legal, regulatory, and policy framework update of the SOE sector; parliamentary approval of the SOE law in line with IMF recommendations (new end-June 2022 SB). The law aims to: - define a rationale for state ownership; - ensure commercially sound SOE operations; - regulate oversight and ownership arrangements. - Define a new ownership policy, amend several SOEs’ Acts, and operationalize a central monitoring unit within the Ministry of Finance. - Gradual reduction of the footprint of the state in the economy, retaining only a small number of SOEs considered strategic (triage finalized with World Bank TA in March 2021). - Finalize divestment of two LNG-based power plants and two small public banks. - Ensure regular and timely audits of key SOEs, including the Utility Stores Corporation (still under review at end-2021; end-April 2021 SB). ### Policy discussion — Structural reforms to support private sector and jobs - Multi-pronged strategy agreed between authorities and staff: - Boosting the business environment (MEFP ¶26): - Press ahead with digitalization, legal, and regulatory reforms to: (i) simplify procedures to start a business and eliminate unnecessary regulations; (ii) streamline the FDI approval process; (iii) improve trading across borders by reducing custom-related processing time and reducing hours to prepare import/export documents; (iv) simplify and harmonize the process of paying taxes. - Invest more in education and human capital, improve product market access, and increase adoption of information and communication technologies (ICT) to expand IT, digitalization, and outsourcing sectors. - Strengthening the effectiveness of anti-corruption institutions (MEFP ¶27): - Establish an asset declaration system focused on high-level public officials (including federal cabinet members) by end-January 2022 (end-June 2021 SB, reset to end-January 2022). - Publication of the second review cycle report under the UN Convention against Corruption. - Review institutional framework for Pakistan’s anticorruption institutions by independent experts with international experience. - Enhancing use of AML tools to support anti-corruption efforts (MEFP ¶27): - Effectively supervise financial institutions to comply with due diligence obligations for politically exposed persons and suspicious transaction reporting. - Enhance effectiveness of Pakistan's financial intelligence unit and pursue membership to the Egmont Group. - Improving external competitiveness: - Continue rationalizing tariff structure as part of implementing the approved national tariff policy (based on timebound strategic protection) to reduce protection while reducing input costs to promote competition, exports, and domestic production (“Made in Pakistan”). - Pursue high-standard Free Trade Agreements (FTAs) with large, important trading partners. - Support new and small exporters through export financing instruments and market promotion. - Facilitate joining global supply chains by improving product quality, firm reliability, and firm registration for tax and business purposes. - Strengthen Pakistan’s Trade Development Authority. ### Climate action, adaptation, and mitigation priorities - Institutional developments: - Ministry of Climate Change established in August 2017; Environmental Protection Agency created in 1997. - Prime Minister’s Committee on Climate Change since 2018 with GCISC as Secretariat. - Climate Change Act enacted in 2017; national electric vehicle policy enacted. - National Adaptation Plan (NAP): - Prepared with UNFCCC and Green Climate Fund support; expected to be finalized by 2023. - Will build on nature-based approaches including Ten Billion Trees Tsunami Program, Ecosystem Restoration Fund, and Recharge Pakistan initiative. - Aim: reduce vulnerability by integrating adaptation into national policy. - Staff recommendations: - Prioritize more no-regret measures (cost-effective measures that deliver simultaneously on multiple objectives), such as enhancing early warning systems for local communities in flood- and drought-prone areas. - On mitigation, accelerate efforts to meet international GHG reduction commitments, including reforming energy prices, subsidies, and taxes to mobilize significant and easily collected revenues (e.g., to help finance the SDGs). ### Program modalities, financing, and conditionality - Staff supports authorities’ request for waivers of nonobservance for missed continuous PCs and a waiver of applicability for end-December PCs where data is unavailable (¶5). - Corrective actions for end-June QPC and continuous PCs include: - Adopt a supplementary FY 2021/22 budget law with a lower deficit aided by strong tax measures (¶11). - Commit to phase out modified and existing exchange restrictions and MCP inconsistent with Article VIII when BOP conditions stabilize within the next 12 months (¶23). - Conditionality framework: - Quantitative targets: - New PCs for end-December 2021, end-March 2022, and end-June 2022 to support fiscal deficit reduction, limit public debt built-up through public guarantees, contain inflationary pressures via deceleration of base money growth and cap on government borrowing from the SBP, and support adequate reserve coverage (MEFP Table 1). - Three adjusters proposed to accommodate: (i) expenditures on COVID-19 vaccines affecting PCs on NIR, NDA and the general government primary budget deficit; (ii) allowing part of SDR allocation to be used for budget support affecting PC on net government budgetary borrowing from the SBP; (iii) changes in average cash reserve ratio affecting PC on NDA. - Structural benchmarks: - Reset three delayed SBs, drop two SBs, and set six new SBs on critical next steps (MEFP Table 2). - Review schedule and access: - Quarterly schedule of reviews retained until end-June 2022; rephase remaining access under the program in line with quarterly schedule from this review onwards (Table 9b). - Modified and existing exchange restrictions and MCP: - Staff supports temporary retention and extension under Article VIII, given commitment to fully eliminate them when BOP conditions stabilize within next 12 months. - Program financing: - Program remains fully financed. Financing commitments and temporary suspension of debt service under G20 DSSI will help cover public gross external financing needs in FY 2022 and until program end in October 2022 (Table 3b). - Aggregate FY 2022 official financing includes support from: - China: US$6.6 billion (including rollover of US$4 billion SAFE deposits). - UAE: rollover of US$2 billion. - World Bank: US$2.4 billion. - Asian Development Bank: US$1.2 billion. - Islamic Development Bank: US$1 billion. - Other bilateral support under G20 initiative: US$1 billion. - DSSI covers about US$3.8 billion falling due over May 2020–Dec 2021, of which: - US$1.1 billion relate to the second round (January–June 2021). - US$1.0 billion relate to the third round (July–December 2021). ### Debt, IMF exposure, and safeguards - IMF exposure and repayment capacity: - IMF exposure reaches SDR 5,560.34 million (or 274 percent of quota and about 40 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 reforms, high public debt and gross financing needs, low reserves, and global uncertainty from COVID-19. - Mitigation: strong program monitoring, technical assistance (Annex V), and execution of financing commitments. - Safeguards at SBP: - 2019 safeguards assessment found a broadly strong framework: financial reporting, external/internal audit mechanisms, and enterprise-wide risk management. - Areas to strengthen: SBP legal framework (¶24) and phase out involvement in quasi-fiscal activities in the medium term (¶25); amendments to SBP Act and program commitments are addressing these. - 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 to strengthen independent oversight. ### Staff appraisal and policy recommendations - Macroeconomic context: - The economy recovered quickly since summer 2020, but imbalances grew: widening current account deficit, depreciation pressures, and reinforced inflation due to stronger activity, expansionary policy mix, and higher international commodity prices. - Fiscal policy and revenue mobilization: - Sustained implementation of a gradual, revenue-based fiscal adjustment is crucial. - Supplementary budget for FY 2022 targets gradual reduction of the primary deficit via: - High-quality revenue measures to simplify and make tax system fairer (including reforms to the GST system). - Prudent spending restraint while fully protecting social spending. - Reforms already adopted: general sales taxes this FY and corporate taxation last FY; reform of personal income taxation and harmonization of general sales taxes penciled in for FY 2023. - Revenue mobilization combined with careful spending management should create space for development infrastructure and social protection while keeping public debt on a downward trajectory. - Social protection: - Support scaling-up social spending; welcomed finalization of NSER update used to support targeted expansion of BISP beneficiaries. - Caution against launching new programs outside BISP that risk undermining a comprehensive, fully financed, coordinated safety net. - Monetary and financial sector policy: - Monetary tightening is critical to support disinflation: SBP increased policy rate by 275 basis points to 9.75 percent and raised banks’ reserve requirements. - Phase out liquidity-enhancing facilities that support purposes outside SBP’s core mandate over the medium term. - Monetary policy should be data-driven and forward-looking to anchor inflation within SBP’s objective of 5–7 percent over the medium term. - Strengthen oversight of financial institutions, accelerate recapitalization of undercapitalized institutions, and address risks from banks’ housing lending targets. - Continue work to strengthen bank resolution and crisis management frameworks. - Adoption of the SBP Act important to strengthen central bank independence, governance, and move closer to an inflation target regime. - Enhance effectiveness of the AML/CFT framework to complete 2018 and 2021 FATF action plans. *International Monetary Fund — Pakistan Country Report content (chapter 33).* ### 47. Preserving a market-determined exchange rate remains crucial to absorb external ### 47. Preserving a market-determined exchange rate remains crucial to absorb external ### Exchange rate, external position, and reserves - Preserving a market-determined exchange rate is crucial to absorb external shocks, maintain competitiveness, and rebuild international reserves. - For FY 2021, staff finds that the external position was broadly in line with fundamentals and desirable policy settings. - Greater two-way flexibility is justified. - Staff encouraged the authorities to continue to strengthen the central bank balance sheet, including by building buffers. - Strong macroeconomic policies and structural reforms will help further build confidence in the rupee. ### Electricity sector reform - Stronger ownership is critical to advance electricity sector reform to restore the sector’s financial viability and tackle spillovers on the budget, financial sector, and real economy. - Steadfast implementation of the IFI-supported Circular Debt Management Plan (CDMP) will guide planned management improvements, cost reductions, timely alignment of tariffs with cost recovery levels, and better targeting of subsidies to the most vulnerable. - Substantially lowering supply costs requires a modern electricity policy that: - (i) ensures that PPAs do not impose a heavy burden on end-consumers; - (ii) tackles the poor and expensive generation mix, including a wider use of renewables; and - (iii) introduces more competition over the medium term. ### Medium-term structural reforms - A stronger medium-term outlook depends on accelerating structural reforms to boost sustainable and resilient growth, create jobs, and improve social outcomes. - Staff called on the authorities to speed up measures that strengthen economic productivity, investment, and private sector development, including above all: - (i) improving the governance, transparency, and efficiency of the SOE sector; - (ii) fostering the business environment and control of corruption; - (iii) unleashing competitiveness and exports; - (iv) promoting financial deepening and inclusion. - Beyond this, investing more in education and human capital remains crucial for socio-human development and strong growth. ### Risks - Risks continue to be tilted to the downside, both on the domestic and external front. - The outlook for growth, trade, and remittances remains clouded amid the ongoing COVID-19 pandemic, especially at the global level. - Inflation may rise further than expected as commodity prices feed through to domestic prices. - Political tensions over reforms could weaken policy implementation and undermine Pakistan’s adjustment path, debt sustainability, and growth potential. - Reform fatigue and the political cycle could quickly narrow the window to undertake critical reforms. - Tapering, geopolitical tensions, and waning reform efforts could affect external financing conditions. - Close program monitoring, interlinked TA, and financing assurances from key lenders somewhat mitigate those risks. ### Staff support and actions on the EFF sixth review - Staff supports the authorities’ request for completion of the sixth review under the EFF. - In view of the authorities’ recent efforts to strengthen program performance and implement a comprehensive set of corrective measures, staff supports: - (i) granting waivers of nonobservance for the missed continuous PCs; - (ii) rephasing access consistent with the modified review schedule; - (iii) setting new quantitative targets for end-December 2021, end-March 2022, end-June 2022; - (iv) granting a waiver of applicability for end-December 2021 PCs; and - (v) making the disbursement related to the sixth EFF review available for budget support; and - (vi) approving modified and existing exchange restrictions and MCP, because they are temporary, non-discriminatory, and needed for BOP reasons. *Source: IMF staff assessment excerpt (content unit: 1pakea2022001 - 47).* ### 52. It is recommended that the next Article IV consultation with Pakistan be held on the ### It is recommended that the next Article IV consultation with Pakistan be held on the 24-month cycle ### Consultation timing - Recommendation: next Article IV consultation with Pakistan to be held on the 24-month cycle, in accordance with Decision No. 14747– (1096) on consultation cycles. ### Macroeconomic performance and outlook - The economy rebounded sharply in FY 2021, but Pakistan continues to lag regional peers and other EMs in economic convergence. - Real GDP at factor cost: - 2017/18: 5.5 - 2018/19: 2.1 - 2019/20: -0.5 - 2020/21: 1.5 - 2021/22 (Est.): 3.9 - 2022/23 (Prog.): 4.0 - 2023/24 (Proj.): 4.0 - Medium-term projections (2024/25–2025/26): 4.5, 5.0, 5.0, 5.0 (as shown in Table 2) - Inflation (consumer prices, period average): - 2017/18: 3.9 percent - 2018/19: 6.7 percent - 2019/20: 10.7 percent - 2020/21: 8.7 percent - 2021/22 (Est.): 8.9 percent - 2022/23 (Prog.): 8.0 percent - Medium-term (2023/24–2025/26): 9.4, 7.8, 6.5, 6.5, 6.5 (Table 2) ### External sector, reserves, and exchange rate - Gross official reserves (end-period, millions of U.S. dollars): - 2017/18: 9,789 - 2018/19: 7,274 - 2019/20: 12,175 - 2020/21: 14,356 - 2021/22: 17,297 - 2022/23 (Prog.): 17,798 - 2023/24–2025/26 (Proj.): 21,211; 20,678; 20,131; 20,857; 23,064 (Table 3a memo; Table 3a and 3b) - Despite foreign reserves reaching a 5-year high (supported by the SDR allocation), the exchange rate has faced depreciation pressures; improvements to SBP’s derivative position have stopped. - Current account balance (in percent of GDP): - 2017/18: -6.1 - 2018/19: -4.9 - 2019/20: -1.7 - 2020/21: -1.5 - 2021/22 (Est.): -0.6 - 2022/23 (Prog.): -1.8 - Medium-term (2023/24–2025/26): -4.0; -3.5; -3.3; -3.0; -2.7 (Table 2) - Balance on goods, services, and income (2017/18–2025/26, US$ millions): examples: - 2017/18: -42,766 - 2019/20: -29,884 - 2020/21: -31,367 - 2021/22: -34,758 - 2023/24 (Proj.): -45,272 (Table 3a) - Current transfers (net): substantial positive inflows, driven by workers' remittances (e.g., remittances in 2021/22: 29,370; Table 3a). ### Balance of payments and financing - Gross external financing requirements (A) and available financing (B), selected years (US$ millions): - 2018/19: Gross external financing requirements 25,552; Available financing 21,103; Remaining financing needs (C=A-B): 4,449 (Table 3b) - 2021/22 (Est.): Gross external financing requirements 30,417; Available financing 31,275; Remaining financing needs (C=A-B): -858 (Table 3b) - 2022/23 (Prog.): Gross external financing requirements 35,068; Available financing 33,450; Remaining financing needs 1,618 (Table 3b) - Major financing sources (Table 3b, selected lines): - Disbursements (total) 2022/23: 26,120 (Table 3b lines) - Rollover of short-term debt (public and private) constitutes a material portion of official creditor inflows in some years (e.g., rollover of short-term debt 2018/19: 8,244; 2019/20: 12,631; Table 3b) - IMF SDR allocation appears in 2020/21 as 2,767 (Table 3b) - Reserves and related items (Table 3a): 2017/18: 6,141; 2018/19: 1,504; 2019/20: -2,465; 2020/21: -1,116; 2021/22: -5,054; several subsequent projected negative changes reflect drawdowns in some years. ### Fiscal position, public debt, and budget dynamics - Revenue and grants (percent of GDP): - 2017/18: 15.2 - 2018/19: 13.0 - 2019/20: 15.2 - 2020/21: 15.8 - 2021/22 (Est.): 14.5 - 2022/23 (Prog.): 17.0 - Medium-term (2023/24–2025/26): 15.9; 16.7; 16.7; 16.8; 16.9 (Table 4b) - Expenditure (including statistical discrepancy, percent of GDP): - 2017/18: 21.6 - 2018/19: 21.9 - 2019/20: 23.2 - 2020/21: 22.9 - 2021/22 (Est.): 21.6 - 2022/23 (Prog.): 22.5 - Medium-term (2023/24–2025/26): 22.8; 21.1; 21.1; 20.6; 20.4 (Table 4b) - Overall balance (including grants, percent of GDP): - 2017/18: -6.4 - 2018/19: -9.0 - 2019/20: -8.0 - 2020/21: -7.1 - 2021/22 (Est.): -7.1 - 2022/23 (Prog.): -5.5 - Medium-term (2023/24–2025/26): -6.9; -4.4; -4.4; -3.9; -3.5 (Table 4b) - General government debt (incl. IMF obligations, percent of GDP): - 2017/18: 72.1 - 2018/19: 85.3 - 2019/20: 87.6 - 2020/21: 87.7 - 2021/22 (Est.): 83.6 - 2022/23 (Prog.): 83.3 - Medium-term (2023/24–2025/26): 82.0; 77.7; 74.1; 70.1; 66.9 (Table 2 & 4b) - Table 10 (decomposition of public debt and debt service, FY 2020/21–FY 2022/23): total debt stock 2020/21 reported as 268,410 (US$ million); external debt 91,766; domestic debt 176,644. Debt service and creditor breakdowns are presented in detail in Table 10. ### Financial sector and banking - Banking system remains oriented toward providing credit to the government; private sector credit lagged relative to peers despite a rebound from FY 2021 lows aided by SBP’s expanded refinancing schemes. - Selected banking indicators (Table 6 and Figure 3): - Regulatory capital to risk-weighted assets (Dec): 2013: 14.9; 2014: 17.1; 2015: 17.3; 2016: 16.2; 2017: 15.8; 2018: 16.2; 2019: 17.0; 2020: 17.2; 2021 (Dec): 18.7; 2021 (Mar/Jun/Sep/Dec): various readings shown. - Nonperforming loans (NPLs) to gross loans (percent): 2013: 13.3; 2014: 12.3; 2015: 11.4; 2016: 10.1; 2017: 8.4; 2018: 8.0; 2019: 8.6; 2020: 9.1; 2021 (Dec): 9.7; 2021 (Mar/Jun/Sep/Dec): 9.9; 9.2; 9.3; 8.9 (Table 6) - Capital adequacy and profitability: return on assets (after tax) around 0.8–1.5 across years; return on equity (after tax) in the low to mid-teens in many years (Table 6). - Banking-sector liquidity remained high; banks remain well capitalized overall. ### Monetary policy and market indicators - SBP interest rate corridor and policy tightening: SBP recently started to tighten monetary policy after sharp loosening early into the COVID-19 shock; market rates have moved in line with the policy rate (Figure 2). - Broad money growth (annual percent change, Table 1 & Table 5): - 2017/18: 9.7 - 2018/19: 11.3 - 2019/20: 17.5 - 2020/21: 16.0 - 2021/22 (Est.): 16.2 - Reserve money (percent change): 2017/18: 12.7; 2018/19: 19.9; 2019/20: 16.8; 2020/21: 16.5; 2021/22 (Est.): 12.8; (Table 1 & Table 5) ### Vulnerabilities and risks - External vulnerabilities: - Gross external debt in percent of GDP: 2017/18: 30.0; 2018/19: 37.4; 2019/20: 41.6; 2020/21: 42.1; 2021/22 (Est.): 39.1 (Table 8) - Gross external financing requirement (US$ billions): examples across years: 2017/18: 28.5; 2018/19: 26.6; 2019/20: 19.8; 2020/21: 16.5; 2021/22: 14.8; projected increases in subsequent years (Table 8 memo and Table 3b) - Public sector financing requirements remain large (gross PS financing requirement in percent of GDP: 2017/18: 31.7; 2018/19: 36.7; 2019/20: 29.1; 2020/21: 27.7; 2021/22: 23.3; Table 8) - Sovereign bond spreads and market volatility: Pakistan’s bond spreads have widened, reflecting ongoing uncertainty; stock market volatility is pronounced relative to regional peers (Figure 2). ### Key statistics and memoranda (selected exact figures) - Population: 212.5 million (2020/21) - Main exports: Textiles (US$15.4 billion, 2020/21) - Per capita GDP: US$1,394.1 (2020/21) - Unemployment: 6.9 percent (2018/19) - Poverty rate: 21.9 percent (at national line; 2018/19) - Nominal GDP (market prices, billions of Pakistani rupees, memorandum): - 2017/18: 34,616 - 2018/19: 38,086 - 2019/20: 41,556 - 2020/21: 45,778 - 2021/22 (Est.): 47,709 - 2022/23 (Prog.): 52,057 - 2023/24 (Proj.): 54,382 - Medium-term projections up to 2025/26: 61,682; 68,953; 77,799; 86,950 (Tables 1 and 2) _Italic: Sources: Pakistani authorities; World Bank; Bloomberg; IMF World Economic Outlook Database; and IMF staff calculations and estimates (as presented in the source content)._ ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### EXTERNAL RISKS - Intensified geopolitical tensions and security risks (Geopolitical tensions in selected countries/regions (notably Afghanistan)) - Relative Likelihood: High - Time Horizon: Short Term - Expected Impact: High - Findings - Geopolitical tensions cause economic/political disruption, disorderly migration, higher volatility in commodity prices (if supply is disrupted), and lower confidence, with spillovers to other countries (including Pakistan). - Financial volatility raises risk aversion, causing financing pressures and capital outflows from emerging markets, including Pakistan. - Inflow of refugees and concessions to interest groups raise spending or lower growth, weakening the underlying fiscal position. - Weaker confidence and supply disruptions drag on economic growth. - Policy Response - Implement strong policies and strengthen institutions as a foundation of strong and sustainable growth. - scale up targeted social assistance. - Resist pressures to weaken fiscal discipline and preserve fiscal and debt sustainability. - Build fiscal and external buffers. - Uncontrolled COVID-19 local outbreaks and subpar/volatile growth in affected countries - Relative Likelihood: High - Time Horizon: Short Term - Expected Impact: Medium - Findings - Outbreaks in slow-to-vaccinate countries force new lockdowns. - For many Emerging Markets and Low-Income Countries, policy response to cushion the economic impact is constrained by lack of policy space, with some market access countries facing additional financial tightening as a reassessment of growth prospects triggers capital outflows, depreciations, and debt defaults. - Disruptions in supply chains and distribution channels weakening economic activity and raising prices. - Worsening sentiment and lower demand for Pakistan’s assets resulting in the deterioration of the stock market, increased funding costs, and/or reduced capital inflows. - Policy Response - Reallocate resources to health spending to accelerate the vaccination drive and efficiently manage the pandemic. - Provide targeted support to the vulnerable, while maintaining fiscal and debt sustainability. - Maintain market-determined exchange rate, while intervening during disorderly market conditions. - Maintain financial stability. - Global resurgence of the COVID-19 pandemic - Relative Likelihood: Medium - Time Horizon: Short Term - Expected Impact: Medium - Findings - Local outbreaks lead to a global resurgence of the pandemic (possibly due to vaccine-resistant variants), which requires costly containment efforts and prompts persistent behavioral changes rendering many activities unviable. - Disruptions in trade channels leading to lower exports as main trading partners experience slowdown. - Financial volatility raises risk aversion, raising financing pressures and driving capital outflows. - Weakening global demand decreases commodity prices. - Policy Response - Accelerate the vaccination drive and provide targeted support. - Maintain market-determined exchange rate to support competitiveness, while intervening only during disorderly market conditions. - Maintain financial stability. - Disorderly transformations - Relative Likelihood: Medium - Time Horizon: Medium Term - Expected Impact: Medium - Findings - COVID-19 triggers structural transformations, but the reallocation of resources is impeded by labor market rigidities, debt overhangs, and inadequate bankruptcy resolution frameworks. - Withdrawal of COVID-19-related policy support undermines growth prospects and increases unemployment, with adverse social/political consequences. - Adjustments in global value chains and reshoring shift production activities across countries, potentially lowering exports as main trading partners resort to more agile economies. - In the absence of efficient reallocation of domestic resources, structural change weighs down on growth and increases unemployment. - Policy Response - Preserve fiscal and debt sustainability. - Create fiscal space to invest in infrastructure and human capital. - Enhance bankruptcy resolution frameworks. - Enact labor market reforms to limit rigidities and inefficiencies in both the private and the public sectors. - Maintain market-determined exchange rate to support competitiveness. - De-anchoring of inflation expectations in the U.S. leads to rising core yields and risk premia - Relative Likelihood: Medium - Time Horizon: Short to Medium Term - Expected Impact: Medium - Findings - A fast recovery in demand (supported by excess private savings and stimulus policies), combined with COVID-19-related supply constraints, leads to sustained above-target inflation readings and a de-anchoring of expectations. - The Fed reacts by signaling a need to tighten earlier than expected, resulting repositioning by market participants and a front-loaded tightening of financial conditions and higher risk premia for credit, equities, and emerging and frontier market currencies. - Worsening sentiment and lower demand for Pakistan’s assets resulting in increased funding costs or reduced capital inflows. - Stock market deteriorates. - Reduced interest in privatization portfolio. - Policy Response - Maintain market-determined exchange rate to support competitiveness. - Continue building fiscal and external buffers. - Decisive progress on structural reforms should anchor confidence and improve competitiveness. - Maintain an appropriate medium-term debt strategy. - Maintain financial stability to weather external shocks, tighten supervision to monitor banking risks. - Rising commodity prices amid bouts of volatility - Relative Likelihood: Medium - Time Horizon: Short to Medium Term - Expected Impact: Medium/ High - Findings - Commodity prices increase by more than expected against a weaker U.S. dollar, post-pandemic pent-up demand and supply disruptions, and accelerated plans for renewable energy adoption. Uncertainty leads to bouts of volatility, especially in oil prices. - Higher energy prices could weaken energy sector’s financial position, especially if not permitted to pass along price increases, leading to buildup of more arrears. - Higher headline inflation. - Policy Response - Short term: Allow energy prices increases to be passed through to end-users. - Short term: Press ahead with reforms of the energy sector. - Medium term: Maintain financial stability to weather external shocks. - Higher frequency and severity of natural disasters related to climate change - Relative Likelihood: Medium - Time Horizon: Medium to Long Term - Expected Impact: Medium - Findings - Severe events in smaller economies cause severe economic damage and accelerate emigration; a sequence of severe events in large economies reduces global GDP and prompts a recalculation of risk and growth prospects. - Disasters hitting key infrastructure or disrupting trade raise commodity price levels and volatility. - Weaker confidence and supply disruptions drag on economic growth. - Higher risk aversion, and higher risk premia leading to financing pressures and capital outflows from vulnerable countries. - Trade disruptions leading to higher commodity price levels and volatility, heightening external imbalances. - Disorderly migration. - Policy Response - Implement strong policies and strengthen institutions as a foundation of strong and sustainable growth. - Maintain market-determined exchange rate to support competitiveness. - Maintain financial stability. - Advance policies and reforms aiming at climate risk mitigation, adaptation, and transition to a low-carbon economy. - Build fiscal and external buffers. ### DOMESTIC RISKS - Slippages in policy implementation - Relative Likelihood: High - Time Horizon: Short to Medium Term - Expected Impact: High - Findings - Pressures on the government could rise to provide incentives/exemptions to key groups. - Political resistance or hesitation to delivering on structural reforms could undermine effective reform implementation and lessen the prospects for durable adjustment and sustainable and inclusive growth. - Weaker fiscal discipline could compromise the quality and durability of fiscal adjustment; expose debt sustainability risks. - Unfinished structural reform agenda would reduce growth prospects, preserve over-reliance on the public sector and large informal economy, and leave unaddressed contingent liabilities. - Subdued economic growth. - Policy Response - Implement strong policies and strengthen institutions as a foundation of strong and sustainable growth. - Resist pressures to weaken fiscal discipline and preserve fiscal sustainability. - Build external buffers. - Foster more inclusive growth through scaling up targeted social assistance. - Improve external competitiveness and reduce red tape to reduce the costs of doing business. - Deterioration in security conditions - Relative Likelihood: Medium - Time Horizon: Short to Medium Term - Expected Impact: Medium/ High - Findings - Regional tensions and possible retaliation against ongoing domestic security operations could increase security concerns. - Eroded confidence and discouraged investment would disrupt economic activity and reduce growth prospects. - Increased military spending/ fiscal burden could strain fiscal sustainability. - Policy Response - Instill confidence through strong implementation of the economic stabilization program and structural reforms. - Maintain engagement with donors. - Build external buffers. - Preserve fiscal sustainability. ### Bottom line assessment and notes - Bottom line assessment: The balance of risks is tilted to the downside. - Notes on the Risk Assessment Matrix (RAM) - The RAM shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). - The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). - The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. - “Short term” and “medium term” are meant to indicate that the risk could materialize within one year and three years, respectively. *Annex I. Risk Assessment Matrix — INTERNATIONAL MONETARY FUND* ### 5. The authorities have remained engaged with external creditors to secure financing to ### 1pakea2022001 - 5. The authorities have remained engaged with external creditors to secure financing to ### External financing and creditor engagement - Authorities secured external financing measures to meet program debt sustainability objectives. - China actions: - Renewed (and augmented) the US$4.6 billion swap (US$3 billion at the time of EFF approval). - Renewed maturing commercial loans, though some at shorter maturity. - Provided an additional US$1 billion loan in July 2020 through the State Administration of Foreign Exchange, raising its deposits to US$4 billion. - Recent additional support: - Secured a US$3bn deposit at the central bank. - Secured a deferred oil financing facility from Saudi Arabia. - G-20 Debt Service Suspension Initiative (DSSI): - Recently extended by a third round until December 2021. - Has provided around US$3.8 billion in total (1.3 percent of FY 2021 GDP) of debt service suspension and rescheduling to outer years. - Risk assessment: - Despite these measures, near term financing risks remain elevated, reflecting the large size of public sector amortization needs. ### Public debt dynamics and baseline projections (selected figures from Public DSA) - Nominal gross public debt (2019–2026): 68.1, 90.5, 93.2, 88.6, 86.7, 82.1, 78.1, 73.8, 70.4 - (Figure presented as "Nominal gross public debt68.190.593.288.686.782.178.173.870.4") - Of which: guarantees (2019–2026): 2.9, 5.2, 5.6, 5.0, 4.8, 4.4, 4.0, 3.8, 3.6 - Public gross financing needs (percent of GDP, selected): 30, 36.6, 29.0, 27.7, 29.1, 25.0, 23.4, 20.6, 19.1 - (presented as "Public gross financing needs3036.629.027.729.125.023.420.619.15") - Sovereign spreads: - EMBIG (bp): 575 - 5Y CDS (bp): 395 - Macroeconomic assumptions (selected): - Real GDP growth (2019–2026): 4.4, 2.1, -0.5, 3.9, 4.0, 4.5, 5.0, 5.0, 5.0 - Inflation (GDP deflator, in percent, 2019–2026): 4.9, 7.8, 9.6, 10.5, 9.6, 8.5, 6.5, 7.4, 6.4 - Nominal GDP growth (in percent, 2019–2026): 9.6, 10.0, 9.1, 14.8, 14.0, 13.4, 11.8, 12.8, 11.8 - Effective interest rate (in percent, 2019–2026): 7.7, 8.4, 8.1, 7.7, 7.5, 7.9, 7.8, 7.6, 8.0 - Contribution to changes in public debt (cumulative to 2026): - Change in gross public sector debt cumulative: -22.8 - Identified debt-creating flows cumulative: -25.9 - Primary deficit (selected annual values; cumulative to projection year shown as -3.1): 1.8, 3.5, 1.7, 1.3, 1.2, -1.3, -1.3, -1.4, -1.5 - Primary (noninterest) revenue and grants (in percent of GDP): 14.6, 13.0, 15.2, 14.5, 15.9, 16.7, 16.7, 16.8, 16.9, 97.5 (table format in source) - Primary (noninterest) expenditure (in percent of GDP): 16.4, 16.4, 16.9, 15.8, 17.1, 15.4, 15.4, 15.4, 15.4, 94.4 (table format in source) - Automatic debt dynamics: - Total automatic debt dynamics (selected/yearly): 0.0, 6.4, 0.6, -5.8, -5.0, -4.2, -2.9, -3.6, -2.5, cumulative -24.1 - Interest rate/growth differential (selected): -1.1, -1.1, -0.9, -5.8, -5.0, -4.2, -2.9, -3.6, -2.5, cumulative -24.1 - Real interest rate contribution (selected): 1.6, 0.3, -1.3, -2.6, -2.0, -0.8, 0.8, -0.1, 0.8, cumulative -3.8 - Real GDP growth contribution (selected): -2.7, -1.4, 0.4, -3.2, -3.1, -3.4, -3.7, -3.5, -3.3, cumulative -20.2 - Other identified debt-creating flows (selected): 0.8, 3.3, -0.1, 2.0, -0.7, 0.0, 0.0, 0.0, 0.0, cumulative 1.2 - Residual, including asset changes (selected): -0.1, 1.0, 0.4, -2.1, 2.7, 0.9, 0.3, 0.8, 0.6, cumulative 3.1 ### Alternative scenarios and composition of public debt - Baseline underlying assumptions (selected, 2021–2026): - Real GDP growth (2021–2026): 3.9, 4.0, 4.5, 5.0, 5.0, 5.0 - Inflation (2021–2026): 10.5, 9.6, 8.5, 6.5, 7.4, 6.4 - Primary Balance (2021–2026): -1.3, -1.2, 1.3, 1.3, 1.4, 1.5 - Effective interest rate (2021–2026): 7.7, 7.5, 7.9, 7.8, 7.6, 8.0 - Historical scenario (selected differences from baseline): - Real GDP growth (historical scenario 2021–2026): 3.9, 3.6, 3.6, 3.6, 3.6, 3.6 - Primary Balance (historical scenario 2021–2026): -1.3, -2.1, -2.1, -2.1, -2.1, -2.1 - Effective interest rate (historical scenario 2021–2026): 7.7, 7.5, 8.3, 8.3, 8.2, 8.5 - Constant Primary Balance Scenario: - Primary Balance held at -1.3 for 2021–2026, with corresponding effective interest rate path shown in source. - Composition charts (presented in figures): show gross nominal public debt, public gross financing needs, by maturity (medium and long-term vs short-term), and by currency (local vs foreign currency-denominated) across 2019–2026. ### Stress tests and sensitivity analysis (selected scenarios) - Stress tests presented include: Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock, Contingent Liability Shock. - Selected underlying assumptions in stress tests (examples given in source): - Real GDP growth under Real GDP Growth Shock (2021–2026): 3.9, 2.2, 2.8, 5.0, 5.0, 5.0 - Inflation under Real GDP Growth Shock (2021–2026): 10.5, 9.2, 8.1, 6.5, 7.4, 6.4 - Primary balance under Primary Balance Shock (2021–2026): -1.3, -2.0, 0.5, 1.3, 1.4, 1.5 - Effective interest rate under Real Interest Rate Shock (2021–2026): 7.7, 7.5, 7.9, 10.3, 10.8, 11.6 - Real exchange rate shock example: inflation path includes a value "20.2" in one year as presented in source. - Stress outcomes (figures show): increases in gross nominal public debt (percent of GDP) and public gross financing needs (percent of GDP) under various shocks; charts present debt rising materially under combined and real depreciation shocks. ### External debt sustainability (Table 1 highlights) - Baseline external debt (2016–2026, percent of GDP): 26.1, 27.0, 30.0, 37.4, 41.6, 39.1, 40.6, 40.1, 39.1, 37.7, 35.2 - Debt-stabilizing non-interest current account (percent of GDP): -2.4 (presented at top of table) - Change in external debt (2016–2026): 2.4, 0.9, 3.0, 7.4, 4.2, -2.5, 1.5, -0.5, -1.0, -1.4, -2.5 - Identified external debt-creating flows (2016–2026): 0.3, 1.0, 4.5, 8.2, 2.9, -1.4, 1.9, 0.9, 0.5, 0.2, -0.1 - Current account deficit, excluding interest payments (2016–2026): 1.0, 3.2, 5.2, 3.5, 0.3, -0.3, 2.9, 2.3, 2.1, 1.8, 1.5 - Deficit in balance of goods and services (2016–2026): 8.2, 10.1, 11.9, 11.8, 9.3, 10.1, 12.6, 11.5, 11.1, 10.4, 9.9 - Exports (percent of GDP, 2016–2026): 9.9, 9.2, 9.8, 10.9, 10.7, 10.5, 11.4, 11.1, 11.0, 10.9, 10.8 - Imports (percent of GDP, 2016–2026): 18.0, 19.2, 21.7, 22.7, 20.0, 20.6, 24.0, 22.7, 22.1, 21.3, 20.7 - Net non-debt creating capital inflows (percent of GDP, 2016–2026): -0.9, -0.8, -0.9, -0.5, -1.0, -0.6, -0.7, -0.9, -1.0, -1.0, -1.0 - Automatic debt dynamics (2016–2026): 0.1, -1.5, 0.2, 5.2, 3.6, -0.5, -0.3, -0.5, -0.6, -0.6, -0.5 - Residual, incl. change in gross foreign assets (2016–2026): 2.1, -0.1, -1.5, -0.9, 1.3, -1.1, -0.4, -1.5, -1.4, -1.6, -2.4 - External debt-to-exports ratio (in percent, 2016–2026): 265.0, 294.7, 306.9, 342.6, 388.8, 370.8, 355.7, 360.4, 354.7, 345.3, 324.9 - Gross external financing need (in billions of US dollars, 2016–2026): 11.6, 22.0, 28.5, 26.6, 19.8, 21.6, 30.4, 35.1, 41.9, 39.1, 36.6 ### Annex III — General Sales Taxation (GST) and competitiveness: key findings - Structural features and administrative fragmentation: - Pakistan is a federation with taxation powers shared between federal government and provinces. - Sales tax base is fragmented: services taxed at provincial level, goods at federal level. - Taxpayers must interact with four separate sales tax administrations—one in each province—plus the FBR. - Multi-jurisdictional inputs mean federal and provincial revenue authorities interact repeatedly in each transaction, making crediting incomplete and creating disputes over base definition and coverage, leading to double taxation for businesses. - Cascading effect and export pricing: - The current GST system has a cascading effect because there is no systemic mechanism to ensure that all tax paid on input can be credited against the final sale (the output tax). - This results in cumulative taxation of intermediate inputs, divergence of nominal and effective tax rates, and unrecovered tax embedded in exports. - The DSSI-related numerical example: Pakistani exports carry unrecovered tax on their input, causing exporters’ prices to be systemically higher than those in countries without the cascading effect. - Revenue concentration: Manufacturing accounts for only 14 percent of GDP but represents 58 percent of total tax revenue (cited ADB, 2018). - Impact on value-added and global value chains (GVC): - The cascading GST system creates an incentive for low value-added production and hampers integration in GVCs. - Distorted relative prices across the value chain encourage inefficient production choices and discourage adoption of advanced technology. - Export structure concentration: textile exports constitute 60 percent of total exports; food exports constitute 20 percent of total exports. Textile exports are mainly simple knitwear, bed wear, cotton cloth, and readymade garments; food exports are mostly rice and fish. - Administrative drivers of crediting problems: - Problems with crediting are only in part due to tax policy features; administrative issues (information sharing and refund delays) also contribute. *Source: IMF staff.* ### References ### References ### Bibliographic citations - Ehtisham Ahmad, 2011, “Why is it so Difficult to Implement a GSTA in Pakistan,” International Growth Center. - M. Khan, 2018, “Analysis of Pakistan’s Export Performance Main Challenges and Issues,” Asian Development Bank. ### Box 1 — Pakistan: Illustrative Case on the Cascading Effect of GST in Pakistan - Scenario summary: - Example follows a three-stage production chain: Cotton Ginning → Textiles → Export (garment factory). - GST rate used: 10 percent. - Input credit available only for goods inputs (note: fragmented tax base prevents crediting input tax on services initially). - Stage 1 — Cotton ginning company: - Purchased raw materials (goods): PRs 1,000. - Purchased services: PRs 500. - Input VAT paid on goods: PRs 100. - Input VAT paid on services: PRs 50. - Total input tax paid: PRs 100 (federal) + PRs 50 (province) = PRs 150. - Total input costs reported: (1000+500+100+50) = 1650. - Value added: PRs 100. - Sale price in fragmented system: total input costs (1650) + value added (100) - input tax credited after sale on goods (100) = PRs 1650 (instead of PRs 1600 in fully harmonized GST). - Output tax collected at sale: PRs 165. - Refund/credit available only for goods input tax: PRs 100. - Net tax paid by cotton ginning company: 165–100 = PRs 65, instead of 160–100–50 = PRs 10 under fully harmonized GST. - Effective VAT rate at this stage: 65 percent (tax paid/value added), versus nominal 10 percent. - Stage 2 — Textile manufacturer: - Purchased cotton fiber: PRs 1650 (on which sales tax PRs 165). - Purchased input services: PRs 800. - Input taxes paid: PRs 245 = PRs 165 (on goods) + PRs 80 (on services). - Value added: PRs 200. - Sale price to garment factory: PRs 2,730 = 2,308 + 10 percent GST (230.8). - Net tax paid by textile manufacturer in fragmented system: PRs 108, while in fully harmonized GST the producer would pay PRs 20. - Production costs for textile manufacturer are PRs 40 higher compared to fully harmonized tax base regime. - Final stage — Garment factory and exports: - Exports are zero-rated, but because previous stages carried unrecovered service input taxes, exporters face higher pre-tax prices and not all taxation is removed from exports. - Additional costs are incurred in each segment of the production value chain, disadvantaging exporters in international markets. - Table excerpt (stage-level numeric fidelity): - Stage labels: Stage 1 (Cotton Ginning), Stage 2 (Textiles), Stage 3 (Export) - Input costs (goods): 1000 / 1000 / 1650 / 1600 / 2730 / 2600 (as presented in table layout) - Input costs (services): 500 / 500 / 800 / 800 / 10 / 10 - Input VAT (@10%) goods: 100 / 100 / 165 / 160 / 273 / 260 / 273 / 260 (table cells as presented) - Input VAT (@10%) services: 50 / 50 / 80 / 80 / 1 / 1 - Total input costs: 1650 / 1650 / 2695 / 2640 / 3014 / 2871 (as presented) - Value Added: 100 / 100 / 200 / 200 / 10 / 10 - Output price: 1650 / 1600 / 2730 / 2600 / 2751 / 2620 - Output VAT (@10%; Exports @0%): 165 / 160 / 273 / 260 / 0 / 0 - Total output price: 1815 / 1760 / 3003 / 2860 / 2751 / 2620 - Net VAT payable(+)/refund(-): 65 / 10 / 10 / 82 / 0 / 0 - Effective VAT rate (%): 65.0 / 10.0 / 54.0 / 10.0 - Footnote: 1/ Input credit only available for goods inputs. - Note: Effective VAT rate is expressed as a percentage of value added at that stage of the production process. ### Annex IV — External Sector Assessment (FY 2021) - Summary assessment: - Pakistan’s external position in FY 2021 assessed to have been broadly in line with fundamentals and desirable policies. - Current account improved from a peak of 6.1 percent of GDP in FY 2018 to 0.6 percent of GDP in FY 2021 (July-June). - Drivers: surge in remittances and moderation of the trade deficit over FY 2020 and FY 2021; commitment to exchange rate flexibility supported reserves buildup. - Ongoing vulnerabilities: reserves still below adequate levels, sizable external financing needs, potential exchange rate pressure as domestic demand picks up. - Policy recommendation: continued commitment to exchange rate flexibility and advancing structural reforms to improve export competitiveness. - Current account and remittances: - Trade deficit: 9½ percent of GDP in FY 2021. - Remittances: 9.8 percent of GDP in FY 2021. - Financial account and IIP: - Financial account balance hovered around US$8–12 billion over FY 2019–21. - Financial account structure relies on debt-creating flows rather than FDI; FDI remained relatively limited over the last decade. - Net portfolio flows turned positive in FY 2021 due to government’s recent Eurobond issuance. - Net International Investment Position (IIP) slightly declining and dominated by debt instruments on the liability side. - Reserves: - Gross reserves improved by about US$10 billion since onset of the EFF-supported program; stood at $17.3 billion in June 2021 (3 months of import coverage, up from pre-program 1.7 months). - Reserves remained below adequacy level per ARA metric (74 percent in June 2021). - EBA (External Balance Approach) results, FY 2021 (Table 1): - CA-Actual: -0.6 (percent of GDP). - Cyclical contributions (from model): 0.1. - Additional temporary/statistical factors 1/: 0.7 (staff estimated adjustor for remittances = -0.7; negative indicates revising actual CA down). - Adjusted CA (cyclical and other): -1.4. - CA norm: -2.2 / -1.4 (depending on model column). - CA GAP: 0.8 / 0.7 (by model). - Semi-elasticity of CA/GDP to REER: 0.11 / 0.11. - REER Gap (- is undervaluation): -7% / -4% / -6% (from CA, REER, ES models respectively). - Interpretation: CA gap of 0.8 percent of GDP in FY 2021 based on EBA Current Account model, within range {-1,1}, considered broadly in line with fundamentals and desired policies; suggests modest REER undervaluation of about 7 percent for FY 2021; REER-based EBA model and External Stability model suggest modest undervaluation of 4-6 percent. - Caveats and outlook: - Assessment subject to significant model uncertainty and uncertainty over temporary versus permanent pandemic impacts. - Since May 2021, widening of capital account and trade deficits, increase in commodity prices, exchange rate developments, and central bank interventions have somewhat weakened external position. - Policy recommendations: continued exchange rate flexibility, fiscal adjustment, and structural reforms to boost competitiveness to converge external position to levels conducive to external stability and building buffers. ### Annex V — Agenda for Technical Assistance (IMF FYs 2019/20–2021/22) - Receiving agencies listed: MOF (Ministry of Finance), MOI (Ministry of Interior), FBR (Federal Board of Revenue), SBP (State Bank of Pakistan), PBS (Pakistan Bureau of Statistics). - Fiscal Affairs Department (FAD) engagements (status: ongoing since FY 2019/20 unless noted): - Medium-term tax policy: including on general sales tax (GST) harmonization, corporate income tax (CIT) simplification, and tax policy diagnostics — FBR/MOF, ongoing since FY 2019/20. - Public financial management: cash management and treasury functions, fiscal risks, and PFM law — MOF, ongoing since FY 2019/20. - Revenue administration: tax administration diagnostics, compliance risk management, reform of the inland revenue service — FBR, ongoing since FY 2019/20. - Sustainable development goals (SDG) costing — MOF, delivered FY 2019/20. - Legal Department (LEG): - State-owned enterprise law — MOF, delivered FY 2020/21. - State-owned enterprise governance — MOF, delivered FY 2019/20. - AML/CFT (incl. supervision and legislative drafting) — SBP/MOF/MOI, ongoing since FY 2019/20. - Bank resolution framework (jointly with MCM) — SBP, partly delivered FY 2021/22, more upcoming. - Central bank law reform — SBP, delivered FY 2019/20. - Monetary and Capital Markets Department (MCM): - Debt management — MOF, delivered FY 2019/20. - Banking resolution framework (jointly with LEG) — SBP, partly delivered FY 2021/22, more upcoming. - Cyber risks — SBP, delivered FY 2019/20. - Statistics Department (STA): - National Accounts rebasing — PBS, planned for FY 2021/22. - Note 2/: Technical assistance may be delivered in multiple missions and/or continuously, including remotely. ### Appendix I — Letter of Intent (Islamabad, December 17, 2021) - Public health and vaccination status: - As of November 30, positivity rate around 1 percent; new daily cases less than 400. - Objective: fully vaccinate 70 million people in CY 2021. - As of end-November: fully vaccinated 51.1 million people; an additional 30 million received a single dose. - Economic recovery and vulnerabilities: - Provisional growth FY 2021: 3.9 percent (Pakistan Bureau of Statistics). - Inflation in FY 2021: 8.9 percent yoy; core inflation: 6.6 percent. - Current account deficit improved to 0.6 percent of GDP in FY 2021. - Emerging vulnerabilities: widening current account deficit, elevated inflation due to higher international commodity prices, stronger economic activity, and accelerating government spending. - Monetary and macro-financial measures taken: - Key policy rate raised cumulatively by 275 basis points since September to 9.75 percent as of mid-December 2021. - Revised prudential regulations for consumer financing. - Imposed a 100 percent cash margin on additional import items. - Raised average cash reserve requirement (CRR) to 6 percent. - Fiscal measures and prior actions referenced: - National assembly to adopt a supplementary finance bill to ensure delivery of a zero percent of GDP adjusted primary balance based on: - (i) adopting an appropriate GST reform and withdrawing the zero-rated GST on some domestic industries; - (ii) ensuring fuel excises will deliver agreed revenues; - (iii) reversing preferential tax treatments introduced in the FY 2022 budget. - Lowered spending while protecting social spending. - For the first time, guarantees expected to be issued in remainder of FY 2022 will be laid before the National Assembly and treated as a ceiling. - Prior actions for the review include: - (i) parliament to adopt amendments to the State Bank of Pakistan Act (to be signed into law); - (ii) an ex-post audit of procurement of COVID-19 related supplies and social payments during FY 2020 to be conducted by the Auditor General and published on the Ministry of Finance website (end-April 2021 SB); - (iii) publication of key information of all COVID-related awarded procurement contracts on the Public Procurement Regulatory Authority (PPRA) website (end-April 2021 SB). - Program performance and breaches: - Quantitative program performance strong: all but one end-June 2021 and three continuous performance criteria (PCs) were observed. - Observed PCs included floor on net international reserves (NIR), net general government budgetary borrowing from SBP, net domestic assets (NDA) of the SBP, SBP’s stock of net foreign currency swaps/forward position, and government guarantees. - Missed: ceiling on general government primary budget deficit. - Breaches caused by policy actions: - Extension of 100 percent cash margin to additional 114 import items resulted in breach of PCs on non-imposition/non-intensification of exchange restrictions and on non-imposition/non-modification of Multiple Currency Practice (MCP). - SBP on-lent SDR allocation to federal government for vaccine budget financing, breaching PC on zero new flow of SBP credit to government. - Missed indicative targets (ITs) for end-June 2021: - (i) floor on targeted cash transfers spending (BISP) missed because PRs 5 billion were spent by Poverty Alleviation Fund and not counted under IT definition. - (ii) floor on gross issuance of PIBs, Sukuks, and Eurobonds missed due to reduced investor appetite, bottlenecks in Sukuk issuance, and delayed Eurobond issuance. - Requests to IMF: - (i) waiver of applicability for end-December 2021 QPCs; - (ii) waivers of nonobservance for missed continuous PCs on exchange restrictions/MCP and zero new flow of SBP credit to government; - Rephasing of access and modification of review schedule due to delays in completing the review and to better align with reform agenda. - Program monitoring to continue via quarterly reviews and conditionality per MEFP and TMU. - Request completion of sixth review under the EFF and disbursement of SDR 750 million. - Commitments: - Continue to consult with IMF on adoption of additional measures and supply timely and accurate data for program monitoring. - Consent to IMF publication of this letter, the MEFP, the TMU, and accompanying Executive Board documents. ### Attachment I — Memorandum of Economic and Financial Policies (excerpt: Recent Economic Developments and Outlook) - Key indicators and outlook: - Provisional FY 2021 growth: 3.9 percent (supported by large scale manufacturing, construction, wholesale and retail trade). - High frequency indicators point to acceleration; business sentiment reached record high since 2018. - FY 2021 inflation: 8.9 percent yoy; core inflation: 6.6 percent. - Current account deficit improved sharply to 0.6 percent of GDP in FY 2021. - Gross reserves achieved highest level in more than 4.5 years. *Source: 1pakea2022001 - References (PDF).* ### 2. However, as our recovery picked up speed in Q4 FY 2021 there have been signs of ### 1pakea2022001 - 2. However, as our recovery picked up speed in Q4 FY 2021 there have been signs of ### Macroeconomic developments and baseline outlook - Recovery picked up speed in Q4 FY 2021 with strong growth momentum continuing into Q1 FY 2022. - Emerging imbalances exacerbated by a sizeable swing in our terms of trade. - Current account deficit has experienced a substantial widening since June, fueled by an accommodative monetary-fiscal policy mix and rising international commodity prices. - As of end-October 2021: - imports have topped US$5 billion for five consecutive months, - the exchange rate has steadily depreciated since May, - inflationary pressures from energy and food prices have remained. - Baseline macroeconomic scenario (reflecting recent developments and agreed policies): - Real GDP is expected to expand close to 5 percent in FY 2022 and will gradually rise to above 5 percent over the medium term. - Annual headline CPI inflation is projected to average 9-11 percent in FY 2022. - Over the medium-term inflation is expected to remain at the upper end of SBP’s 5-7 percent inflation range. - The current account deficit is expected to widen in FY 2022 to around 4 percent of GDP and settle at about 2 to 3 percent of GDP in the medium term. - Reserve cover is expected to strengthen, including on the back of the SDR allocation, and remain at about three months of imports. - External financing will continue to rely mostly on official and multilateral creditors, but also on issuances of Eurobonds and international Shariah compliant Sukuks. ### Risks to the baseline - Upside risks: - Successful and swift rollout of vaccines in Pakistan. - Global economic recovery. - Downside risks: - Increased demand and higher-than-expected international commodity prices widening the current account deficit and increasing external vulnerabilities. - Delays in implementing structural reforms, particularly tax reform and power sector, may compromise durability of fiscal adjustment and hamper public debt reduction and recovery. - Geopolitical tensions, especially from Afghanistan, could cause economic/political disruptions, disorderly migration, disrupt prices and the exchange rate, weaken growth prospects, increase risk premia, and tighten external financing conditions. - Program mitigating factors: - Structural changes since the start of the program include a flexible exchange rate, fiscal consolidation of 2.2 percent of GDP despite COVID-19 during the first two years, and adherence to zero central bank financing of the budget, which negate the risk of a boom-bust cycle. ### FY 2021 fiscal outturn and early FY 2022 developments - FY 2021: - General government posted a primary deficit of 1.4 percent of GDP, marking a 0.4 percent of GDP improvement on top of the 1.8 percent of GDP improvement in FY 2020. - Missed the underlying program target by 0.1 percent of GDP due to lower non-tax revenue collection and higher late-year spending. - Q1 FY 2022: - Spending increased by 38 percent, mostly due to procurement of COVID-19 vaccines and subsidies. - FBR tax revenue grew strongly by 38 percent yoy, driven mainly by import taxes. - Overall primary surplus was smaller than envisaged. - Deficit target for end-FY 2022 was at risk of being exceeded by a wide margin on underlying trends and policy measures. ### Revised FY 2022 legislation and fiscal stance - Adopt a supplementary finance bill for FY 2022 (to be signed into law by the President after national assembly approval) aiming to balance supporting growth while remaining on the path of fiscal consolidation (PA). - Revised FY 2022 legislation aims for an underlying general government primary balance of 0 percent of GDP—excluding PRs 352 billion COVID-19 vaccine-related spending and payments related to clearance of outstanding arrears to some IPPs. - This amounts to a moderate primary fiscal adjustment of 0.1 percent of GDP compared to the previous year. - Will support a reduction of public debt to about 82 percent of GDP by end-FY 2022. - For the first time all guarantees expected to be issued in FY 2022 will be laid before the National Assembly and treated as a ceiling. ### Revenue measures (key elements) - Federal tax revenue projected to grow by more than 25 percent, supported by durable fiscal reforms and tax administration efforts. - Petroleum development levy (PDL) on gasoline and diesel: - Raise PDL by PRs 8/liter (PA). - Commit to raise PDL by PRs 4/liter per month for the remainder of FY 2022 until the maximum of PRs 30/liter is achieved. - Commitments: - Not granting further tax amnesties (continuous SB). - Avoiding the practice of issuing new preferential tax treatments or exemptions (continuous SB). - General sales tax (GST) reform: - Estimated to yield 0.5 percent of GDP in FY 2022 (0.8 percent of GDP in annualized terms). - Measures include eliminating most zero-rated goods (Fifth Schedule), removing reduced rates under the Eighth Schedule, eliminating most exemptions (Sixth Schedule) with small subset preserved, removing the Ninth Schedule and replacing a specific tax rate for cell phones with the standard rate for CBU condition imports priced at US$200 or more, and raising point of sale (POS) GST to the standard rate. - About 60 percent of tax expenditures were removed. - Fertilizers, pesticides, and tractors currently account for 23 percent of total tax expenditures; a more equitable subsidy scheme will be designed and implemented in the FY 2023 budget after deliberations in the Fertilizer Commission. - Harmonizing service sales tax across provincial jurisdictions launched in September 2021 to create common definitions for goods and services between provinces and FBR. - Personal income tax (PIT) reform: - Committed to reduce number of rates and income tax brackets, reduce tax expenditures and allowances, and increase progressivity. - Draft legislation to be prepared by end-February 2022 (new end-February 2022 SB) to come into effect on July 1, 2022 with the FY 2023 budget. - PIT reforms estimated to yield 0.3 percent of GDP in revenue gains in FY 2024. - Current PIT threshold preserved (almost 3 times income per capita) to protect low-income households. ### Expenditure, social protection, and provincial agreements - Social and sectoral budgets: - PRs 250 billion for social spending under the BISP program (up 26 percent from the FY 2021 budget). - PRs 2,014 billion for health and education spending (18 percent increase from the FY 2021 budget). - Federal PSDP spending (excluding development grants to provinces) budgeted at PRs 554 billion, an increase of about 25 percent. - New programs: - Kamyab Pakistan Program (KPP) rolled out to support farmers, small businesses, and low- and middle-income homebuyers with a 50 percent government guarantee (pari passu) and a food subsidy program for low-income households. - Wages and pensions: - After 1 year of frozen nominal wages, wages and pensions raised by 10 percent for all civil servants. - Additional 25 percent increase provided to lower paid staff to reduce allowance disparities. - Agreements with provinces: - New formal written agreements signed with provinces on fiscal strategy and required provincial fiscal efforts, including revised revenue and fiscal surplus targets by province for FY 2022 and implications in case of missed targets. - These agreements made public for accountability and performance measurement. ### Fiscal structural reforms and administration - Public financial management (PFM) reforms: - Treasury single account (TSA-1) made functional in September 2021 (end-May 2021 SB). - Steps to implement TSA-2: development of design and implementation plan, approval process, promulgation of TSA-2 Treasury rules; expect TSA-2 operational in June 2022. - Created Treasury and Cash Management Unit and Cash Forecasting Unit; will develop monthly and quarterly cash forecasts starting January 2022. - Developing guidelines for annual and multi-annual commitments control system anticipated to come into effect end-March 2022. - Tax administration priorities: - Develop overarching compliance strategy and set up Central Risk Management Unit and Compliance Risk Management Committee at central level. - Systematic identification and assessment of compliance risks. - Adopt project-based approach to high-risk tax compliance areas. - Strengthen data collection and analysis. - Simplify tax filing and expand e-services, accelerate resolution of refunds and administrative appeals, strengthen large taxpayer office. - Launched Collectible Tax Debt Campaign in March 2021. - Reintroduced track-and-trace system for tobacco products in one company in October 2021 (end-June 2021 SB); likely expansion to tobacco, cement, sugar, and fertilizer sectors but cannot commit to full rollout during program period and request to drop this SB. - Establish single filing portal by December 2021 to remove filing with five different tax administrations and simplify to a single tax base. ### Transparency and COVID-related spending oversight - Emergency measures remain targeted and temporary. - Publishing key information of all COVID-related awarded procurement contracts on the PPRA website (end-April 2021 SB, PA for completion of the review). - PPRA and SECP to enter agreement enabling PPRA direct and full access to beneficial ownership information of companies bidding for public contracts. - PPRA will issue regulations to require collection for publication of beneficial ownership information from companies awarded public procurement contracts for PRs 50 million and above (new end-March 2022 SB). - With World Bank support, pilot e-procurement system by end-June 2022 linking procurement, beneficial ownership, tax and national ID registries. - Auditor General of Pakistan (AGP) completed ex-post audit of procurement of COVID-related supplies and social payments made during FY 2020; report submitted to national assembly in September 2021 and published in full on November 19, 2021 (end-April 2021 SB, PA for completion of the review). - Audit of all COVID-related spending and social payments for FY 2021 underway; AGP expected to complete audit report by end-April 2022 with submission to national assembly by end-July 2022. ### Public debt position and debt management strategy - Public debt (excluding government guarantees) fell to 83.5 percent of GDP at end-FY 2021, down more than 4 percentage points compared to FY 2020, supported by nominal appreciation of PRs/US$ and strong economic recovery. - Measures to strengthen debt sustainability: a. Securing debt relief under the DSSI expected to reduce Pakistan’s external debt service through December 2021 by an estimated US$3.8 billion (1.2 percent of FY 2022 GDP) over and above assurances under the EFF. b. Lengthening the maturity profile of domestic debt: - Since FY 2019 shifted towards medium- and long-term instruments, but in H2 FY 2021 (March through May) strong reliance on T-bills occurred; partially reversed in early FY 2022. - Exploring options to partially use newly allocated SDR to reduce reliance on short-term instruments. c. Updating and implementing Medium-Term Debt Strategy (MTDS): - Explicit target: Gross Financing Needs (GFN) lower than 24 percent of GDP by FY 2023, down from around 29.2 percent of GDP in FY 2020. - Steps taken: reintroduction of 15-, 20-, and 30-year fixed rate Pakistan Investment Bonds (PIBs); reintroduction of Shariah Compliant Sukuks of longer tenors (5-years); introduction of 3- and 5-year floating rate PIBs; ban on institutional investments in National Savings Schemes with effect from July 1, 2020; discontinuation of sale of some prize bonds; expansion of Naya Pakistan Certificates; issuance of US$2.5 billion Eurobonds in April 2021 and reopening US$1 billion in July 2021 through multi-tenor transaction of 5-, 10- and 30-years. - Future instruments to explore: green Sukuks, gender bonds, Panda bonds (Renminbi-denominated), resumption of international Shariah-compliant Sukuks. - Committed to a floor on cumulative gross issuance of PIBs, Sukuks, and Eurobonds (Indicative Target). d. Establishing a Debt Management Office (DMO): - Established rules of business and initiated amendments to the Fiscal Responsibility and Debt Limitation Act (2005); Draft Bill submitted to National Assembly in June 2021 and referred to Standing Committee. - Finance Division assigned additional functions to the existing Debt Policy and Coordination Office and approved an organogram to hire additional staff. - Setting up front office/middle office/back office of new DMO to be completed by end-November 2022; committed to hiring part of staff by end-November 2021. - Migration of relevant functions to DMO from other government agencies to be completed by end-March 2022. - Enhanced cooperation with Economic Affairs Division through Working Group established February 2021 to ensure accurate compilation and reporting of debt-related statistics. *Source: 1pakea2022001 — IMF chapter excerpt* ### 11. We are proud of our Ehsaas Emergency Cash (EEC) program, which was recognized by ### 11. We are proud of our Ehsaas Emergency Cash (EEC) program, which was recognized by ### Ehsaas Emergency Cash (EEC) and social protection expansion - EEC was recognized by the World Bank in May 2021 as being in the top 4 globally for the number of people covered (almost 101 million by end-FY 2021). - Launched in April 2020; one-time cash assistance disbursed PRs 40.6 billion in FY 2021 in two rounds, covering about 47 percent of our population. - During a third COVID-19 wave over summer 2021, the second round of emergency support was extended into early months of FY 2022. - Commitments and actions to expand social safety nets and reduce poverty: - National Socio-Economic Registry (NSER) - Finalization of NSER update formally announced in October 2021 (end-June 2021 SB). - NSER covers approximately 33 million households via combined door-to-door survey and desk-based self-registration. - Based on an initial PMT increase: started to add newly eligible BISP beneficiaries in Q3 FY 2021; began to exit undeserving BISP beneficiaries in Q1 FY 2022. - Established live registry points in all regions for re-declaration in case of shocks (personal or regional climate disaster). - Benazir Income Support Programme (BISP) strengthening - FY 2021: enrollment in regular BISP cash benefit program increased by 16 percent to 6.1 million families. - One-off EEC transfer amount to PRs 12,000 (EEC beneficiary households defined as those that just fall above the PMT eligibility threshold). - Revised FY 2021 budget allocation fully executed at PRs 194.3 billion (note: missed end-June 2021 IT on BISP cash transfers by a small margin). - FY 2022 allocation to BISP: PRs 250 billion, marking a 50 percent increase over the FY 2021 budget allocation (excluding COVID-related EEC spending). - Additional resources will allow: - monthly benefit level increase by 8 percent from January 2022; and - expansion of coverage to at least 8 million families (by end-FY 2022) found deserving per updated NSER. - Assisted by World Bank: adopted mechanism for periodic inflation updates of all BISP cash transfers (to be proposed for cabinet approval by an expert committee within a period of three years from the last update). - The targeted expansion includes: 4.2 million re-confirmed households, 3.8 million newly eligible households, and 1.9 million exiting households. - Kamyab Pakistan Program (KPP) - Launched October 2021 to promote SME, agriculture, and low-cost housing financing and transform lives of marginalized segments. - Pilot in Balochistan, Khyber Pakhtunkhwa, Gilgit Baltistan, Azad Jammu and Kashmir, and poorest districts of Sindh and Punjab; extension nationwide after evaluation. - Aim to reach 3.7 million households within the first 5 years. - Subsidy interest rate component included as part of spending and guarantees recorded in debt statistics. - New food subsidy program (unveiled November 2021) - Aims to cover 20 million households by providing PRs 1000 per family per month for three food products that account for about 25 percent of food spending by low-income households. - Distribution via Utility Stores Corporation and Kiryana stores. - Estimated cost: PRs 120 billion during FY 2022, to be shared between Federal government and provinces. ### Monetary and exchange policies - Objectives: entrench monetary and financial stability via market-determined exchange rate, lowering inflation, building foreign exchange reserves. - External conditions deteriorated early FY 2022: widening trade deficit and higher uncertainty. - Exchange rate and inflation developments: - Exchange rate depreciated by more than 14 percent between May and December 14, 2021, despite FX sales to prevent disorderly market conditions. - Inflation remained elevated at around 9 percent. - Policy responses: - State Bank of Pakistan (SBP) raised key policy rate by 275 basis points since September 2021 to reach 9.75 percent as of mid-December 2021. - Commitment to market-determined exchange rate; SBP interventions limited to preventing disorderly market conditions (DMCs) while not suppressing underlying trend; guided by market conditions and objective of rebuilding reserve buffers. - Monetary policy stance pivoted since September 2021 toward tapering COVID-19 monetary stimulus; interest rates now close to being mildly positive in real terms on a forward-looking basis. - Monetary policy will aim to guide inflation to medium-term objective of 5-7 percent. - Mid-November: average cash reserve requirement (CRR) raised to 6 percent, with the daily minimum CRR rising to 4 percent. - Forward guidance: continue monetary policy statement (introduced January 2021) and publish 6-month ahead calendar of MPC meetings; November 2021 announced move to 8 meetings per year. ### Housing, construction, and refinance measures - Housing and construction sector support: - June 2021: amended capital adequacy regulations to lower risk weight to 100 percent (from 200 percent) on bank and development finance institution investments in real estate investment trusts. - As of end-September 2021: lending to construction and housing sector reached PRs 305 billion, or 4.3 percent of private sector credit against end-December 2021 requirement of 5 percent of banks’ domestic private sector lending. - Banks received applications worth more than PRs 185 billion as of end-September 2021 under government housing financing scheme; PRs 72 billion approved. - Temporary refinancing schemes and transition: - As of end-September 2021: outstanding amount for all facilities PRs 1,225 billion, of which PRs 322 billion related to temporary COVID schemes. - August 2021: new refinancing scheme for SME lending without collateral with a 40-60 percent first loss guarantee provided by the government. - October 2021: eased conditions for renewable energy solution providers under Refinance Scheme for Renewable Energy. - Study of Export Refinancing Scheme (EFS) to be undertaken by end-February 2022 with actions to improve effectiveness. - Ministry of Finance and SBP to design, by end-April 2022, a plan (in consultation with stakeholders) to establish an appropriate Development Finance Institution (new end-April 2022 SB) to enable future transfer of refinancing schemes to government. ### Strengthening SBP autonomy, governance, and mandate - March 2021: amendments to SBP Act submitted to parliament aiming to: - establish domestic price stability as primary objective, with financial stability and growth as secondary objectives; - define SBP’s functions to achieve objectives; - strengthen SBP’s financial autonomy via statutory mechanisms for sufficient recapitalization and profit retention; - prohibit extension of direct credits or guarantees to general government; - establish statutory underpinnings for audits; - secure stronger protection of personal autonomy of senior officials; - strengthen collegial decision making at executive management level; - provide stronger Board oversight; and - improve SBP’s accountability regarding monetary policy conduct and achievement of objectives. - Prior action for review: amendments to the Act to be adopted by parliament and signed into law by the President. - Complete main outstanding recommendations from 2019 safeguards assessment by filling vacant non-executive director positions and naming additional audit committee members by end-January 2022. ### Financial sector health and bank recapitalization - COVID-related regulatory forbearance ended March 2021; returned to preexisting loan classification, provisioning rules, and pre-COVID lending standards. - Banks remain well capitalized and profitable; non-provisioned NPLs at 1.1 percent as of end-June 2021. - Since July 2019: three banks resolved successfully; two non-systemic private sector banks and one public sector bank remain undercapitalized. - Supervisory actions include restrictions on fresh lending, capital expenditures, and bonuses for senior management; Board replacements and new CEOs at private banks; one private bank accepted investor recapitalization offer in October 2021; recapitalization of another private bank still under discussion. - Recapitalization timeline and requirements: - By end-May 2022: two private sector banks to complete first stage recapitalization (new end-May 2022 SB). - First stage requires capital injections with documentation submitted to, and accepted by, SBP, to fill 50 percent of the capital shortfall calculated as of September 30, 2021, resulting in banks achieving positive capital. - Identify any further capital requirements by end-September 2022 and require new owners to submit updated plans by end-December 2022 to achieve minimum capital requirements. - Public sector bank undergoing privatization process expected to be completed by end-January 2022; if unsuccessful, other resolution options including liquidation will be considered. - Self-assessment of key attributes of effective resolution regime completed May 2021; gaps remain (including recovery and resolution planning). - IMF technical assistance supporting strengthening of bank resolution and crisis management frameworks, including deposit insurance scheme’s role. - Draft law to address gaps to be submitted to Federal Government by end-January 2022 with aim of parliamentary adoption before end of program. ### AML/CFT and supervisory measures - Commitment to full completion of AML/CFT Action Plans: - Engaged several capacity development providers, including IMF. - Significant progress on 2018 Action Plan: satisfactory progress across 26 of 27 action items. - Pending action item: terrorist financing investigations and prosecutions of senior leaders of UN-designated terrorist groups (Immediate Outcome 9). - Continue work to demonstrate substantial effectiveness in last remaining item of 2018 Action Plan (end-June 2021 SB, reset to end-March 2022). - Progress on addressing strategic deficiencies from 2019 Mutual Evaluation Report of APG. - Established Secretariat to centralize and coordinate AML/CFT efforts across agencies. - On track to meet timelines for 2021 Action Plan implementation (mutual legal assistance framework, AML/CFT supervision, transparency of beneficial ownership information, compliance with targeted financial sanctions for proliferation financing). - Targeting full completion of 2021 Action Plan by end-January 2023. - Tax amnesty program for construction sector: SBP to conduct by end-June 2022 a thematic inspection of banks’ compliance with AML/CFT obligations on funds received through designated bank accounts; key findings and recommendations to be shared by end-September 2022 and appropriate enforcement actions to be undertaken. ### Exchange restrictions and import measures - Commitment to remove exchange restrictions, MCPs, and administrative measures when balance of payments (BOP) conditions allow. - To support BOP and reduce foreign currency outflows, action taken: - Late-September 2021: extended a 100 percent cash margin requirement on imports to an additional 114 items. - Acknowledge this intensification of exchange restriction for BOP measures; intend to eliminate when BOP conditions allow within the next 12 months and request approval for existing measures subject to Article VIII listing. ### Energy sector policies and circular debt management - Energy sector financial conditions remain difficult with accumulating arrears and unsustainable implicit cost to budget and economy; COVID-19 measures limited progress. - Actions and developments since January 2021: - Circular debt flow - Accumulated PRs 297 billion in new power payment arrears through FY 2021, which was PRs 57 billion better relative to updated circular debt management plan (CDMP) adopted March 2021. - Reasons: later-than-expected new generation capacity, stronger-than-expected power demand, and rupee appreciation. - Annual tariff rebasing - FY 2021 annual rebasing (AR) completed by November 5, 2021 (June 1, 2021 SB). - Delay estimated to imply lost revenue of about PRs 60 billion; did not jeopardize CDMP targets given CD flow overperformance in FY 2021. - CPPA-G payables - First payment on June 4, 2021 of PRs 89.9 billion (one-third in cash, remainder in debt instruments) to reduce payables to IPPs; covered 20 IPPs with immediate downward tariff adjustments per renegotiated PPAs signed March 2021 (end-May 2021 SB). - Plan to use similar contract structure to settle another PRs 311 billion in FY 2022 to continue reducing CPPA-G payables; further reductions dependent on adequate budget space and CDMP implementation progress. - Debt instruments used were 10-year floating-rate PIBs and 5-year sukuks (in equal parts). - NEPRA Act amendments and quarterly tariff adjustments - Parliament adopted key NEPRA Act amendments in August 2021, making permanent previous presidential ordinance provisions (March 2021). - Establishes regulator’s power to determine and notify quarterly tariff adjustments (QTAs) for capacity payments and government power to levy surcharges above system revenue requirements. - NEPRA implemented first two QTAs under new regulation for (PRs 0.90 and -0.07 per kwh for Q1 and Q2 FY 2021, respectively) in October 2021, together with last QTA under old regulation (PRs 0.83 per kwh for Q4 FY 2020 (end-September 2021 SB)). - Expect NEPRA to notify next QTA (covering Q1 in FY 2021) in December 2021. - DISCO governance and efficiency - HR mandates returned to independent boards to facilitate competitive and transparent appointment of board members and CEOs in all DISCOs. - Exploring options for phased privatization of DISCOs. *International Monetary Fund — Pakistan: excerpts and commitments from the cited chapter.* ### 21. However, given the continuing challenges in the sector, some of our commitments ### 1pakea2022001 - 21. However, given the continuing challenges in the sector, some of our commitments require recalibration. ### Energy sector: electricity tariff rebasing, subsidy reform, and arrears - Annual tariff rebasing - On track to implement the FY 2022 AR by February 2022. - DISCOs to submit their petitions by mid-November 2021. - Subsidy reform: comprehensive 3-phased energy subsidy reform plan spanning 2021-24 - FY 2022 budget (adopted in June, end-June 2021 SB) did not underpin better targeting of energy subsidies. - Following NEPRA approval in late-September 2021, first reform phase implemented: - (i) eligibility criterion for protected consumer slabs based on households’ maximum usage from the previous 6-months consumption rather than the average over the previous 12 months; - (ii) lower threshold for protected consumer slabs of 200 rather than 300 units per month; - (iii) breakdown of the unprotected 301-700 units slabs into smaller slabs of 100 each; - (iv) expansion of the definition of lifeline consumers to include residential consumers with consumption of 50-100 units per month. - Second reform phase (previously envisaged for the FY 2022 budget) delayed to allow full poverty-impact analysis and cabinet approval by end-January 2022 (new end-January 2022 SB) to: - (i) remove the previous slab benefit (incremental block tariff); - (ii) increase the effective tariff of the unprotected slabs by at least PRs 0.5 per kwh. - Remaining agenda: further targeting (including to households and the agricultural sector) while protecting the most vulnerable (including through the Ehsaas program). - Arrears and cost-side measures - Aim to replicate PPA renegotiation success (¶20) with other groups of power producers, including government-owned, via MoUs then binding contracts to reduce capacity payments. - Power sector arrears held by the Power Holding Private Limited (PHPL) stood at PRs 93 billion (about 1.9 percent of GDP) at end-June 2021, down PRs 77 billion since end-June 2020; mainly reflects conversion of PRs 72.6 billion in maturing PHPL debt into public debt. ### Gas sector reforms and circular debt - Estimated circular debt stock in gas sector increased to about PRs 654 billion at end-June 2021: - PRs 554 billion in system gas arrears and about PRs 100 billion in RLNG arrears. - Measures to improve sector performance: - Updating tariffs - OGRA’s determination of the annual Estimated Revenue Requirement (ERR) for FY 2022 received since September 2021. - Revising consumer gas prices to restrict/minimize addition to circular debt; first gas price adjustment since September 2020. - Amending the OGRA Act - Parliament to adopt amendments before end-June 2022 (end-June 2021 SB, reset to end-June 2022) to support timely notification of OGRA determinations. - Reducing unaccounted for gas losses (UFG) - Second UFG monitoring report covering FY 2021 published in November 2021. - Both Sui companies over-performed relative to their annual UFG reduction targets during FY 2021: - SSGCL achieved a UFG reduction of 13,087 MMCF against a target of 10,462 MMCF. - SNGPL achieved a UFG reduction of 14,019 MMCF against a target of 5,700 MMCF. - Progress toward OGRA benchmark allowed UFG of 7.5 percent. - Further measures: system revamping, replacing leaking transmission network, curtailing gas pilferage via illegal taps and increased vigilance. - Definition note: circular debt defined as accumulated shortfall when the 2 SUI companies charge the ‘sale price’ set by the government rather than the ‘prescribed price’ by OGRA. ### State-Owned Enterprises (SOEs) reforms, privatization, and governance - Privatization and SOE support - Advancing plans to privatize two RLNG power plants; expected completion by end-June 2022 with proceeds to debt reduction and poverty programs. - Privatization of two small public banks: - Constitute the board of one bank by end-December 2021 and aim to complete privatization by end-June 2022. - Complete 2018-2020 outstanding annual audits of the other bank by end-June 2022 and the 2021 annual audit by end-August 2022; aim to complete privatization by end-December 2022. - ECC approved a bailout for Pakistan International Airways (PIA) amounting to PRs 44 billion (half in cash, remainder in sovereign guarantees). - Transparency and audits - External audit of Utility Stores Corporation (USC) based on FY 2020 financials facing delays and data challenges; request to drop related SB due to risk of delaying publication beyond program period. - Monitoring and legal framework - Operationalize a Central Monitoring Unit (CMU) within the MoF by end-May 2022; staff hiring began October 2021. - New SOE law submitted to parliament in March 2021 for enactment by end-June 2022 (new end-June 2022 SB) to: - (i) define rationale for state ownership; - (ii) ensure SOE operations grounded on commercial footing, including definition of a commercial SOE; - (iii) regulate oversight and ownership arrangements. - Additional work by end-May 2022: - (i) Cabinet adoption of an SOE ownership policy to operationalize the SOE law; - (ii) Selection of four SOEs and submission of amendments to their Acts to parliament. ### Competitiveness, business environment, and housing/construction sector - Tariff and trade policy - Continue implementing national tariff policy with 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. - Business environment improvements - Simplify procedures to start a business; introduce one portal for business registrations and integrate federal and provincial entities. - Streamline FDI approval process. - Improve trading across borders by reducing customs processing time and hours to prepare import/export documentation. - Simplify and harmonize tax payment process via a simple and fully automated regime for paying taxes, contributions, and fees. - Launch a communication drive to disseminate reform information. - Housing and construction sector - Establish a working group of stakeholders to produce a strategy paper by end-February 2022 to address structural impediments and increase private sector lending to the sector. ### Governance, anti-corruption, and AML/CFT measures - Anticorruption institutions and transparency - Issue regulations to establish an electronic asset declaration system (end-June 2021 SB, reset to end-January 2022) that is: - Comprehensive (covering assets beneficially owned or located abroad); - Centrally-held with the Federal Board of Revenue; - Covering federal civil servants of Base Pay Scale 17 to 22; - Accessible to entities authorized by law (including banks for limited customer due diligence); - Effectively verified; - Institutionalize public access for annual declarations for all members (elected and unelected) of the federal government cabinet of Pakistan. - Undertaking 2nd review cycle under the UNCAC implementation mechanism and will publish the full report including findings, analysis, and recommendations. - Task force with international experts and civil society to complete review of institutional framework of anticorruption institutions by end-December 2021 with proposals for legislative amendments. - AML/CFT and Financial Monitoring Unit (FMU) - Support to financial and reporting institutions to identify politically exposed persons and apply enhanced due diligence. - Enhance risk-based supervision and improve suspicious transaction reporting quality, particularly on corruption activities. - Enhance FMU analytical skills through training and enter information sharing arrangements with foreign counterparts. - Continue pursuing membership in the Egmont Group of Financial Intelligence Units. - Reducing bearer instruments - In April 2021 announced withdrawal of PRs 7,500 and PRs 15,000 prize bonds. ### Financing, SDR allocation, and program monitoring - FY 2022 gross external financing needs projected at US$26 billion, of which about US$10 billion is amortizations to multilateral, bilateral official, and commercial creditors. - Secured financing commitments: - China US$6.6 billion - UAE US$2 billion - World Bank US$2 billion - Asian Development Bank US$1.5 billion - Islamic Development Bank US$1 billion - G-20 DSSI temporary suspension of debt service to official bilateral creditors will cover US$1.0 billion falling due during July-December 2021 (third round of DSSI). - SDR allocation - SDR allocation of US$2.77 billion to be used prudently and transparently; intended to bolster reserves and, if needed, complement vaccine finance. - Program monitoring and conditionality - Implementation monitored through prior actions, quantitative performance criteria, indicative targets, continuous performance criteria, structural benchmarks, and schedule of reviews as set out in the MEFPs and the attached Technical Memorandum of Understanding (TMU). - Quantitative targets for end-December 2021, end-March 2022, and end-June 2022 and continuous criteria are set out in Table 1; prior actions and structural benchmarks are in Table 2. *Source: 1pakea2022001 - 21. However, given the continuing challenges in the sector, some of our commitments require recalibration.* ### 19. Audits results will be published on the website of the Ministry of Finance. ### 1pakea2022001 - 19. Audits results will be published on the website of the Ministry of Finance. ### Structural benchmarks and implementation status - "Audits results will be published on the website of the Ministry of Finance." - Target date: end-Apr. 2021 - Status: Not met. To be implemented through PA #5. - "Establish a robust asset declaration system with a focus on high-level public officials (including elected and unelected members of the Federal Cabinet)." - Target dates: end-Jun. 2021 end-Jan. 2022 - Status: Not met. ### New Structural Benchmarks (listed items and deadlines) - 1. Preparation of draft personal income tax (PIT) legislation. - Deadline: end-Feb. 2022 - 2. Preparation of a plan by Ministry of Finance and State Bank of Pakistan, in consultation with other stakeholders, to establish an appropriate Development Finance Institution to support the eventual phasing out of SBP refinance facilities. - Deadline: end-Apr. 2022 - 3. Completion of the first stage recapitalization of the two private sector banks that are undercapitalized. - Deadline: end-May 2022 - 4. Cabinet decision on the second step of the energy subsidy reform for residential consumers. - Deadline: end-Jan. 2022 - 5. Parliamentary approval of new SOE law in line with staff recommendations. - Deadline: end-Jun. 2022 - 6. Issuance of regulations by the Public Procurement Regulatory Authority to require collection for publication of beneficial ownership information from companies which are awarded public procurement contracts for PRs 50 million and above. - Deadline: end-Mar. 2022 ### TMU scope and program exchange rates - The Technical Memorandum of Understanding (TMU) sets definitions of quantitative performance criteria, indicative targets, and reporting requirements for the Extended Arrangement under the Extended Fund Facility (EFF), following the authorities' Letter of Intent dated December 17, 2021. - Program exchange rate of the Pakistani rupee to the U.S. dollar: PRs 141.3172 per U.S. dollar. - Selected cross exchange rates (units of currency per U.S. dollar): - EUR 0.896456 - JPY 111.699717 - CNY 6.741081 - GBP 0.769292 - AUD 1.428981 - CAD 1.346196 - THB 32.035948 - MYR 4.141502 - SGD 1.362695 - INR 69.267944 - SDR 0.723019 ### Quantitative targets — performance criteria (as defined) - Performance Criteria include: - 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 (see ¶25). ### Indicative targets (as defined) - Indicative Targets include: - 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). ### Definitions and key statistics - General government: central (federal) government and local (provincial) governments, excluding state-owned enterprises; includes any new funds or special budgetary/extra-budgetary entities of a fiscal nature. - Net international reserves (NIR) of the SBP: U.S. dollar value of the difference between usable gross international reserve assets and reserve-related liabilities, evaluated at program exchange rates. - NIR of SBP on April 16, 2019: negative US$15,557 million. - At end-April 2019: - SBP's aggregate net derivative position (aggregate net positions in forwards and futures): negative US$8,055 million. - Usable gross international reserves: include holdings of foreign currencies, holdings of SDRs, the reserve position in the IMF, and holdings of fixed and variable income instruments; exclude claims on residents, assets in nonconvertible currencies, precious metals, illiquid assets, pledged/collateralized assets, non-marketable reserve assets at book price, and balances at foreign branches of non-investment rated domestic banks. - Reserve-related liabilities: include foreign currency liabilities (remaining maturity of one year or less), foreign exchange liabilities arising from derivatives positions on a net outstanding basis, outstanding IMF credits, foreign exchange deposits with the SBP of foreign governments/central banks/deposit money banks/international organizations/foreign nonbank financial institutions/domestic financial institutions (excluding regulatory capital deposits), and exclude SDR allocations and accrued interest on reserve-related liabilities. ### NIR and NDA adjustment mechanisms (selected provisions) - Floor on NIR adjusted upward (downward) by cumulative excess (shortfall) in: - a. cash inflows from multilateral and bilateral creditors, commercial borrowing, and bond issuance relative to projected inflows; - b. the actual stock of NIR at end-June 2019 relative to the projected amount (projected end-June 2019 NIR: negative US$17,743 million); - c. use by the SBP of foreign assets related to commercial consortium loan to make import payments relative to 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-Dec 2021 End-Mar 2022 End-Jun 2022 - 0 0 0 - Floor on NIR also adjusted downward by cumulative amount of purchase of foreign exchange from the central bank for financing COVID-19 vaccines imports; adjustor cumulates from October 1, 2021. - Net domestic assets (NDA) of the SBP defined as reserve money minus the NIR of the SBP (NIR valued at the program exchange rate and expressed in Pakistani rupee). - Reserve money (RM) defined as sum of: (i) currency outside schedule 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 federal/provincial government deposits and SBP staff retirement accounts. - NDA adjustment mechanism includes adjustments: - a. for cumulative excess (shortfall) in cash inflows from external creditors relative to projections (evaluated at program exchange rate); - b. for actual stock of NIR at end-June 2019 relative to projections (evaluated at program exchange rate); - c. for SBP use of foreign assets related to commercial consortium loans (evaluated at program exchange rate); - d. upward by cumulative amount of purchase of foreign exchange from the central bank for financing COVID-19 vaccines imports to the government; adjustor cumulates from October 1, 2021 and evaluated at the program exchange rate; - e. ceilings on the NDA adjusted upward by PRs 166.6 billion to account for increase in the average cash reserve ratio (CRR) on November 12, 2021. Formula: ΔNDA = Δr B0, where on November 12, 2021 ΔNDA = 1% * PRs 16,664.2 billion = PRs 166.6 billion. Ceilings will be similarly adjusted upward (downward) by the amount of banks’ Pakistani rupee reserves seized (freed) by any increase (reduction) of the average CRR. ### Other ceilings, definitions, and adjustment rules - Ceiling on SBP's stock of net foreign currency swap/forward position: aggregate net positions in forwards and futures in foreign currencies of the SBP vis-à-vis the domestic currency (including forward leg of currency swaps), evaluated at the program exchange rate. At end-April 2019 this position was negative US$8,055 million. - General government primary budget deficit (excluding grants): monitored quarterly as the general government’s overall budget deficit (excluding grants) minus the consolidated interest bill of federal and provincial budgets. - General government overall budget deficit (excluding grants) measured as cash deficit from below the line, defined as 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 non-residents (notably T-bills, Pakistan Investment bonds (PIBs), Naya Pakistan Certificates, and Banao Certificates); - c. change in net domestic nonbank financing, excluding valuation changes (privatization receipts, change in stock of issued government securities held outside government and banking system, change in net deposits/reserves received by government, any other government borrowing from domestic nonbank sources net of repayments, minus change in government deposits with nonbank financial institutions); - d. total external grants to 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). - Net external budget financing (excluding valuation changes and external financing counted as SBP reserve liabilities) defined as sum of: - a. external budget loans to the general government (including on-lent amounts and external emergency relief lending) comprising medium- and long-term multilateral, bilateral, and private sector sources and short-term maturity net of foreign portfolio investment (with specified inclusions/exclusions); - b. net external debt amortization flow of the general government (change in stock of external debt service arrears net of debt amortization due on external budget loans, accounting for rescheduled/relieved/accelerated amortization including debt swaps or cancellation recorded as capital grants). - Ceiling on the general government primary budget deficit (excluding grants) will be adjusted cumulatively since the start of the fiscal year by: - a. downward (upward) for any shortfall (excess) in external project financing relative to program projections (evaluated in Pakistani rupee terms at actual average exchange rates); - b. downward by any underexecution in targeted cash transfers (BISP) relative to indicative program target; - c. downward by any excess in flow of power sector payment arrears above respective indicative program targets, excluding non-recoveries and excess line losses; - d. downward by any increase in stock of budgetary arrears on social payments accumulated since beginning of fiscal year; - e. downward by any excess in flow of tax refund arrears relative to indicative program targets; - f. for SBP profit transfers: - (i) until amended SBP Act is approved and enacted by the National Assembly, downward (upward) for any excess (shortfall) in actual interim SBP profit transfers to the general government budget relative to its programmed SBP level (Text Table 3); - (ii) after amended SBP Act enacted, upward by any shortfall in actual interim SBP profit transfer to the general government budget relative to its programmed level (Text Table 3). - Text Table 3. Pakistan: Fiscal Program: Selected Projections (Cumulative flows from start of fiscal year; billions of Pakistani Rupees) - SBP profit transfers to the budget: - End-Dec 2021: 349 - End-Mar 2022: 437 - End-Jun 22: 550 - Additional upward adjustors: - Upward by up to PRs 311 billion for the clearance of CPPA arrears to IPPs in FY 2021/22; - Upward by up to PRs 352 billion for the purchase of COVID-19 vaccines in FY 2021/22. ### Net government budgetary borrowing from the SBP (definition) - Net government budgetary borrowing from the SBP (including provincial governments) defined as SBP claims on general government minus general government deposits with the SBP. - SBP claims include government securities, treasury bills, treasury currency, and debtor balances; exclude accrued profits on government securities. - Government deposits with the SBP exclude the Zakat Fund. *Source: Attachment II. Technical Memorandum of Understanding, from the IMF staff report content provided in the source PDF.* ### 21. The ceiling on net government budgetary borrowing from the SBP will be adjusted upward ### 21. The ceiling on net government budgetary borrowing from the SBP will be adjusted upward ### Adjustment to SBP borrowing ceiling - The ceiling on net government budgetary borrowing from the SBP will be adjusted upward by the amount of local currency on-lending by the SBP to the Ministry of Finance of the SDR allocation. - This adjustor is cumulative and is capped at PRs 457 billion for FY 2022. ### Ceiling on the amount of government guarantees - The ceiling applies to the stock of publicly guaranteed debt for which guarantees have been issued by the central government and includes both domestic and external government guarantees. - 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. - The stock of issued guarantees at end-September 2019 was PRs 2,580 billion. ### No new SBP credit to general government — Continuous Performance Criterion - To protect the capability of the central bank to pursue its price stability objective, there should be no new flow of SBP's direct credit to the general government, including in the form of purchases of public debt securities on the primary market. - The performance criterion applies on a continuous basis throughout the program period. ### Zero ceiling on accumulation of external payment arrears by the general government — Continuous Performance Criterion - External payment arrears are defined as all unpaid debt-service obligations (payments of principal and interest) of the general government (federal and provincial government, SBP, and state-owned enterprises) to nonresidents arising in respect of public sector loans, debt contracted or guaranteed (including unpaid penalties or interest charges associated with these obligations that are beyond 30 days after the due date). - The definition of debt, for the purposes of the EFF, is set out in Point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Executive Board Decision No. 6230-(79/140), last amended by Executive Board Decision No. 14416-(09/91), adopted August 31, 2009). - The ceiling on the accumulation of external payment arrears is set at zero. - The performance criterion applies on a continuous basis 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 though MPCs arising from the introduction and/or modifications of the multiple-price foreign exchange auction system operating in line with IMF staff advice with the objective of supporting flexible market-determined exchange rate; - c. conclude bilateral payment agreements that are inconsistent with Article VIII of IMF Articles of Agreement; and - d. impose or intensify import restrictions for balance of payments purposes. ### Indicative targets: social and fiscal spending - Floor on Targeted Cash Transfers Spending (BISP) — Indicative Target: - Applies to the 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 the cumulative budgetary spending on health and education by the federal and provincial governments. - Floor on Net Tax Revenues Collected by the Federal Bureau of Revenue (FBR) — Indicative Target: - Net tax revenues collected by the FBR are defined as the sum of revenues collected from: - (i) general sales tax (GST) on goods (including GST on services collected in Islamabad Capital Territory); - (ii) customs duties, customs registration fees and levies; - (iii) excise duties on imported products; - (iv) excise duties on domestic products; - (v) levies (toll) on oil derivatives; - (vi) other proceeds and fees; - (vii) sales tax; and - (viii) unclassified revenues minus the tax refunds. - Net revenue collection is defined, for each test date, as the cumulative sum of net revenues collected since the beginning of the respective fiscal year. - The floor on the collection of net revenues by the FBR is measured quarterly based on cumulative end-of-quarter data. - Ceiling on Net Accumulation of Tax Refund Arrears — Indicative Target: - Applies to the cumulative flow of tax refund arrears. - The stock of tax refund arrears is defined as the amount of tax refund claims that have not been settled (through a cash refund, netting out against obligations of taxpayers, payment with a government bond/promissory note or an official decision to reject the claim) within a specified time period after the tax refund claim has been submitted to the FBR. - The 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 are defined as power sector payables in arrears that arise from: - (i) non-recoveries from supply to Azad Jammu and Kashmir (AJ&K), industrial support package, other federal and provincial governments including FATA, private consumers, and Baluchistan Tube Wells; - (ii) accrued markup from the servicing of PHPL; - (iii) line losses and non-collections that are not recognized by NEPRA; - (iv) GST non-refunds,; - (iv) late payment surcharges; - (v) delays in subsidy payments; and - (vi) delays in tariff determinations. ### Monitoring of power sector payables - The stock of payment arrears includes the payables of PRs 2,280 billion (of which PRs 930 billion held at PHPL) as of end-FY 2020/21. - The projected evolution of the stock and the flow of payables, including measures (policy and surcharges) and its components are given in Text Table 4. ### Program reporting requirements - To effectively monitor program performance, the authorities will provide all the needed data to the IMF in line with Article VIII, Section 5 of the IMF Articles of Agreement as deemed necessary. - Performance under the program is monitored from data supplied to the IMF by the SBP, Ministry of Finance, FBR, Pakistan Bureau of Statistics, Ministry of Water and Power, and other agencies as outlined in Table 3. - The authorities will transmit promptly to IMF staff any data revisions as well as other information necessary to monitor the arrangement with the IMF. *Source: Pakistani authorities (text as provided).* ### 3. Outstanding amount of MTBs (Primary market; discounted value) ### 1pakea2022001 - 3. Outstanding amount of MTBs (Primary market; discounted value) ### Outstanding amount of MTBs (Primary market; discounted value) - Reported series header: 3. Outstanding amount of MTBs (Primary market; discounted value) - Reported values: 4,363,090 5,243,197 4,259,110 4,803,332 4,956,617 4,497,227 4,429,945 5,205,372 5,979,180 6,044,578 ### Net Government Borrowings (Cash basis) — From Banking System and components - Reported series header: Net Govt. Borrowings (Cash basis) From Banking System11,545,89311,422,88911,587,63212,147,70513,471,05113,721,96914,022,00114,268,80215,247,85715,222,347 - (i) From SBP: 6,688,9584,845,7865,842,0195,925,4756,455,1796,089,0305,884,6195,126,7775,273,9534,972,729 - (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 9,142,025 9,973,904 10,249,617 ### Monitoring and reporting requirements — Selected reporting items, frequency, and timing - Reporting agency: State Bank of Pakistan (SBP) - SBP balance sheet — Summary: Weekly; Timing: First Thursday of the following week - SBP balance sheet — Summary at program exchange rates; and by official exchange rates: Monthly; Timing: Within 15 days of the end of each month - Monetary survey — Summary banking system balance sheet for the central bank at both program exchange rates and by chart of accounts at actual official exchange rates; the consolidated balance sheet of commercial banks at actual official exchange rates: Monthly; Timing: Within the first 30 days of each month. - International reserves — By (i) program exchange rates; and (ii) at actual official exchange rates: Daily; Timing: The following working day - Foreign exchange market — Market exchange rates (buying and selling); weighted average customer exchange rate; monthly trade volume, and high and low exchange rate of the interbank, the KERB market: Daily/Monthly; Timing: Within one day/ monthly within five working day - Foreign exchange market — SBP foreign exchange operations, and intervention (volume), distinguishing within spot transactions the outright purchase/sale and purchase/sale related to forward contract: Daily; Timing: Within one day - Foreign exchange market — SBP operation against the domestic currency in swap/forwards by (volumes): Daily; Timing: Within one day - Foreign exchange market — SBP operations against the domestic currency in swap/forwards (including all legs of transactions): for each day, the initial outstanding FX swap/forward position, summary of transactions during the day, the end-of-day position: Daily; Timing: Within one day - Foreign exchange market — Breakdown of short, long, counterparts, of the swap/forward contracts: Monthly; Timing: Third working day of the following month - Foreign exchange market — Outstanding swap/forward positions by maturity buckets, and counterparties: Monthly; Timing: Third working day of the following month - Net International Reserves — Net International reserves at program exchange rates as defined in TMU, including a breakdown by currency and specification of nostro balances with foreign branches of National Bank of Pakistan: Quarterly; Timing: Seventh working day after quarter end - External financing — Foreign assistance received and projections for the coming four quarters. Please categorize all grants and loans by program/project, and the amounts received/expected in cash: Quarterly; Timing: Within 15 days of the end of each quarter - Interbank money market — Daily interbank repo volume and interest rate of trades: Daily; Timing: Within one day - SBP operations — Repo (reverse repo) operations, open market operations: Weekly; Timing: First Monday of the following week - Bank liquidity — Excess reserves, in local currency: Bi-weekly; Timing: With a lag of 15 days - T-bill and coupon bond financing, SBP securities - Auction data: date, original and remaining maturities, issuance volume, allocation, average yield and coupon yield (if available): Fortnightly; Timing: Last working day of the fortnight - Banking data (selected) - Sectoral distribution of loans and deposits; loans and deposits by local and foreign currency; deposit and lending rates, disaggregated between new operations and outstanding stock: Monthly; Timing: Within 25 working days of the end of each month. - Loan maturities: Quarterly; Timing: 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; Timing: Within 15 days of the end of each month - Banking indicators — Core Financial Stability Indicators (FSIs) including capital adequacy; asset composition and quality; profitability; liquidity; open FX positions – in aggregate and bank-by-bank (without names): Quarterly; Timing: Within 45 days of the following quarter - Banking indicators — Liquidity data and deferred/restructured loans: Weekly; Timing: Within 5 days of the end of each week - Banking data — Banks’ net open foreign exchange positions split between total foreign assets and foreign exchange liabilities: Monthly; Timing: Within five days of the end of each month - Banking data — Holdings of government securities – in aggregate and bank-by-bank (without names): Monthly; Timing: Within 7 days of the end of each month - Banking sector stress tests — Results of stress tests on exchange rate, liquidity, and credit risk: Quarterly; Timing: Within 60 days - Other agencies — selected items (frequency and timing) - Transfers (Workers’ remittances): Monthly; Timing: Within 25 days of the following month - SBP refinance schemes — Outstanding position under SBP refinance schemes (by program): Monthly; Timing: Within 25 days of the end of each month - Balance of payments — Detailed export and import data; Detailed balance of payments data: Monthly; Timing: Within 28 days of the end of each month - Ministry of Finance (MOF) — External debt: Monthly; Timing: Within 25 days of the following month - MOF — Domestic debt composition: Monthly; Timing: Within 25 days of the end of each month - MOF — T-Bill and PIB Bid sheet from domestic debt auctions: Daily; Timing: Within 1 day of each T-Bill and PIB auction - PBS — Detailed monthly price indices (SPI, CPI, WPI): Monthly; Timing: Within five days of the following month - FBR — Revenue collection: Monthly; Timing: Within seven days of the end of each month ### Data adequacy and statistical issues (selected assessments and recommendations) - General: "Data provision is broadly adequate for surveillance with some key data shortcomings in the government finance and national accounts statistics." - National Accounts: - PBS disseminates annual national accounts using the 2005/06 benchmark estimate; current GDP and component series go back to 1999/00. - PBS is in the process of rebasing national accounts to 2015/16; rebasing delayed due to difficulties in conducting an Integrated Agriculture Census (IAC). - STA technical assistance (TA) is planned for FY 2022 to support rebasing and development of quarterly national accounts. - Price Statistics: - PBS produces CPI, WPI, and SPI. CPI and WPI compiled monthly; SPI compiled weekly (53 essential commodities). - Need to replace WPI with a producer price index (PPI). - September 2019: PBS released an updated CPI with base year 2015–16 covering rural and urban areas. - External Sector Statistics: - SBP reports quarterly balance of payments (BoP) statistics from Q1 2005 in line with BPM6; since October 2015 SBP reports BPM6-based IIP beginning Q1 2014. - Some consistency issues between BoP and IIP remain. - Government Finance Statistics: - Compilation broadly based on GFSM 1986; scope limited (central government excludes extra budgetary funds). - Reporting mixes economic and functional classifications; wage bill not reported separately. - Basis of recording GFS is on, or close to, a cash basis with gross transactions. - No data on transactions in nonfinancial and financial assets and liabilities provided. - Areas for improvement include: (i) moving to GFSM 2014; (ii) improving timeliness of annual and quarterly data; (iii) reviewing revenue and expenditure classification; (iv) improving availability of data on transactions in nonfinancial and financial assets and liabilities; and (v) expanding coverage from budgetary central government to general government. - Monetary and Financial Statistics: - SBP reports SRFs for central bank (1SR), other depository corporations (2SR), and monetary aggregates (5SR) to the Fund and publishes on IFS website. - In 2017 STA conducted TA for expanding MFS and compilation of OFC survey (4SR); SBP has not yet started reporting 4SR. - Financial Surveillance: - Pakistan reports all series and indicators of the Financial Access Survey (FAS). - Pakistan reports all core financial soundness indicators (FSIs) for deposit takers (DT) and 12 out of 28 FSIs of the encouraged set for DT, non-financial corporations, and real estate prices. ### IMF relations and program metadata (selected figures as reported) - Membership Status: Joined July 11, 1950; Article VIII. - Quota and holdings (General Resources Account): - Quota: 2,031.00 SDR Million; Percent Quota: 100.00 - Fund Holdings of Currency: 7,051.21 SDR Million; Percent Quota: 347.18 - Reserve Position: 0.12 SDR Million; Percent Quota: 0.01 - SDR Department: - Net cumulative allocation: 2,935.19 SDR Million; Percent Allocation: 100.00 - Holdings: 2,186.89 SDR Million; Percent Allocation: 74.51 - Outstanding Purchases and Loans (SDR Million): - Emergency Assistance: 1,015.50 - Extended Arrangements: 4,004.83 - Percent Allocation entries shown: 50.00 and 197.19 (as reported) - Latest Financial Commitments — Arrangements (selected): - EFF Jul 3, 2019 to Oct 2, 2022: Amount Approved (SDR Million) 4,268.00; Amount Drawn (SDR Million) 1,394.00 - EFF Sep 4, 2013 to Sep 30, 2016: Amount Approved (SDR Million) 4,393.00; Amount Drawn (SDR Million) 4,393.00 - Stand-By Nov 24, 2008 to Sep 30, 2011: Amount Approved (SDR Million) 7,235.90; Amount Drawn (SDR Million) 4,936.04 - Outright Loans — RFI: - RFI Apr 16, 2020; Date Drawn Apr 20, 2020; Amount Approved (SDR Million) 1,015.50; Amount Drawn (SDR Million) 1,015.50 - Projected Payments to the Fund (Forthcoming, SDR Million): - 2021 Principal: 210.00; Charges / Interest: 23.47; Total: 233.47 - 2022 Principal: 702.17; Charges / Interest: 74.71; Total: 776.88 - 2023 Principal: 986.04; Charges / Interest: 46.13; Total: 1,032.18 - 2024 Principal: 1,263.92; Charges / Interest: 28.68; Total: 1,292.60 - 2025 Principal: 769.21; Charges / Interest: 16.59; Total: 785.80 *Source: PAKISTAN — STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION, SIXTH REVIEW UNDER THE EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY, AND REQUESTS FOR WAIVERS OF APPLICABILITY AND NONOBSERVANCE OF PERFORMANCE CRITERIA AND REPHASING OF ACCESS—INFORMATIONAL ANNEX (as provided in the source content).* ### 1. Recent economic developments. Economic activity remains broadly in line with the ### 1. Recent economic developments. Economic activity remains broadly in line with the ### Recent economic developments - Inflation increased to 12.3 percent in December (y-o-y). - Authorities’ policy adjustment is expected to gradually bring inflation down in the coming months, but persistently high commodity prices might keep it somewhat higher than anticipated at the time of issuance of the report. ### COVID-19 situation - Since end-December 2021, COVID-19 cases have been on the rise, and the test positivity rate has increased markedly in various cities. - On January 20, 2022, the authorities introduced bans on indoor gatherings as well as capacity limits for cities with a test positivity rate above 10 percent. - Vaccination campaign progress: as of mid-January 2022, only 36 percent of the population are fully vaccinated. ### Prior actions and prior assurances met (all five PAs for the review) - Supplementary budget: - National Assembly adopted a supplementary finance bill (with the GST reform) broadly in line with staff agreement on January 13, 2021; the President signed into law on January 15, 2021, to take effect immediately. - Ministry of Finance published a Statement of Contingent Liabilities with all guarantees expected to be issued during the remainder of the current fiscal year on January 11, 2022; laid before the National Assembly on January 21, 2022. - Fuel taxes: - Development levy on gasoline and diesel raised by PRs 8/liter in two equal steps on November 5 and December 1, 2021 (PA) and by another PRs 4/liter on January 1, 2022. - Central bank legislation: - Parliament adopted amendments to the State Bank of Pakistan (SBP) Act, prepared in consultation with IMF staff; the President signed into law on January 28, 2022. - Governance and transparency I: - Authorities publishing key information on COVID-related awarded procurement contracts on the Public Procurement Regulatory Authority's website. - Governance and transparency II: - Auditor General of Pakistan conducted an ex-post audit of procurement of COVID-related supplies and social payments made during FY 2020; full audit report published on the Ministry of Finance website on November 19, 2021. ### Adjustments to performance criteria and structural benchmarks due to timing - One PC originally proposed for end-2021: - Information on the ceiling on the SBP’s stock of net foreign currency swaps/forward position for end-December 2021 is already available; in line with Fund policy, staff proposes this PC be set only for end-March and end-June 2022 (Attachment II). The Proposed Decision 2 revised accordingly (Attachment I). - Two SBs proposed for end-January 2022: - Cabinet adopted the second step of the energy subsidy reform for residential consumers on December 16, 2021 (SB met). - Due to capacity constraints in establishing a robust asset declaration system focused on high-level public officials (including elected and unelected members of the Federal Cabinet), staff supports authorities’ request to reset the related SB to end-March 2022. ### Staff recommendation - Staff continues to recommend completion of the review as set forth in the main staff report, the authorities’ December 2021 LOI and the attached MEFP and TMU. ### Supplementary Letter of Intent — key updates (Islamabad, January 28, 2022) - Confirmation of completed prior actions: - National Assembly adoption of supplementary finance bill (GST reform) on January 13, 2022; President signed into law January 15, 2022; Statement of Contingent Liabilities presented January 21, 2022. - Petroleum development levy (PDL) on gasoline and diesel raised by PRs 8/liter in two equal steps on November 5 and December 1, 2021, and by an additional PRs 4/liter effective from January 1, 2022. - National Assembly approved SBP Act amendments on January 13, 2022; Senate approved and President signed into law on January 28, 2022. - Publication of key information on COVID-related awarded procurement contracts on the Public Procurement Regulatory Authority's website. - Auditor General’s ex-post audit of procurement of COVID-related supplies and social payments made in FY 2020 published on November 19, 2021. - Net foreign currency swaps/forward position information: - Position of negative US$4,382 million for end-December 2021; end-December indicative target met. - As a result, the performance criterion will be set for end-March and end-June 2022; a revised QPC table included in Table 1. - Structural conditionality updates: - Cabinet decision for second step of energy subsidy reform for residential consumers adopted on December 16, 2021 (SB completed). - Request to establish a robust asset declaration system focused on high-level public officials by end-March 2022 (revised SB deadline). ### Table 1 — Selected quantitative performance criteria and indicative targets (highlights) - Floor on net international reserves of the SBP (millions of U.S. dollars): - Program (PC) end-March Est.: -10,238; Adjusted: -10,198; Actual: -7,836; Status: Met. - Program (PC) end-June Est.: -8,676; Adjusted: -8,041; Actual: -4,434; Status: Met. - Program (IT) end-September Est.: -8,518; Adjusted: -2,303; Actual: -7,677. - Program (IT) end-December: -5,450; Actual: -6,000; -5,100. - Ceiling on net domestic assets of the SBP (stock, billions of Pakistani rupees): - Program (PC) end-March Est.: 9,655; Adjusted: 9,650; Actual: 9,044; Status: Met. - Program (PC) end-June Est.: 10,173; Adjusted: 10,083; Actual: 9,290; Status: Met. - Program (IT) end-September Est.: 9,947; Adjusted: 8,793; Actual: 10,190. - Program (IT) end-December: 9,850; Actual: 10,233; 10,792. - Ceiling on SBP's stock of net foreign currency swaps/forward position (negative, millions of U.S. dollars): - Various entries showing ceilings and actuals, including references to 5,200; 4,285; 4,870; 4,900; 4,870; 4,600; 4,300; 4,000. - Ceiling on general government primary budget deficit (cumulative, excluding grants, billions of Pakistani rupees): - Entries include: 2/-230; -350; -505; Met; 246; 412; 462; Not met; -130; -137; -96; -300; -389; 25. - Ceiling on net government budgetary borrowing from the SBP (stock, billions of Pakistani rupees): - Entries include: 6,908; 5,127; Met; 6,618; 5,274; Met; 6,333; 4,973; 6,049; 6,049; 6,049. - Zero new flow of SBP's credit to general government: - On-lent PRs 475 billion on November 18, 2021; noted as Not met for one column. - Cumulative floor on Targeted Cash Transfers Spending (BISP) (billions of Pakistani rupees): - Entries include: 7/114; ...76; Not met; 199; ...194; Not met; 486; 102; 861; 992; 50. - Floor on net tax revenues collected by the FBR (cumulative, billions of Pakistani rupees): - Entries include: 3,394; 3,395; Met; 4,691; 4,764; Met; 1,181; 1,397; 2,585; 2,852; 4,343; 6,100. - Ceiling on net accumulation of tax refund arrears (billions of Pakistani rupees): - Entries include: 4/ 5/65; ...112; Not met; 65; ...-30; Met; 0; 170; 115.50. - Ceiling on power sector payment arrears (cumulative flow, billions of Pakistani rupees): - Entries include: 4/319; ...269; Met; 354; ...297; Met; -166; 114; -154; 671; 841; 66. - Gross issuance of PIBs, Sukuks, and Eurobonds (cumulative, billions of Pakistani rupees): - Entries include: 6/2,850; ...2,341; Not met; 4,250; ...3,496; Not met; 1,000; 1,443. (Note: Table 1 contains multiple program, adjusted, actual, and status entries across end-March, end-June, end-September, end-December, and end-June reporting dates for FY 2020/21 and FY 2021/22.) ### Table 2 — Structural Conditionality (Revised) — summary of selected items - Prior Actions (completed and critical items): 1. National assembly adoption of a supplementary finance bill (GST reform), President signed into law, and supporting measures (published list of expected guarantees). 2. Petroleum development levy on gasoline and diesel raised by PRs 8/liter. 3. Adoption by parliament, and signed into law by the President, of amendments to the SBP Act. 4. Publication of key information on all COVID-related awarded procurement contracts on the PPRA website. 5. Auditor General to conduct ex-post audit of procurement of COVID-related supplies and social payments made during FY 2020; full audit report published. - Structural Benchmarks (status and revisions): - Fiscal: commit to not grant further tax amnesties (Continuous — Met); avoid issuing new preferential tax treatments or exemptions (Continuous — Not met); establish TSA-1 by end-May 2021 (Not met; implemented with delay in September 2021); track-and-trace for tobacco by end-Jun. 2021 (Not met; reintroduced and rolled out only in one company out of 16 in October 2021). - Social Protection and Gender: finalize update of BISP beneficiaries' database by end-Jun. 2021 (Not met; implemented with delay in October 2021 with coverage of 33 million households). - Monetary and Financial: adopt measures to strengthen AML/CFT framework to support exit from FATFlist by end-Jun. 2021 / end-Mar. 2022 (Not met). - Energy Sector, SOEs, and Governance: multiple benchmarks with varied statuses, many Not met or implemented with delay (examples provided for CPPA-G payables, FY 2021 rebasing, electricity tariff adjustments, energy cross-subsidy reform, OGRA Act amendments, USC audit, publication of COVID-contracts and beneficial ownership information, and establishment of an asset declaration system). - New Structural Benchmarks (dates and items): 1. Preparation of draft personal income tax (PIT) legislation. end-Feb. 2022 2. Preparation of a plan by Ministry of Finance and SBP to establish an appropriate Development Finance Institution. end-Apr. 2022 3. Completion of the first stage recapitalization of the two private sector banks that are undercapitalized. end-May 2022 4. Cabinet decision on the second step of the energy subsidy reform for residential consumers. end-Jan. 2022 (Met) 5. Parliamentary approval of new SOE law in line with staff recommendations. end-Jun. 2022 6. Issuance of PPRA regulations to require collection for publication of beneficial ownership information for companies awarded public procurement contracts for PRs 50 million and above. end-Mar. 2022 *Source: IMF staff report and Supplementary Letter of Intent, Islamabad, January 28, 2022.* ### 6. Import Tariff ________________________________________________________________________________ 21 ### 6. Import Tariff ### Summary and overarching finding - Pakistan needs additional annual spending of 16.1 percent of GDP by 2030 to make substantial progress towards the Sustainable Development Goals (SDGs), with about two-thirds of this additional spending corresponding to education and health. - The estimates use the IMF SDG costing methodology, assigning levels of key inputs and unit costs to match countries with similar GDP per capita that perform well in SDG index scores. The information for this analysis was current as of March 2020. ### A. Background - Pakistan committed to the 2030 Agenda in 2015 and adopted the SDGs into its national development agenda in 2016; a Voluntary National Review (VNR) was undertaken in 2019. - Pakistan’s performance in education, health, electricity, and water and sanitation—measured by SDG indices—is below the median for Emerging Market and Developing Economies (EMDEs) and, in some cases, below the median for countries with GDP per capita below US$3,000. - The SIP focuses on education, health, electricity, roads, and water and sanitation and reports additional spending in 2030 as a share of GDP (education and health: difference between spending consistent with high performance in 2030 and current spending; physical capital: annualized spending required to close infrastructure gaps between 2020 and 2030). ### B. Human Capital — Education - Current situation and gaps: - Primary gross enrollment increased from 73 percent in 2003 to 94 percent in 2018, but an estimated 23 million children aged 5 to 16 are out of school (about 40 percent of students aged 5 to 16). - Enrollment in secondary and tertiary education remains below peers; female enrollment rates are lower, particularly at pre-primary and primary levels. - Average years of schooling increased from 3.3 in 2000 to 5.2 in 2018. - Total education spending (public and private) was about 4 percent of GDP in 2018. - Student-teacher ratio is 22 (overall), compared with 15 for high-performing countries with similar income per capita; primary student-teacher ratio exceeds 40, while secondary and tertiary is 13. - Teacher absenteeism reduced from 24 percent in 2009 to 12 percent in 2016. - Additional spending required by 2030: - Annual total (public and private) education spending must increase by about 5.7 percent of GDP (from 3.9 percent in 2018 to 9.6 percent in 2030). - Key assumptions and targets: - By 2030 gross enrollment rates assumed to reach: 50 percent in pre-primary, 100 percent in primary and secondary, and 50 percent in tertiary education. - Student-teacher ratio should be reduced to 15 to match high-performing countries. - Note: the assumed pre-primary gross enrollment rate by 2030 (50 percent) is below the current level of 83 percent; maintaining the current high pre-primary enrollment rate would increase the 2030 annual spending needs by 1 percentage point of GDP. - Policy and implementation priorities: - Increase enrollment rates (especially secondary and tertiary) and address demand- and supply-side barriers (parental reluctance, cultural norms, school facilities, teacher absenteeism). - Build more schools, particularly in rural areas, and improve essential infrastructure (bathrooms, electricity, drinking water, boundary walls). - Improve teacher quantity and quality, ensure attendance, and reduce "ghost" teachers. ### B. Human Capital — Health - Current situation and gaps: - Infant mortality fell from 106 to 58 deaths per 1,000 live births between 1990 and 2018; under-5 mortality decreased by about 50 percent over that period. - Pakistan’s infant and under-5 mortality rates are about twice as high as EMDE and MENAP averages; life expectancy at birth is somewhat below peer averages. - Pakistan spends only 3 percent of GDP on healthcare (reported), with total health spending noted elsewhere as 2.8 percent of GDP in the baseline used for projections. - The "out of pocket" share of healthcare spending is 65 percent. - Number of doctors per 1,000 inhabitants is 0.6. - Healthcare inputs (doctors and other medical personnel) are below peer levels; Pakistan is far from the health efficiency frontier despite being above countries with GDP per capita below US$3,000 in spending efficiency. - Additional spending required by 2030: - Total healthcare spending needs to increase from the current 2.8 percent to 8.2 percent of GDP by 2030. - Public healthcare spending must increase from 0.9 percent of GDP in 2018 to 4.3 percent of GDP in 2030. - Key assumptions and targets: - Doctors per 1,000 inhabitants should increase from 0.6 to 0.9. - Other medical personnel (nurses, midwives, etc.) should increase to almost six times current levels. - Policy and implementation priorities: - Substantially increase the number of medical service providers. - Rebalance public and private shares of health spending to reduce the 65 percent out-of-pocket burden and improve access for poor households. - Improve spending efficiency while scaling up public provision. ### C. Physical Capital — Electricity (selected findings) - Current situation and gaps: - Per capita electricity consumption was 452 kWh in 2018. - Electricity consumption per capita equals about 10 percent of the MENAP average and 19 percent of the EMDE average (comparative context noted). - On-grid electricity access is 77 percent of the population. - Approximately 32,300 villages, accounting for 8.8 million households, remain without grid access; these villages are typically remote and sparsely populated, making grid extension technically challenging and costly. - Directional priorities: - Expand access, particularly to remote and rural areas, while addressing technical and cost challenges associated with reaching sparsely populated villages. - Increase per capita electricity consumption toward peer levels as part of the infrastructure spending envelope needed for the SDGs. *Selected Issues Paper: Spending Needs for Reaching the Sustainable Development Goals — IMF staff estimates; information current as of March 2020.* ### 13. Installed capacity has increased significantly over the last decade, but generation ### 13. Installed capacity has increased significantly over the last decade, but generation ### Installed capacity and utilization - Generation capacity increased by 52 percent in the last 5 years, from 23,663 megawatt (MW) in 2013 to 36,010 MW in 2018. - Most additional capacity comes from thermal and hydro plants, with an increasing share of renewable energy sources. - Average capacity utilization factor is around 43 percent (government estimates). - Transmission and distribution losses average about 20 percent. ### Renewable energy and electricity access plans - Government plans to significantly increase generation capacity from hydro, nuclear, and renewable sources over the next ten years to achieve SDG7 and cope with expected increases in electricity consumption. - Government plans to rely on renewable energy sources to provide access to electricity in areas not connected to the grid and where extending the grid might not be economically feasible. - Government plans to extend access on-grid to 97 percent of the population; the remaining 3 percent would have access off-grid. - Electricity access is universal in the provinces of Punjab and two autonomous territories (Azad Jammu and Kashmir, Gilgit-Baltistan), but limited in Balochistan (44 percent), Khyber Pakhtunkhwa (96 percent), and Sindh (95 percent). ### Investment needs for electricity to 2030 (IMF staff estimates) - Change in total consumption 2019-2030 (kWh): 109,183,957,844 - Change in consumption 2019-2030 that cannot be met by current installed capacity (kWh): 61,423,117,980 - Required change in installed capacity (incl. generation, transmission and distribution) (KW): 16,255,365 - Additional required change in transmission and distribution capacity (KW): 13,630,377 - Assumptions: - Coefficient (electricity consumption to GDP per capita): 0.95 - Plant capacity factor: 43% - Unit cost of installed capacity (incl. generation, transmission and distribution) (US$ per KW): 1,059 - Unit cost - only transmission and distribution capacity (US$ per KW): 530 - Depreciation per year: 5% - Investment required by 2030 (US$ billion): 24.5 - Annual spending 2020-2030 (percent of GDP): 0.7 ### Roads: stock and investment needs - Since 2000, road network increased by 19,000 kilometers (from 250,000 kilometers in 2000 to 269,000 in 2018). - Most of the road network (124,442 kilometers) is composed of provincial roads; federal highways and motorways represent 5 percent of total road length. - Road density in Pakistan is equivalent to 66 percent of the average for other countries in the MENAP region and 58 percent of the average for EMDEs. - Government target: increase road density to 0.45 kilometers per square kilometer by 2025, implying expanding the existing road network by 38 percent. - Rural connectivity: 61 percent of the rural population live within 2 km of an all-season road. - To increase rural access from 61 percent to 75 percent by 2030 requires about 94,146 additional kilometers of all-season roads (a 36 percent increase). - Aggregate investment required by 2030 for roads: US$76 billion. - Equivalent annual spending 2020-2030: 2.3 percent of GDP. - Average construction cost used in estimates: US$808,000 per kilometer. ### Water and sanitation: progress and needs - Open defecation declined from 40 percent in 2000 to 10 percent in 2018. - Access to basic sanitation facilities increased from 36 percent in 2000 to 73 percent in 2018. - Rural basic sanitation access rose from 16 percent in 2000 to 60 percent in 2018. - Current access to non-contaminated drinking water: 44 percent of the population. - Current access to safely managed sanitation facilities on household premises: 46 percent of the population. - To achieve universal coverage by 2030, Pakistan must expand access to safely managed water and sanitation to an additional 168 million and 184 million people, respectively. - Expand access to basic handwashing facilities with soap and water to an additional 131 million people. - Investment required by 2030 (water, sanitation, hygiene combined): US$55.2 billion. - Annual spending 2020-2030 (percent of GDP): 2.0 - Per capita costs used in estimates (US$): - Water: Rural US$200; Urban US$178 - Sanitation: Rural US$146; Urban US$835 - Hygiene: Rural US$8; Urban US$58 ### Aggregate SDG spending needs and fiscal implications - Making substantial progress in critical SDG sectors will require additional annual spending of about 16 percent of GDP by 2030. - Additional spending needs for education and healthcare are especially large. - Electricity investment alone requires aggregate US$24.5 billion by 2030 (0.7 percent of GDP annually 2020–2030). - Roads require aggregate US$76 billion by 2030 (2.3 percent of GDP annually 2020–2030). - Water, sanitation, hygiene require aggregate US$55.2 billion by 2030 (2.0 percent of GDP annually 2020–2030). - Financing challenges: - High fiscal deficit and need for fiscal consolidation limit short-run availability of resources. - Pakistan's tax-to-GDP ratio is low compared to peers. - A medium-term revenue strategy could help boost revenues. - Private financing and development assistance may be needed. - Structural reforms to boost growth and increase efficiency are necessary. ### Institutional and capacity constraints - Meeting SDG spending efficiently requires addressing institutional and capacity constraints across sectors. - Education: reducing class sizes in primary education and increasing enrollment in secondary and tertiary education requires more qualified teachers. - Health: raise quantity and quality of inputs (health workers and facilities); lower out-of-pocket expenses to reduce financial vulnerability for disadvantaged groups. - Infrastructure: raise institutional and technical capacity, particularly in rural areas. - Strengthening coordination between federal and provincial governments is critical due to devolution under the eighteenth amendment of 2010. - National SDG framework is based on provincial targets; SDG support units established, but coordination and data collection for monitoring need strengthening. ### Trade and export competitiveness (summary points) - Pakistan is a very closed economy; openness (sum of exports and imports) is very low compared to peers and has barely changed since 1990. - Exports peaked at about 15 percent of GDP in 2003 and stand at about 11 percent of GDP currently. - Pakistan’s share of world exports declined by almost 40 percent since the early-1990s to 0.13 percent of world exports in 2020. - Export product mix concentrated in textiles and clothing, agriculture, and services; lack of technological sophistication and decline in number of unique products exported: 2,824 unique products in 2019 compared to 2,987 in 2009 (HS 6-digit level). - Net exports have frequently been a drag on growth; low economic complexity suggests low growth unless diversification and higher complexity are achieved. - Exchange rate effects on exports may be limited in the short run due to weak global demand, structural bottlenecks, rising input prices (e.g., energy), limited export-experienced firms, and scarce trade credit. *Source: IMF staff estimates and text from the IMF PDF chapter.* ### 6. Exported values tend to be small, but concentrated. In FY 2021, the number one ### 6. Exported values tend to be small, but concentrated. In FY 2021, the number one ### Export structure and concentration - The number one exporting firm exported goods valued at less than US$450 million, or 1.6 percent of total exports (FY 2021). - Exports were concentrated: 198 firms contributed 50 percent of total exports. - Less than 3000 firms exported more than US$1 million of goods and services. - The median value of exports by a firm was about US$105,000. ### Export financing - The State Bank of Pakistan has operated an export finance scheme (EFS) since 1973 to boost exports. - EFS provides short-term financing to exporters via banks (commercial and Islamic) for exports of manufacturing goods under two separate facilities: - (i) transaction-based facility; and - (ii) revolving facility based on the previous year’s exports. - Financing is offered at highly concessionary fixed interest rates, for up to 180 days. - Lending decisions are commercial decisions made by banks, which assume the credit risk. - In FY 2021, PRs 700 billion was allocated to EFS, with an additional PRs 90 billion allocated toward export-oriented investment under the Long-Term Financing Facility. - PRs 565 billion was outstanding as of end-June 2021. ### Trade policy, tariffs, and competitiveness - Pakistan has relied heavily on import tariffs to boost tax revenue; tax revenue collected at import stages stands at about ½ of total tax revenue. - Although tariffs have been reduced during the last decade, Pakistan’s tariffs remain relatively high compared to most EMDEs. - High effective protection has resulted in long-protected “infant” industries that: - prevent their development; - reduce the incentive to compete with imports; and - reduce the need to export given privileged domestic market positions. - Pakistan’s export basket is concentrated on primary goods at the lowest rungs of the value chain, with low technological sophistication and high susceptibility to terms of trade shocks and competition from lower-cost economies. - Factors hampering exports include: - legacy of an overvalued exchange rate; - an unsupportive tax and business environment; - a restrictive and non-transparent trade regime; and - high levels of protection creating an anti-export bias. ### Free Trade Agreements and market access - Pakistan has signed FTAs with China, Sri Lanka, and Malaysia; preferential trade agreements with Iran, Indonesia, and Mauritius; and is part of SAARC. - Most of Pakistan’s exports are to countries without FTAs with Pakistan. - In FY 2021, trade with the United States, United Kingdom, Afghanistan, and Germany (Pakistan’s first, second, fourth, and fifth most important export destinations, respectively) comprised about 37 percent of total merchandise exports. - Exports to Pakistan’s 3 FTA markets were about 10 percent (FY 2021). - The absence of permanent FTAs with major export market destinations exposes Pakistani exporters to higher tariffs relative to competing exporters. - New FTAs are being negotiated with Turkey, Thailand, Uzbekistan, and Afghanistan. ### Policy recommendations and conclusions (short- and medium-term actions) - Continue to work to further rationalize the tariff structure as part of implementing the approved national tariff policy, based on time-bound strategic protection; aim for low tariffs at uniform rates as domestic tax revenue mobilization strengthens. - Support new and small exporters: - Facilitate market discovery and entry through a well-developed country strategy supported by embassies and a strengthened Trade Development Authority. - Consider developing new export financing instruments and reevaluating existing financing instruments. - Advance efforts to establish the Ex-Im Bank. - Facilitate integration into global supply chains by improving product quality, firm reliability, and registering firms with necessary entities for tax and business purposes. - Negotiate new Free Trade Agreements (FTAs), pursuing high-standard, permanent FTAs with large, important trading partners to secure market access. - Invest in education and human capital to raise average skill levels and support production of more complex products. - Reduce red tape and improve the overall business environment to reduce uncertainty and simplify the tax and business environment; address a disproportionate GST burden on exporting manufacturing industries. - Remove exchange restrictions to facilitate trade: remain committed to phasing out existing exchange measures when conditions permit and eliminate them by the end of the current EFF (September 2022). - Develop an export strategy to articulate and expand on the recommendations in greater detail. ### SOE context relevant to trade and fiscal risks - Total assets of non-financial SOEs stood at 44 percent of GDP in 2019 (up from 31 percent of GDP in 2015). - The SOE sector employed 0.7 percent of total formal employment (2019). - As of end-June 2019 there were 213 federal-level SOEs, of which 67 were commercial non-financial federal SOEs. - Out of 67 non-financial commercial SOEs, 28 are in the power or oil and gas sectors; an additional 15 are in manufacturing. - Almost half of SOEs operated at a loss in 2019; commercial SOEs recorded losses of PRs 143 billion in FY 2019. - The average return on assets for SOEs in Pakistan was –1.4 percent (2019 or latest available). - Liabilities of loss-making SOEs are estimated in the range of 14–18 percent of GDP. - Publicly guaranteed SOE debt amounted to almost 6 percent of GDP in FY 2021, mostly concentrated in the power sector. - Governance and oversight issues include: - decentralized coverage and oversight over SOEs with fragmented responsibilities across line ministries and provincial governments; - an ownership policy not well communicated to the public; - only a subset of SOEs following international audit and accounting standards and making financial statements publicly available; and - SOE risk not integrated into the overall fiscal risk management framework despite limits on government exposure to SOEs. Italic Source attribution: *Sources: Pakistani authorities; PBS; SBP; Finance Division, Government of Pakistan (2021); IMF staff calculations; Fenochietto et al. (2019).* ### 12. Pakistan’s overall corporate ### 12. Pakistan’s overall corporate ### SOE corporate governance: index and cross-country comparison - A composite SOE governance index (score range 0–16.5) is used for cross-country comparison in the ME&CA region. - Pakistan scores 9.5 out of a maximum of 16.5. - The maximum score in the ME&CA region is 11.8. - Pakistan’s score of 9.5 is comparable to the median MENAP country score of 9.5. - The index covers de jure policies on ownership policy, financial oversight, and fiscal and policy interactions, based on survey responses from country authorities; it does not reflect de facto policies. - The index components and their score ranges (as used in the source) include: - Ownership Policy and Governance Framework (0–8.5) - Financial Oversight (0–4.8) - Fiscal and Policy Interactions with Government (0–3.2) ### IMF technical assistance findings on SOE governance (early 2020) - The IMF technical assistance mission noted that corporate governance of SOEs in Pakistan was weak. - Observed governance weaknesses and consequences: - Fragmented ownership model with blurred roles between line ministries and regulatory authorities. - Marginal role by the Ministry of Finance in ownership oversight. - Examples of role overlap: Ministry of Energy with final say on power tariff adjustments; aviation sector regulator owning civil aviation infrastructure; financial regulator as majority shareholder of a systemic state bank. - Political interference in selection of SOE board members appears prevalent, contrary to de jure policies. - Internal audit functions lack capacity. - Accounting and auditing standards are weak; financial reporting contains numerous accounting exemptions that may affect evaluation of SOE financial performance. - Lack of performance target setting and evaluation due to absence of an efficient performance monitoring system. - These shortcomings have produced unanticipated fiscal risks from SOE operations. - The IMF technical assistance was conducted by Pasquale Di Benedetta and Mia Pineda (both IMF Legal Department)—in collaboration with the World Bank and the Asian Development Bank. ### SOE Sector Reform: SOE Governance and Operations Act (early 2021) - The government submitted an SOE Governance and Operations Act to parliament in early 2021 with objectives to: - Enhance governance framework, management, and financial efficiency of SOEs. - Limit fiscal risks stemming from SOE operations. - Key features of the Act as described: - Lays groundwork for a gradual move towards a more centralized ownership model. - A newly created SOE unit in the Ministry of Finance would assume functions of ownership and oversight. - The Ministry of Finance’s oversight functions began improving with publication of the “Federal Footprint—SOE Annual Report” to assess SOE portfolio risks more structurally and transparently. - Selection of SOE board members: proposes a “nomination committee” headed by the minister of the line-ministry in charge, with four other members: the secretary of the division in charge, the finance secretary or his/her nominee, and two private sector experts with at least 20 years of experience. - Under the new model, the majority of SOE board members would be independent directors. - Governance functions of the SOE would be separated from its management. - The Act intends to separate regulatory and policy making functions of the state with regards to its SOEs. - Ownership policy reforms under the Act: - SOEs must set company mandates and strategies through a publicly available statement of corporate intent. - An ownership policy document will integrate the framework and clarify processes for developing strategy, negotiating performance agreements, and roles of involved institutions. - Strengthen central role of the board in oversight, internal and external controls, reporting, and disclosure. - Timeline for compliance with IFRS accounting standards. - Requires disclosure of non-financial information (for example, details of a PSO agreement) and aggregate reporting on an annual basis at a minimum. - Boards of each SOE expected to adopt a three-year business plan every financial year, laying out targets, strategic direction, and operational and financial performance measures; business plan envisaged to serve as the performance agreement between the government and the SOE. ### Policy recommendations and conclusions (short- and medium-term actions) - Immediate priority: - Passage of the SOE Governance and Operations Act. - Additional actions to strengthen SOE corporate governance and contribute to improving performance: - Produce and publish a consolidated list of all SOEs—owned by the federal government, provincial governments, or other SOEs—on an annual basis to provide a comprehensive picture of the SOE sector in Pakistan. - Publish the ownership policy document to communicate ownership objectives, financial and public policy targets, reporting guidelines, and guidelines for boards of directors to the markets and the public. - Assess SOE performance on an annual (or quarterly) basis, supported by timely audited annual financial statements following the best international standards; include evaluation against public policy and individual SOE objectives as well as private sector comparators. - Empower the Ministry of Finance by strengthening the legal and institutional framework and building its capacity to assess and monitor fiscal risks stemming from SOEs; given capacity constraints, initial focus could be on the sectors generating the most fiscal risk in Pakistan, namely the power and transport sectors. - Increase transparency and disclosure of SOE debt including both explicitly and implicitly guaranteed debt to adequately monitor and reduce fiscal risks. - Incorporate into the government balance sheet information such as state holdings in SOEs, as well as government’s receivables from and payables to SOEs. - Condition financial support to SOEs on commitments to improve corporate governance practices and audit procedures as well as enhance reporting, disclosure, and transparency. - Improve SOE board composition requirements to support objective and independent decision making, while avoiding potential conflicts of interest. - Beyond legal reforms, ensure attention and commitment to the implementation of corporate governance standards. ### Climate mitigation context (introductory findings) - Pakistan’s GHG emissions context (2018 and related data): - In 2018, Pakistan contributed about 1 percent of the world’s total GHG emissions, representing 438 million tons of GHG. - Using a different methodology than CAIT, Pakistan reported 490 million tons of GHG in 2018 (GoP 2021). - Pakistan ranks at the bottom of the 20 largest emitters of greenhouse gases. - Since 1990, Pakistan’s GHG emissions have grown by over 160 percent. - Regional and global comparisons: - Pakistan’s GHG growth since 1990 (over 160 percent) is below the MENAP country average of 175 percent and above the world’s 50 percent. - Emissions composition and sources: - Energy and agriculture together account for more than 85 percent of Pakistan’s GHG emissions. - Carbon dioxide (CO2) is prominent in the energy sector (electricity and heat production, transportation, manufacturing and construction). - Methane (CH4) is the dominant source within agriculture, mainly from enteric fermentation and agricultural soil. - Emission targets and policy commitments: - Under the 2021 NDC for COP26, Pakistan set a cumulative GHG reduction target of 50 percent below its projected 2030 BAU emissions (equivalent to more than 4,000 MtCO2): - Unconditional reduction of 15 percent financed from the country’s own resources. - Conditional reduction of 35 percent subject to international grant finance requiring an estimated US$101 billion just for energy transition (GoP 2021). - Pakistan’s 2016 NDC (COP21) had a conditional reduction target of 20 percentage below its projected 2030 BAU emissions, subject to international support amounting to US$40 billion (GoP 2016). - Pakistan joined the global methane pledge launched at COP26 to cut global methane emissions by 30 percent by 2030. - Policy actions since 2015 Paris Agreement and outcomes: - Pakistan reports these actions helped reduce GHG emissions by 8.7 percent between 2016–18 relative to the BAU scenario reflected in its 2016 NDCs (GoP 2016; GoP 2021). - Key efforts (mostly nationally financed and ongoing) include: - Pakistan Climate Change Act (2017) establishing: - Pakistan Climate Change Council (cross-ministerial) for overall climate strategy. - Pakistan Climate Change Authority to coordinate climate policy development and implementation and to design/establish a national registry and database on GHG emissions. - Nature-based solutions (NBS) flagship: Ten Billion Tree Tsunami Program (TBTTP) - Goal to plant 10 billion trees in 2021–23. - By mid-2021, more than one billion new trees had been planted. - Protected Areas Initiative (PAI): increase number of national parks from 30 to 45 and enhance total protected land area from 12 percent to 15 percent. *Italic: Source — IMF staff and country authorities as presented in the chapter "12. Pakistan’s overall corporate" (excerpts).* ### 2023. The country is also working toward becoming a member of the UN’s REDD+ program ### 1pakea2022001 - 2023. The country is also working toward becoming a member of the UN’s REDD+ program ### Climate mitigation measures and nature-based solutions - The country is working toward becoming a member of the UN’s REDD+ program (Reduction of Emissions from Deforestation and Forest Degradation), providing co-benefits including biodiversity conservation, clean air and water, and poverty alleviation. - The Ten Billion Trees Tsunami Program (TBTTP) has sequestered 8.4 MtCO2e emissions between 2016–21 and, at an estimated cost of about US$800 million (financed nationally), is projected to sequester another 149 MtCO2e emissions over the next 10 years. - Pakistan’s 2016 NDC projected a 300 percent growth in GHG emissions for 2015–30 (based on annual GDP growth of over 9 percent), with the 2021 update revising estimates downwards reflecting realized GHG reductions from nature-based solutions, increased renewables and energy efficiency, and an updated economic growth outlook after the Covid-19 pandemic. ### Energy mix, renewable targets, and coal policy - Pakistan’s primary energy consumption in 2019: natural gas, oil, and coal account for 85 percent of the mix; the share of renewables was almost 11 percent in 2019. - In 2019, about 85 percent of Pakistan’s primary consumption of renewables came from hydropower and the remainder mainly from solar. - Target: 60-percent share of renewables in all energy production by 2030. - Hydropower potential: 60,000 MW total potential, of which only 12 percent is currently developed. - Coal policy: committed in 2020 to refrain from constructing new coal plants beyond those under construction and to completely ban imported coal; plans for two new coal-fired power plants were shelved in favor of hydro-electric power, with focus on coal gasification and liquefaction for indigenous coal. ### Transport and electric vehicles - Target: 30 percent of all vehicles to run on electricity by 2030. - Fiscal incentives aim to bring 500,000 electric motorcycles and rickshaws and more than 100,000 electric cars, buses, and trucks into the transport system by 2025. - Use of revenue-neutral feebates for vehicles recommended to incentivize clean vehicles without fiscal cost. ### Market-based instruments and carbon pricing - Authorities published a study on carbon pricing and an emission trading system (ETS) in power and industry sectors, supported by UNFCCC and GES. - A National Committee on the Establishment of Carbon Markets was launched in late 2019 to develop recommendations on a domestic ETS and a credit-based trading mechanism linked to international carbon markets. - Carbon taxation estimates: - A carbon tax of US$25 per ton could annually yield 1.2 percent of GDP in Pakistan (IMF staff estimate). - A carbon tax of US$75 per ton could annually yield 2.7 percent of GDP in Pakistan (IMF staff estimate). - World Bank estimates show that a US$20 carbon tax can reduce emissions by more than 1/3 by 2050. - Rationale: GHG taxation can be implemented through a tax on carbon content of fossil fuels and on non-carbon GHG emissions based on CO2-equivalent transformation; unlike an ETS it does not require new capacity and can be administered as an extension of existing fuel taxes. ### Energy subsidies, fiscal impacts, and implicit costs - In 2020, Pakistan spent about ½ percent of GDP on explicit energy subsidies, with almost two thirds on electricity and the remainder on natural gas. - When accounting for implicit subsidies (capturing environmental costs), Pakistan’s total energy subsidies come closer to some 9½ percent (Parry et al., 2021). - Concerns: energy subsidies are not well targeted, costly for a tight budget under large public debt, and reduce incentives for investment in energy-efficient capacity and technology. ### Climate financing and external support - Pakistan received about US$5½ billion for climate projects during 2016–19, of which US$3.4 billion were directed to mitigation. This mainly came from multilateral sources and exceeded the average seen in peers. - Pakistan issued a green bond in 2021 for US$500 million, earmarked for projects increasing the share of hydro-energy in national power generation. - Recommendation: intensify collaboration with bi- and multilateral partners, seek more private financing, and facilitate foreign direct investment, particularly in green technologies. ### Policy recommendations and conclusions - Ensure adequate energy pricing and carbon taxation, while better targeting subsidies: - Energy price reform to bring electricity and gas prices in line with cost recovery under amended NEPRA and OGRA Acts. - Energy subsidy reform to reduce fiscal (and quasi-fiscal) subsidies and better target support to the most vulnerable. - GHG taxation on carbon content and non-carbon GHGs; consider compensatory measures for redistributive effects (targeted subsidies, improved public services). - Consider policy responses to potential border carbon adjustments (BCA) from trading partners and the option of an international carbon price floor. - Step up technology- and know-how-based interventions to reduce carbon emissions and methane: - Promote renewable energy, energy conservation and efficiency, and mass transit systems (particularly in and between urban areas). - Reduce methane emissions by updating agricultural production methods: improve livestock system efficiency (improved animal feed, breeding, adapted manure storage), better water management and irrigation, reduced crop burning and chemical inputs, and biogas production. - Consider payment for ecosystem services (PES) programs to promote forest conservation and combat land degradation, especially in REDD+ readiness context. - Garner more external support given budget and capacity constraints; tangible mitigation progress critically depends on financial and know-how transfers. ### Executive Board — concluding fiscal and structural points (authorities’ perspectives) - Pakistan’s economy showed resilience during Covid; with EFF support the country addressed twin deficits and rebuilt fiscal and external buffers. - Authorities remain committed to program objectives under the EFF, aiming to raise tax revenues and lower the public debt-GDP ratio over the medium term. - Monetary policy: SBP will remain data-driven and forward-looking to anchor inflation expectations; exchange rate flexibility to act as shock absorber. - Structural priorities: finalize amendments to State Bank of Pakistan Act to increase SBP autonomy and accountability; improve tax system efficiency; address energy sector financial viability; accelerate SOE governance, public financial management, and business climate reforms to unlock growth. - Authorities emphasize ownership of reforms and commitment to successful completion of the EFF program while protecting the poor. *Source: Executive Board Meeting on Pakistan—2021 Article IV Consultation, Sixth Review Under the Extended Arrangement Under the Extended Fund Facility, and Requests for Waivers of Applicability and Nonobservance of Performance Criteria and Rephasing of Access; IMF staff report material (excerpts).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1pakea2022001.pdf_