## Pakistan: IMF Staff Report (Content unit 1pakea2022002) ## Source details **Canonical URL:** [Pakistan: IMF Staff Report (Content unit 1pakea2022002)](https://www.imf.org/-/media/files/publications/cr/2022/english/1pakea2022002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1pakea2022002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1pakea2022002.pdf.json) --- ### Executive summary — economic backdrop and key indicators - Economic activity remained robust in FY22, fueled by loose fiscal policy and a delayed monetary response to inflationary pressures. - Underlying primary deficit in FY22 is estimated to have reached 1.6 percent of GDP (against a sixth review target of a primary balance). - Growth and inflation: - Growth: authorities’ provisional estimate of 6 percent in FY22. - Headline inflation: 21.3 percent in June. - External position and reserves: - Trade deficit in first 11 months of FY22: US$40.1 billion (10.7 percent of GDP). - Current account deficit in FY22: about US$15 billion (4.5 percent of GDP). - Remittances: around US$2.5 billion per month. - Gross official reserves declined from US$17.6 billion at end-December 2021 to US$9.8 billion at end-June 2022 (about 1.5 months of imports coverage). - Exchange rate and financial conditions: - Rupee depreciated around 30 percent in FY22. - SBP has hiked policy rates by 525 bps since December 2021. - EMBIG spreads close to 2,000 bps since mid-July. - Domestic demand and credit: - Private credit growth reached 24 percent y-o-y in May 2022. - SBP kept ex-post real rates in negative territory in FY22 (about -2.5 percentage points on average). ### Program performance to end-June 2022 - Overall performance deteriorated shortly after the sixth review; several quantitative criteria were missed and multiple structural benchmarks unmet. - Quantitative performance criteria (PCs): - Met: four end-June 2022 quantitative PCs on ceilings (NDA of SBP; SBP’s FX forward book; net government budgetary borrowing from SBP; government guarantees). - Met: two continuous PCs on zero new flow of SBP credit to the government and zero external public payment arrears. - Missed: two quantitative PCs—floor on net international reserves (NIR) and ceiling on the general government primary budget deficit (also missed at end-March 2022). - Missed: three continuous PCs on (i) non-imposition and non-intensification of exchange restrictions, (ii) non-modification of multiple currency practices (MCPs), (iii) non-imposition of import restrictions for BOP purposes. - Indicative targets (ITs): - Met: two ITs—floors on net tax revenue collection and gross issuance of longer-term debt instruments. - Missed: four ITs—targeted cash transfers (BISP); floor on health and education spending; net accumulation of tax refund arrears; power sector payment arrears. - Structural benchmarks (SBs): - Of ten SBs due through end-June 2022: one SB met; two implemented with delay; seven SBs missed. - Examples implemented: OGRA Act Amendments for gas sector adopted; PPRA beneficial ownership publication regulations issued with delay; AML/CFT measures adopted in June with delay. - Missed SBs included further tax amnesties and preferential tax treatments; draft PIT law deviated from sixth review commitment. - Four SBs remain outstanding and will be reset (parliamentary approval of new SOE law; plan for phasing out SBP refinance facilities; first-stage recapitalization of two private sector banks; establishment of an asset declaration system). ### Recent policy actions taken by authorities - Adopted the FY23 budget with a sizable primary balance adjustment; parliamentary approval including a personal income tax reform in late-June (signed into law June 30, 2022). - Reversed untargeted February relief package during May–July: - Removal of untargeted power and post-tax fuel subsidies. - Commencement of restoration of the Petroleum Development Levy (PDL) with scheduled increases. - Monetary and exchange actions: - Increased policy rate significantly (policy rate reached 15 percent by July 7, 2022; cumulative tightening noted up to 800 bps in some passages). - Acted to restore market-determined exchange rate flexibility; SBP interventions limited to containing disorderly market conditions. - Energy and tariff measures: - Eliminated post-tax fuel subsidies, increased fuel taxation, and increased electricity tariffs through staged AR and QTAs. - Signed Memoranda of Understanding with provincial governments and implemented catch-up on overdue power tariff adjustments. - Financial sector: - Plan to strengthen supervision and take necessary actions to safeguard financial sector stability, including recapitalization and resolution plans for undercapitalized banks. ### Key policy recommendations and program goals - Restore fiscal discipline and debt sustainability while protecting social spending. - Safeguard monetary and financial stability and maintain a market-determined exchange rate. - Rebuild external buffers. - New structural benchmarks to: - Enhance social protection (new PC elevating BISP IT to QPC). - Strengthen energy sector viability. - Support financial stability. - Acknowledged limits: mobilizing additional high-quality tax revenue and substantially increasing reserve coverage are out of reach under current assumptions. ### Staff views, program modalities, and financial impact - Staff supports completion of the seventh and eighth reviews and extension of the program through end-June 2023. - Staff supports augmentation of access by SDR 720 million based on corrective actions and policy commitments. - Financial impact of this review: - This review will make available SDR 894 million and help catalyze essential external financing. - Waivers and approvals sought: - Waivers of nonobservance for missed PCs and continuous PCs. - Temporary approval (12 months) of new/intensified exchange restrictions and modified MCP under Article VIII, given partial removal and commitment to phase out when BOP stabilizes. ### Macroeconomic outlook and selected projections (staff table figures) - Growth and inflation paths (Real GDP growth (%) and Consumer prices (period average, % change)): - Real GDP growth (%) : FY21 5.7, FY22 6.0, FY23 3.5, FY24 4.2, FY25 4.6, FY26 5.0, FY27 5.0. - Consumer prices (period average, % change): FY21 8.9, FY22 12.1, FY23 19.9, FY24 10.0, FY25 7.7, FY26 6.5, FY27 6.5. - Fiscal and debt projections: - Gen. gov. overall balance (incl. grants, %GDP): FY22 -7.0, FY23 -4.6, FY24 -4.0, FY25 -3.7, FY26 -3.5, FY27 -3.7. - Gen. gov. primary balance (underlying, excl. grants, %GDP) 1/: FY22 -1.6, FY23 0.4, FY24 0.5, FY25 0.6, FY26 0.6, FY27 0.2. - Gen. gvt. debt (incl. guarantees and IMF obligations, %GDP): FY21 77.9, FY22 78.9, FY23 72.1, FY24 66.9, FY25 65.3, FY26 62.4, FY27 60.7. - External and reserves outlook: - Current account balance (%GDP): FY22 -4.7, FY23 -2.5, FY24 -2.5, FY25 -2.5, FY26 -2.5, FY27 -2.6. - Gross official reserves (billions of US$): FY22 9.8, FY23 16.2, FY24 17.3, FY25 18.9, FY26 21.0, FY27 22.5. - Gross official reserves (months of next year's GNFS imports): FY22 1.5, FY23 2.2, FY24 2.3, FY25 2.4, FY26 2.4, FY27 2.5. - Gross official reserves (% IMF reserve adequacy metrics) 2/: FY22 40.9, FY23 59.7, FY24 60.7, FY25 62.3, FY26 68.8, FY27 71.7. ### Energy sector: circular debt, tariffs, and reform imperatives - Power sector circular debt (CD): - CD stock at PRs 2.253 trillion (3.4 percent of GDP) at end-June 2022 — decrease of PRs 27 billion during FY22. - CD stock payments from the budget amounted to PRs 564 billion, overcompensating a record CD flow of PRs 536 billion. - PRs 800 billion (1.2 percent of GDP) of the stock is held by PHPL. - Tariff adjustments and timing: - NEPRA overdue adjustments: QTAs for FY22 Q1 and Q2 together PRs 2.12/kwh for three months; ARs for FY22 and FY23 PRs 7.91/kwh; subsidy reform markup PRs 0.54/kwh to unprotected slabs. - Government notifications in July 2022: subsidy markup from July 5; two rounds of AR of PRs 3.50/kwh each from July 25 and August 1; remaining AR of PRs 0.91/kwh from October 1. - Cumulative effect: AR steps likely increase weighted average power price in October 2022 by only about 10 percent over end-December 2021 level. - Implementation urgency: each month of delaying an adjustment of PRs 1 per kWh adds about PRs 8½ billion to the stock of arrears. - Policy recommendations: - Implement regular tariff adjustments in line with established formulas to implement the CDMP, limit fiscal pressures, halt arrears accumulation, reduce load shedding, and restore generator viability. - Better target power subsidies and proceed to third stage of multi-year subsidy reform (World Bank-supported), including tube-well subsidy rationalization plan by November 2022. - Pursue medium-term reforms: reduce commercial and technical losses, improve DISCO governance, introduce competition, renegotiate PPAs, and implement National Electricity Policy 2021. ### Gas sector priorities - Gas circular debt: - CD stock about PRs 720 billion (1.1 percent of GDP) by end-March 2022; wider gas CD concept exceeds PRs 1,230 billion at end-March 2022. - Key measures: - OGRA Act Amendments adopted (in effect March 1, 2022). - Need to finalize and implement regular end-user gas price adjustments; OGRA ERR implies a prescribed average end-user gas price increase by some 45 percent to PRs 928 per MMBtu. - Establish gas CDMP, improve UFG monitoring and data, and implement unbundling and other structural reforms to reduce losses and improve collections. ### Social protection and BISP - FY22 BISP spending: - BISP spending in FY22 increased to PRs 235 billion—exceeding FY21 execution by 21 percent but falling PRs 15 billion short of the FY22 budget envelope. - Under-execution drivers: lower-than-projected EEC spending; slower expansion of UCT Kafalat (expanded by 0.7 million instead of 1 million families to 7.7 million families); lower CCT spending. - FY23 commitments: - FY23 budget allocation for regular BISP spending raised to PRs 316 billion — an almost 40-percent increase over FY22 execution. - Expansion target: UCT Kafalat program to 9 million families by end-FY23 (new end-June 2023 SB). - UCT Kafalat stipend increases and special SFSD transfers: - Annual UCT Kafalat stipend increased by almost 17 percent to PRs 28,000 over FY23 (noted in one section); elsewhere programmed permanent increases to PRs 13,000/14,000 per family referenced under prior government measures. - SFSD one-off PRs 2,000 disbursed in June 2022; extension into FY23 to provide monthly PRs 2,000 to 2 million non-BISP Kafalat beneficiaries worth PRs 48 billion with sunset at end-FY23. - Staff recommendations: - Fully execute FY23 envelope (elevation of BISP IT to a QPC). - Find fiscal space to further increase UCT generosity and implement periodic inflation update by end-December 2022. - Review benefit levels for education and stunting CCTs. - Generosity benchmark: current level about 9 percent (9.3 percent noted in other section) of average consumption of bottom quintile; international best practice about 25 percent. ### Monetary, exchange rate, and financial sector policies - Monetary policy: - Tightening cycle started in September 2021; policy rate rose to 15 percent through July 2022 (cumulative changes referenced as 525 bps since April and up to 800 bps cumulatively since September 2021 in different sections). - SBP increased interest rates on EFS and LTFF; outstanding refinancing schemes as of end-June 2022: PRs 1,607 billion (17.4 percent of private credit). - Plan to phase out SBP refinance facilities; authorities committed to prepare a transition plan by end-2022 (reset to end-December 2022). - Exchange rate and reserves: - Rupee depreciated by 16 percent between end-December 2021 and end-June 2022 (other passages note around 30 percent in FY22). - Gross official reserves: US$9.8 billion at end-June 2022; mid-August 2022 reported US$7.8 billion (1.2 months of imports). - Reserve rebuilding objective: at least 2.2 months of import coverage by end-FY23. - Administrative exchange measures introduced and partially repealed: 100-percent CMR extended on April 7, 2022 (177 items); import ban on luxury items on May 19, 2022; prior-authorization for certain import payments on May 20, 2022; partial repeal in August 2022 with commitment to full removal by end-FY23. - Financial sector: - Banking sector soundness (end-March 2022): CAR at 16.4 percent; NPLs 7.8 percent with non-provisioned NPLs at 0.7 percent; 10 out of 32 banks report NPLs above 10 percent. - Commitments: ensure two undercapitalized private banks complete first-stage recapitalization (reset to end-March 2023); revise early intervention, resolution and crisis management frameworks by end-October 2022; allow write-off of fully provisioned NPLs and adopt bank-specific NPL reduction plans by end-June 2023. ### Structural policies, SOEs, and governance - Structural weaknesses: uneven playing field for SOEs, corruption, red tape, obstacles to trade and property registration. - SOE reforms: - New SOE law adopted by National Assembly in July 2022; awaiting Senate adoption (reset to end-September 2022). - Operationalize a Central Monitoring Unit (CMU) within MoF by January 2023 (new end-January 2023 SB). - Reduce state footprint through SOE triage and privatizations (including two LNG-based power plants, one development finance institution, one small public bank). - Governance and anti-corruption: - Establish asset declaration system (end-March 2022 SB, reset to end-September 2022). - Publish comprehensive review of anticorruption institutional framework by a task force (new end-January 2023 SB). - AML/CFT: completed 2018 and 2021 Action Plans; encouraged to sustain efforts to mitigate ML/TF risks including from proceeds of corruption. ### Program modalities, conditionality, and financing details - Monitoring and conditionality: - Program to be monitored through PAs, QPCs, ITs, continuous PCs, SBs, and quarterly reviews as set out in the MEFP and TMU. - Program exchange rate in TMU: PRs 141.3172 per U.S. dollar. - Quantitative targets and adjustments: - New PCs for end-September 2022, end-December 2022, and end-March 2023 to support fiscal deficit reduction, contain inflationary pressures, cap government borrowing from SBP, and support reserve coverage. - TMU defines NIR, NDA, swap/forward positions, ceilings/floors with adjustment mechanisms linked to actual disbursements and arrears flows. - Financing: - Program remains fully financed with financing commitments from bilateral and multilateral partners to cover public gross external financing needs in FY23 and until program end in June 2023. - FY23 official financing noted: US$7 billion as rollovers of existing and US$4 billion in additional financing commitments, including from China, Qatar, Saudi Arabia, UAE, and IFIs (World Bank, ADB, Islamic Development Bank). - IMF exposure with this review: SDR 6,088 million (300 percent of quota); with full purchases will peak at 360 percent of quota in FY23. - Requests to IMF: - Waivers for missed PCs and continuous PCs; completion of combined seventh and eighth review; purchase of SDR 894 million; extension of EFF until end-June 2023; augmentation of access by SDR 720 million (around 36 percent of quota); approval of exchange restrictions/MCPs for temporary period. ### Risks and Risk Assessment Matrix (RAM) — selected high-probability/high-impact risks - External risks rated High (relative likelihood) and High (expected impact): - Russia’s invasion of Ukraine escalation: financial volatility, financing pressures, capital outflows. - Rising and volatile food and energy prices: weaker energy sector finances, higher inflation, tighter global conditions. - Widespread social discontent and political instability. - Domestic risks rated High: - Slippages in policy implementation: weaker fiscal discipline, debt sustainability risks, subdued growth. - Other risks (Medium likelihood/impact): COVID-19 variants, abrupt slowdown in China, de-anchoring of inflation expectations in advanced economies, climate-related natural disasters, deterioration in security conditions. - Bottom line: balance of risks tilted to the downside; close program monitoring, TA, and financing assurances are essential mitigation measures. ### Selected numeric highlights from tables and reporting schedules - Population: 222.6 million (2020/21). - Per capita GDP: US$1,546.8 (2020/21). - Poverty rate: 21.9 percent (national line; 2018/19). - Gross external financing needs (millions of U.S. dollars, selected): 34,331 (2022), 35,068 (2023), 30,757 (projection). - End-period gross official reserves (millions of U.S. dollars) in Table 3a memo: 9,821 (FY22), 16,226 (FY23 projected). - Circular debt stock and flows: Power CD stock PRs 2,253 billion end-June 2022; new power payment arrears flow PRs 536 billion in FY22; budget CD payments PRs 564 billion. - Outstanding SBP refinance schemes: PRs 1,607 billion as of end-June 2022 (17.4 percent of private sector credit). - Tax refund arrears: PRs 366 billion as of end-June 2022; target to reduce to PRs 225 billion by end-September 2022. - BISP FY22 execution: PRs 235 billion; FY23 regular BISP budgeted PRs 316 billion; special SFSD FY23 cost PRs 48 billion for 2 million non-BISP families. _Italic: Source: IMF staff report — content unit 1pakea2022002 (Pakistan country report excerpts)._ ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Economic backdrop - Economic activity remained robust in FY22, fueled by loose fiscal policy and a delayed monetary response to inflationary pressures. - Underlying primary deficit in FY22 is estimated to have reached 1.6 percent of GDP (against a sixth review target of a primary balance). - Growth and inflation: - Growth: authorities’ provisional estimate of 6 percent in FY22. - Headline inflation: 21.3 percent in June. - External position and reserves: - Trade deficit in first 11 months of FY22: US$40.1 billion (10.7 percent of GDP). - Current account deficit in FY22: about US$15 billion (4.5 percent of GDP). - Remittances: around US$2.5 billion per month. - Gross official reserves declined from US$17.6 billion at end-December 2021 to US$9.8 billion at end-June 2022 (about 1.5 months of imports coverage). - Exchange rate and financial conditions: - Rupee depreciated around 30 percent in FY22. - SBP has hiked policy rates by 525 bps since December 2021. - EMBIG spreads close to 2,000 bps since mid-July. - Domestic demand and credit: - Private credit growth reached 24 percent y-o-y in May 2022. - SBP kept ex-post real rates in negative territory in FY22 (about -2.5 percentage points on average). ### Program performance - Overall performance deteriorated shortly after the sixth review; several quantitative criteria were missed and multiple structural benchmarks unmet. - Quantitative performance criteria (PCs): - Met at end-June 2022: four quantitative PCs on ceilings (NDA of SBP; SBP’s FX forward book; net government budgetary borrowing from SBP; government guarantees). - Met: two continuous PCs on zero new flow of SBP credit to the government and zero external public payment arrears. - Missed: two quantitative PCs—floor on net international reserves (NIR) and ceiling on the general government primary budget deficit (missed also at end-March 2022). - Missed: three continuous PCs on (i) non-imposition and non-intensification of exchange restrictions, (ii) non-modification of multiple currency practices (MCPs), (iii) non-imposition of import restrictions for BOP purposes. - Indicative targets (ITs): - Met: two ITs—floors on net tax revenue collection and gross issuance of longer-term debt instruments. - Missed: four ITs—targeted cash transfers (BISP); floor on health and education spending; net accumulation of tax refund arrears; power sector payment arrears. - Structural benchmarks (SBs): - Of ten SBs due through end-June 2022: one SB met; two implemented with delay; seven SBs missed. - Examples: OGRA Act Amendments for gas sector adopted; PPRA beneficial ownership publication regulations issued with delay; AML/CFT measures adopted in June with delay. - Missed SBs included further tax amnesties and preferential tax treatments; draft PIT law deviated from sixth review commitment. - Four SBs remain outstanding and will be reset (parliamentary approval of new SOE law; plan for phasing out SBP refinance facilities; first-stage recapitalization of two private sector banks; establishment of an asset declaration system). ### Recent policy actions taken by authorities - Adopted the FY23 budget with a sizable primary balance adjustment (parliamentary approval including a personal income tax reform in late-June). - Reversed untargeted February relief package during May–July (removal of untargeted power and post-tax fuel subsidies; commencement of restoration of the Petroleum Development Levy). - Increased policy rate significantly and acted to restore market-determined exchange rate flexibility. - Eliminated post-tax fuel subsidies, increased fuel taxation, and increased electricity tariffs. - Signed Memoranda of Understanding with provincial governments and implemented catch-up on overdue power tariff adjustments. - Plan to strengthen supervision and take necessary actions to safeguard financial sector stability. ### Key policy recommendations and program goals - Restore fiscal discipline and debt sustainability while protecting social spending. - Safeguard monetary and financial stability and maintain a market-determined exchange rate. - Rebuild external buffers. - New structural benchmarks to: - Enhance social protection (new PC). - Strengthen energy sector viability. - Support financial stability. - Acknowledged limits: despite recalibration, mobilizing additional high-quality tax revenue and substantially increasing reserve coverage are out of reach under current assumptions. ### Staff views and program modalities - Staff supports: - Completion of the seventh and eighth reviews. - Extension of the program through end-June 2023. - Augmentation of access by SDR 720 million based on corrective actions and policy commitments. - Financial impact of this review: - This review will make available SDR 894 million and help catalyze essential external financing. - Risks remain exceptionally high; consistent and decisive implementation is essential to improve economic prospects. ### Outlook and risks - Growth and inflation outlook: - Real GDP growth projected to decelerate to 3.5 percent in FY23 (from above-trend FY21–FY22) and assumed to gradually return to medium-term potential of 5 percent with sustained policy and reform implementation. - Average CPI inflation expected to surge to 20 percent in FY23; core inflation projected to remain elevated. - SBP expected to reach its 5–7 percent inflation target range gradually; medium-term inflation slowing to 6.5 percent. - External and reserve outlook: - Current account deficit projected to narrow to 2.5 percent of GDP in FY23 (from 4.7 percent of GDP in FY22). - Reserve coverage expected to strengthen to some 2.3 months of imports by end of the forecast horizon, up from about 1.7 months at the onset of the program. - Public debt and fiscal outlook: - Public debt projected to fall to 72.1 percent of GDP at end-FY23 (from 78.9 percent at end-FY22 and 77.9 percent at end-FY21). - Projection path: public debt toward 60 percent of GDP by FY27; external debt declining toward 25 percent of GDP. - Selected projections from staff table (as presented): - Real GDP growth (%) : FY21 5.7, FY22 6.0, FY23 3.5, FY24 4.2, FY25 4.6, FY26 5.0, FY27 5.0. - Consumer prices (period average, % change): FY21 8.9, FY22 12.1, FY23 19.9, FY24 10.0, FY25 7.7, FY26 6.5, FY27 6.5. - Gen. gov. overall balance (incl. grants, %GDP): FY22 -7.0, FY23 -4.6, FY24 -4.0, FY25 -3.7, FY26 -3.5, FY27 -3.7. - Gen. gov. primary balance (underlying, excl. grants, %GDP) 1/: FY22 -1.6, FY23 0.4, FY24 0.5, FY25 0.6, FY26 0.6, FY27 0.2. - Gen. gvt. debt (incl. guarantees and IMF obligations, %GDP): FY21 77.9, FY22 78.9, FY23 72.1, FY24 66.9, FY25 65.3, FY26 62.4, FY27 60.7. - Current account balance (%GDP): FY22 -4.7, FY23 -2.5, FY24 -2.5, FY25 -2.5, FY26 -2.5, FY27 -2.6. - Gross official reserves (billions of US$): FY22 9.8, FY23 16.2, FY24 17.3, FY25 18.9, FY26 21.0, FY27 22.5. - Gross official reserves (months of next year's GNFS imports): FY22 1.5, FY23 2.2, FY24 2.3, FY25 2.4, FY26 2.4, FY27 2.5. - Gross official reserves (% IMF reserve adequacy metrics) 2/: FY22 40.9, FY23 59.7, FY24 60.7, FY25 62.3, FY26 68.8, FY27 71.7. *Source: IMF staff report — EXECUTIVE SUMMARY (1pakea2022002).* ### Box 1. GDP Rebasing ### Box 1. GDP Rebasing ### Overview - In January 2022, the Pakistan Bureau of Statistics (PBS) published revised annual GDP estimates for the period 2016–21 based on rebased prices (2015/16 from 2005/06 previously) and reflecting an expanded coverage. - The new GDP estimates follow the 2008 System of National Accounts (SNA) methodology. - The rebasing reflects improvements including better coverage of all sectors and the disaggregation of service sector segments (e.g., accommodation and food services separated from wholesale and retail trade). ### Notable revisions and implications - Revised GDP over 2016–21 is about 16 percent higher in nominal terms relative to the previous series. - The structure of the economy has remained broadly unchanged, with services dominating the economy, albeit by a smaller share and the agricultural sector’s share expanding. - GDP growth rates under the new base were revised in May 2022 in the context of the release of the provisional FY22 estimates, and estimates under the old base are no longer published. ### Data and methodology issues - The GDP rebasing was hampered by bottlenecks related to supporting census and survey studies. - The Integrated Agriculture Census faced repeated delays and agricultural estimates were interpolated off the 2005-06 figures. - In April 2022, PBS published supporting documentation on data sources, estimation methodologies, and deflation methods. ### Comparative figures presented in the box - GDP Growth Rates Comparison (Constant prices) — values presented in the box figure: - 5.2 - 5.5 - 2.1 - -0.4 - 5.4 - 4.6 - 6.1 - 3.1 - -1.0 - 5.6 - (FY17 FY18 FY19 FY20 FY21 labels accompany these values in the figure) - GDP Sectoral Shares, FY21 (Constant basic prices) — values shown for Old base and New base: - Old base: Agriculture 19.2, Industry 19.1, Services 61.7 - New base: Agriculture 23.1, Industry 18.9, Services 58.0 *Source: IMF staff summary of Box 1. GDP Rebasing (Pakistan country report).* ### 17. The authorities have progressed with ### 17. The authorities have progressed with ### Social protection measures and outcomes - BISP spending in FY22 increased to PRs 235 billion—exceeding FY21 execution by 21 percent but falling 6 percent short of the FY22 budget envelope, thus missing the related end-June 2022 IT (MEFP ¶14). - Under-execution drivers: - Lower-than-projected COVID-related Ehsaas Emergency Cash (EEC) transfer spending. - Slower-than-envisaged horizontal expansion of the unconditional cash transfer (UCT) Kafalat program: expanded by 0.7 million families instead of 1 million families, reaching 7.7 million families due to a temporary slowdown in enrollment amid reassessment of social spending priorities. - Triggered lower spending under accompanying conditional cash transfer (CCT) programs for health and education. - Benefit changes and temporary schemes: - Annual UCT Kafalat stipend increased by almost 17 percent to PRs 28,000 over FY23. - Authorities used PRs 17 billion of BISP under-execution to launch a special temporary cash transfer scheme (Sasta Fuel Sasta Diesel, SFSD) to mitigate high inflation and energy price reforms impacts. - In June 2022, a one-off cash transfer of PRs 2,000 was disbursed to all UCT Kafalat families and 1 million non-Kafalat families up to the middle socio-economic status quintile (PMT score below 37). - Note on EEC: launched April 2020, provided two rounds of one-off cash assistance (PRs 12,000 each) disbursed to about 47 percent of the population over FY21 (worth PRs 40.6 billion) and the first half of FY22 (worth PRs 8.7 billion) before retirement in FY22 Q3. ### Policy discussion — poverty reduction and BISP funding - EFF pillar: reducing poverty and boosting social protection remains a key pillar of the EFF (MEFP ¶15). - FY23 budget allocation for regular BISP spending raised to PRs 316 billion — an almost 40-percent increase over FY22 execution. - Expansion target: UCT Kafalat program to 9 million families by end-FY23 (new end-June 2023 SB), using the National Socio-Economic Registry (NSER) finalized in October 2021 and kept live. - Staff recommendations: - Fully execute the FY23 envelope (supported through the elevation of the BISP IT to a QPC). - Find fiscal space to further increase the UCT Kafalat stipend to achieve a meaningful generosity level (including by at least implementing the periodic inflation update by end-December 2022). - Review benefit levels for education and stunting CCTs to better align with actual child schooling and food costs. - UCT generosity benchmark: current level remains low at about 9 percent of the average consumption level of the bottom quintile, compared to a global best practice of 25 percent. ### Policy discussion — fuel subsidy extension - Authorities extended the one-off FY22 SFSD cash transfer of PRs 2,000/month to 2 million non-BISP Kafalat families until end-FY23 at a budgetary cost of PRs 48 billion to prevent lower-middle class families from falling into poverty amid high inflation and ongoing energy price reform. - Structural reforms for inclusive growth (¶30ff) remain crucial to improve livelihoods and create opportunities. ### Monetary, exchange rate, and financial sector — background and developments - External pressures: - Rupee depreciated by 16 percent between end-December 2021 and end-June 2022, reflecting a persistently high import bill and outflows from non-resident investors. - SBP intervened frequently in FX market through FY22Q3, then allowed faster depreciation in FY22Q4 amid falling reserve buffers. - Monetary policy: - Tightening cycle started in September 2021; policy rate more than doubled to 15 percent through July 2022. - Most increases (525 bps) have taken place since April. - SBP increased interest rates on EFS and LTFF, reducing gap with policy rate to 5 percentage points and linked these rates to the policy rate going forward. - Inflation expected to continue rising in FY23Q1 as authorities increase the PDL and allow energy tariffs to catch up. - Banking sector soundness (as of end-March 2022): - Capital adequacy ratio (CAR) at 16.4 percent, regulatory minima of 11.5 percent (including the 1.5 percent capital conservation buffer). - NPLs declined to 7.8 percent with non-provisioned NPLs at 0.7 percent; 10 out of 32 banks report NPLs above 10 percent. - SBP tightened prudential regulations for consumer financing, modifying terms for car financing in May 2022. ### Monetary and exchange rate policy recommendations - Maintain a tight monetary policy stance to reduce inflation and reanchor expectations; SBP agreed to maintain a tight stance to achieve real positive interest rates and target inflation range of 5–7 percent over the medium term. - Pace of policy rate adjustment should consider broader policy mix including degree of fiscal adjustment. - Enhance monetary policy transmission and governance by: - Continuing to reduce the interest rate subsidy provided via refinancing facilities and phasing out SBP’s involvement in these schemes over the medium term (MEFP ¶17). - These schemes have ballooned by almost 43 percent y-o-y and account for 17.4 percent of private credit at end-June 2022. - Authorities committed to prepare a transition plan by end-2022 (end-April 2022 SB, reset to end-December 2022). - Commitment to a market-determined exchange rate to act as a shock absorber, allow exchange rate flexibility, avoid suppressing trend movements, and help rebuild reserves toward program targets. - Authorities partially repealed import ban on luxury and nonessential items in August 2022 and committed to remove remaining import ban, exchange restrictions, and MCP when BOP conditions stabilize and before end-FY23 (MEFP ¶20). - Administrative measures taken in FY22: - April 2022: extended 100-percent cash margin requirement (CMR) by 177 items (about 20 percent of total import values). - May 2022: banned import of luxury and nonessential items (breaching PC on non-imposition of import restrictions). - Imposed requirement to seek payment authorization from SBP for certain imports (discretionary), violating PC on non-imposition of exchange restrictions. - Partial repeal in August 2022 left ban on cars, mobile phones, and household appliances; committed to eliminate import payment authorization requirement at end-August 2022 depending on market conditions. - CMRs reduced in early August 2022 on terms of payment above 90 days; CMRs introduced in April set to lapse in December 2022. - Continued exchange restriction from limitations on advance payments for imports against letters of credit (imposed in 2018). ### Financial sector stability and governance actions - Staff encouraged close monitoring of financial sector health and implementation of IFRS 9. - Authorities’ commitments and actions: - Ensure two undercapitalized private sector banks complete delayed first-stage recapitalization (end-May 2022 SB, reset to end-March 2023) and enter resolution if not fully capitalized by end-May 2023 (new end-May 2023 SB). - Liquidate one public sector bank after delisting from privatization. - Address high NPLs in some banks through bank-specific plans and allow write-off of fully provisioned NPLs in general (new end-June 2023 SB). - Revise early intervention, resolution and crisis management frameworks (including deposit insurance) by submitting related draft amendments to cabinet (new end-October 2022 SB). - Staff urged discontinuation of mandatory housing lending targets for banks (set to increase from 5 to 7 percent effective end-2023) and reversal of reduction in capital adequacy risk weights for real estate investment trusts. - AML/CFT: - Authorities completed 2018 AML/CFT Action Plan in June (end-March 2022 SB) and accomplished 2021 AML/CFT Action Plan ahead of deadline. - SBP conducted thematic AML/CFT inspection of institutions participating in tax amnesty program for construction sector and will share findings by end-September. - Authorities encouraged to ensure sustainability and effectiveness of efforts to mitigate significant ML/TF risks including from proceeds of corruption (MEFP ¶28.b). ### Energy sector — background, current situation, and circular debt - Energy sector vulnerabilities exacerbated by global commodity price increases, slow reform, delayed tariff adjustments, higher generation and financial costs (higher international energy prices, exchange rate depreciation, higher interest rates), and limited impact of medium-term structural reforms. - Power sector: - Circular debt (CD) stock at PRs 2.253 trillion (3.4 percent of GDP) at end-June 2022 — decrease of PRs 27 billion during FY22. - CD stock payments from the budget amounted to PRs 564 billion, overcompensating a record CD flow of PRs 536 billion. - CD flow much higher than envisaged under updated IFI-supported circular debt management plan (CDMP) adopted March 2022, missing related end-June 2022 IT by more than threefold. - Acute cash flow strains have resulted in substantial power outages (load shedding). - Note: PRs 800 billion (1.2 percent of GDP) of the stock is held by PHPL. - Budgeted CD payments allowed: servicing PHPL debt (PRs 130 billion); repaying arrears to independent and government power producers in return for revised purchasing power agreements (PRs 384 billion); repaying arrears to other IPPs (PRs 50 billion). - Gas sector: - CD stock about PRs 720 billion (1.1 percent of GDP) by end-March 2022, driven by accumulated shortfall from below-cost-recovery prices and pending data cleanup. - Main drivers: high unaccounted for gas losses (UFG), delayed sales price adjustments (since September 2020), uncovered subsidies (especially for export and zero-rated industries), and collection shortfalls. _Italic: Source: IMF staff report excerpt (chapter/section provided)._ ### 28. Restructuring the energy sector requires accelerating the reform efforts. This is ### 1pakea2022002 - 28. Restructuring the energy sector requires accelerating the reform efforts. This is ### Energy-sector challenge and overall reform imperative - Recovery costs are poised to continue to increase in the near term driven by: new generation capacity coming on stream, high international commodity prices, and the recent rupee depreciation. - Recent measures (including the renegotiation of IPP contracts) will somewhat help contain rising arrears, but making a dent requires steadfast implementation of a comprehensive, socially-balanced reform strategy (MEFP ¶¶22–24). ### Monitoring via the Circular Debt Management Plan (CDMP) - The authorities are updating the CDMP for FY23 regarding its underlying assumptions and reform progress (supported by World Bank, Asian Development Bank (ADB), and IMF staff). - Continued monthly monitoring reports and efforts to strengthen CD projection capacity are recommended to guide an ambitious and sustained decline in CD accumulation. ### Aligning power tariffs with cost recovery levels - NEPRA determined overdue adjustments: (i) quarterly tariff adjustments (QTAs) for FY22 Q1 and Q2 (together PRs 2.12/kwh for three months); (ii) annual rebasings (ARs) for FY22 and FY23 (PRs 7.91/kwh); and (iii) tariff structure for the second step of subsidy reform for residential consumers (removing the previous slab benefit and adding a markup of PRs 0.54/kwh to unprotected slabs). - Government notifications in July 2022: (i) subsidy markup from July 5, and two rounds of AR of PRs 3.50/kwh each from July 25 and August 1 (PA); (ii) remaining AR of PRs 0.91/kwh from October 1 (new end-September 2022 SBs). - Cumulative effect: these AR steps will likely increase the weighted average power price in October 2022 by only about 10 percent over its end-December 2021 level, by reducing the need for corrective ex-post recovery through monthly FPAs and QTAs. - Protection: not applying the AR to the slabs for smaller consumers will cushion the impact on the vulnerable; under current provisions ARs apply to 56 percent of residential consumers’ meters (unprotected slabs) while lifeline slabs up to 100 kwh/month since fall 2021 are excluded from FPAs and QTAs. - Implementation urgency: each month of delaying an adjustment of PRs 1 per kWh adds about PRs 8½ billion to the stock of arrears. - Staff recommendation: regular tariff adjustments in line with established formulas are critical to implement the CDMP, limit fiscal pressures, halt arrears accumulation, lend credibility to NEPRA, limit load shedding, and restore viability of generators. ### Better targeting power subsidies - Authorities committed to: (i) entering the third stage of their multi-year subsidy reform plan (supported by the World Bank) and submit to cabinet a subsidy rationalization reform plan for tube-wells for large agricultural users by November 2022; and (ii) persevere with regular tariff adjustments while sparing protected slabs to increase progressivity and fairness. ### Pursuing other medium-term reforms to reduce costs and CD - Allocations and measures: - PRs 180 billion set aside to settle IPP/GPP arrears to unlock lower capacity charges including through renegotiated PPPs. - PRs 30 billion to continue to amortize PHPL debt during FY23. - Ongoing work with World Bank and ADB to: (i) reduce commercial and technical losses (smart metering, cutting off delinquent consumers, scaling transmission and distribution infrastructure); (ii) improve DISCO governance and accountability, introduce private participation, and progress phased privatization (as per 2021 SOE triage); (iii) introduce competition; (iv) seek PPA renegotiations with other power producer groups; and (v) implement the National Electricity Policy 2021. - Authorities agreed to only gradually absorb maturing publicly-guaranteed PHPL debt into cheaper central government debt if fiscal space allows and to use proceeds (including privatization proceeds and recoveries) to reduce CD stock. ### Turning around the gas sector - Regulatory steps: parliamentary adoption of OGRA Act Amendments in March 2022 (end-June 2022 SB) supports regular recovery requirements. - Implementation needs: government needs more time than granted in the amended OGRA Act to distribute OGRA’s annual Estimated Revenue Requirement (ERR) for FY22 across the slab system; staff urged swift finalization and respect for regulation. - T&D companies are working to reduce UFG losses through infrastructure improvements, network rehabilitation, and theft control; unbundling (separating supply from network functions) would support these efforts. - Staff recommendations: steadfast implementation of cost-reducing reforms, establishment of accountability and mitigation measures for missed UFG targets, speed up efforts to establish reliable gas CD data, a gas CDMP, and CD projection capacity; regular UFG monitoring reports to improve transparency and planning. ### Structural policies — background and priorities - Long-standing structural weaknesses: uneven playing field for SOEs and private companies, corruption, and red tape (excessive regulations and licensing, obstacles to paying taxes, difficulties trading across borders and registering property) are drag factors on productivity, investment, and job creation. - Authorities’ reform focus: bolstering governance, efficiency, and the business climate. ### Structural policy measures and recommendations - Enhancing SOE governance, transparency, and limiting fiscal risks (MEFP ¶26): - New SOE law adopted by National Assembly in July 2022, awaiting Senate adoption (end-June 2022 SB, reset to end-September 2022). - Ongoing efforts: develop new ownership policy with ADB support; amend SOE-dedicated Acts; operationalize a central monitoring unit (CMU) within the Ministry of Finance by January 2023 (new end-January 2023 SB); gradually reduce state footprint (SOE triage March 2021, including divestment of two LNG-based power plants, one development finance institution, and one small public bank); continue regular and timely audits of key SOEs. - Boosting business environment, job creation, and investment (MEFP ¶27): - Critical measures: simplify procedures to start a business and eliminate unnecessary regulations; streamline FDI approval; improve trading across borders by reducing customs processing time and hours to prepare import/export documents; simplify and harmonize tax payment processes. - Longer-term priorities: invest more in education and human capital, improve product market access, and increase adoption of information and communication technologies (ICT). - Housing and construction (MEFP ¶27): - Working group established June 2022 to address structural impediments; improvements in land title documentation, real estate regulatory authorities, foreclosure laws, and credit scoring noted as promising for financing availability. - Staff advice: continued collaboration with private sector and provincial representatives is crucial; prefer a direct and well-targeted budget subsidy for vulnerable populations over prudential action to stimulate housing lending. - Fostering governance and control of corruption (MEFP ¶28): - Priority measures: establish an asset declaration system focused on high-level public officials (including federal cabinet members) (end-March 2022 SB, reset to end-September 2022); publish a comprehensive review of the anticorruption institutional framework (e.g., National Accountability Bureau) by a task force including independent experts and civil society (new end-January 2023 SB). ### Program modalities, conditionality, and financing - Staff supports authorities’ request for waivers of nonobservance for two end-June QPCs and three continuous PCs, and approval of exchange restrictions and MCP, subject to corrective actions including: - Adopt a FY23 budget law with a small primary surplus backed by non-priority expenditure constraints and tax measures. - For NIR, limit interventions in line with program targets and raise interest rates to strengthen monetary and exchange policies. - Partially repealed import ban on luxury and nonessential items in August 2022; committed to phase out remaining import ban, exchange restrictions, and modified MCP when BOP conditions stabilize by end-June 2023 at the latest. - Program extension and access: - Staff supports extension of the program until June 30, 2023; augment access by SDR 720 million (around 36 percent of quota); modify review schedule along a quarterly timetable until end-March 2023. - Rephasing of augmented access in line with BOP needs and policy implementation track record. - Quantitative targets (MEFP Table 1): - New PCs for end-September 2022, end-December 2022, and end-March 2023 to support fiscal deficit reduction, limit public debt built-up through public guarantees, contain inflationary pressures through deceleration of base money growth and a cap on government borrowing from the SBP, and support adequate reserve coverage. - IT on targeted BISP spending elevated to a QPC and primary balance QPC modified to be assessed using the actual rather than the program exchange rate (TMU ¶17). - Structural benchmarks: - Staff supports resetting four delayed SBs and proposes eight new SBs on critical next steps for ongoing reforms (MEFP Table 2). - Exchange measures: - Staff supports temporary approval (12 months) of new, intensified, and modified exchange restrictions and MCP under Article VIII, given partial removal of import ban and commitment to full elimination when BOP stabilizes. - Financing and risks: - Program remains fully financed with financing commitments from bilateral and multilateral partners to cover public gross external financing needs in FY23 and until program end in June 2023 (Table 3b). - Financing risks remain exceptionally high due to large public sector external rollover needs, sizable current account deficit, difficult Eurobond market conditions, and limited reserve buffers. - Firm commitments of full program financing are in place for the next 12 months. - IMF exposure and repayment capacity: - IMF exposure reaches SDR 6,088 million (or 300 percent of quota and about 80 percent of estimated gross reserves at Sep 2022) with this review; with full purchases, it will peak at 360 percent of quota in FY23 (Table 7). - Elevated risks (delayed reforms, high public debt and gross financing needs, low reserves) could jeopardize objectives and repayment capacity; continued quarterly reviews, updated conditionality, TA, and execution of financing commitments are essential mitigation strategies. - FY23 official financing noted: US$7 billion as rollovers of existing and US$4 billion in additional financing commitments, including from China, Qatar, Saudi Arabia, UAE, and IFIs (World Bank, Asian Development Bank, Islamic Development Bank). ### Central bank safeguards and governance - 2019 safeguards assessment found a broadly adequate safeguards framework at the SBP; recommended strengthening SBP autonomy and governance through amendments enacted in early 2022. - Amendments prohibit SBP from conducting quasi-fiscal activities which need to be phased out or transferred (¶23, MEFP ¶17). - A new SBP governor needs to be appointed in line with amended SBP law; cabinet approved a slate of non-executive director candidates in late-July to be appointed by the president to strengthen independent oversight. ### Staff appraisal — key judgments and policy priorities - Pakistan faces significant imbalances and rising risks driven by fiscal slippages, delayed monetary response, and external shocks (war in Ukraine, COVID-19). - FY23 budget targets a very ambitious adjustment aiming for a small primary surplus; sustained implementation is crucial. - Critical priorities highlighted: - Meet the agreed schedule of increases in the PDL and energy tariffs to generate revenues, strengthen energy-sector viability, reduce fiscal and external risks, and improve electricity provision. - Address risks from staggered PDL increases, administrative capacity for novel tax measures, large planned provincial surpluses, and a tight federal current spending envelope in a pre-election year. - Implement reforms toward a more effective, efficient, and equitable tax system, in particular completing overdue PIT reforms. *Source: IMF content unit 1pakea2022002 — Restructuring the energy sector requires accelerating the reform efforts (excerpt).* ### 38. More efforts are needed to reduce poverty, enhance social programs, and protect the ### More efforts are needed to reduce poverty, enhance social programs, and protect the most vulnerable by building fiscal space and improving coordination ### Social protection and fiscal space - Support for using temporary measures to protect large swathes of the population against fuel price increases (new SFSD program) was reiterated. - Need to enhance transfers to families already covered by BISP, especially in a high inflation environment. - Scaling-up social spending targeted to the most vulnerable is critical for inclusion. - Plans to continue with the targeted expansion of the BISP beneficiary base were welcomed, alongside a restated importance of: - improving a well-targeted social safety net program (i.e., BISP) through a comprehensive, fully financed, and coordinated upscaling. - Caution against the introduction of new programs which can undermine protection of the most vulnerable. - Policy levers to create fiscal space: - continuing to mobilize additional revenue; - careful expenditure management; - keep public debt on a downward trajectory. ### Monetary policy and inflation - Recent policy rate hikes were welcomed; staff stressed the need to continue a tight monetary policy to reduce inflation and support efforts to address external imbalances. - Monetary policy should remain forward-looking and data-driven to anchor inflation within the SBP’s objective of 5–7 percent over the medium term. - Phasing out the refinancing schemes that support purposes outside of the SBP’s core mandate is important to improve the functioning of monetary policy. ### Exchange rate policy and reserves - A market-determined exchange rate and limited SBP interventions remain crucial to: - absorb external shocks; - maintain competitiveness; - rebuild international reserves. - Recommendations: - strengthen resilience by building reserve buffers; - limit interventions in the foreign exchange market; - allow greater exchange rate flexibility to address external pressures and safeguard reserve buffers towards more prudent levels. - Strong macroeconomic policies and structural reforms are needed to build confidence in the rupee and resolve external imbalances. ### Financial stability and banking sector reforms - Maintaining financial stability warrants close oversight of financial institutions and decisive action to address undercapitalized financial institutions. - The SBP should accelerate the recapitalization process using their existing powers to strengthen financial sector resilience. - Lending targets on housing present risks to financial stability and the prudent allocation of credit. - Key priorities: - strengthen bank resolution and crisis management frameworks; - accelerate recapitalization of undercapitalized institutions. - Institutional and legal developments: - adoption of amendments to the SBP Act was welcomed as an important step toward strengthening the central bank’s independence, governance, and mandate; - the new Act will enable the SBP to move closer to formally adopting an inflation target regime. - Anti-financial crime measures: - completion of the AML/CFT 2018 and 2021 Action Plans was welcomed; - authorities urged to sustain efforts to mitigate ML/TF risks, including from tax evasion, corruption, and other financial crimes. ### Electricity and gas sector reforms - Restoring the sector’s financial viability and reducing adverse spillovers on the budget, the financial sector, and the real economy remains a priority. - Timely follow through of the proposed energy tariff increases in FY23 will be key. - Critical actions: - update the CDMP for FY23 to reduce CD and costs; - align power tariffs with the cost structure; - improve targeting of power subsidies to the most vulnerable. - Gas sector actions: - OGRA Act Amendments were welcomed for supporting regular recovery requirements in the gas sector; - speed up efforts to establish reliable CD data in the sector, a gas CDMP, and CD projection capacity. ### Risks and downside scenarios - Risks remain high and tilted to the downside on both domestic and external fronts. - External headwinds: - high food and fuel prices as a consequence of the war in Ukraine; - tighter global financial conditions. - Domestic challenges: - need to tackle high inflation; - undo effects of the large fiscal slippage of FY22 to return growth to a more sustainable pace as fiscal and monetary policies tighten. - Political and institutional risks: - a challenging political climate could weaken reform and policy implementation, and undermine Pakistan’s adjustment path, debt sustainability, and growth potential. - reform fatigue, the political cycle, and weak governance and anticorruption institutions could quickly narrow the window to undertake critical reforms. - Additional external risks: - advanced economy tapering; - geopolitical tensions; - waning reform efforts affecting external financing conditions. - Mitigating measures: - close program monitoring; - supportive TA; - financing assurances from key lenders somewhat mitigate those risks. *Source: IMF staff assessment as presented in the provided chapter excerpt.* ### 44. While recognizing risks, staff supports the authorities’ request for completion of the ### 1pakea2022002 - 44. While recognizing risks, staff supports the authorities’ request for completion of the ### IMF staff recommendation and program actions - Staff supports completion of the combined seventh and eighth review under the EFF. - Staff also supports the following specific actions requested by the authorities: - (i) granting waivers of nonobservance for both the missed quantitative and continuous PCs at end-June 2022; - (ii) augmenting access by SDR 720 million (around 36 percent of quota), extending the program and rephasing access consistent with the modified review schedule; - (iii) setting new quantitative targets for end-September 2022, end-December 2022, and end-March 2023; - (iv) making the purchase related to the seventh and eighth EFF review available for budget support to address their BOP needs; - (v) approving the new and intensified exchange restrictions as well as modified MCP for a period of twelve months, because they are temporary, non-discriminatory, and needed for BOP reasons. ### Key economic indicators and recent trends - Per Capita GDP, 2000–21: Pakistan lags peers (chart reference). - Gross Official Reserves and Exchange Rate, 2014M1–2022M7: foreign reserves declined sharply in FY22, putting pressure on the exchange rate. - SBP Net Foreign Assets and Net Swap/Forward Position, 2011M07–2021M11: SBP’s derivative position has widened. - Real and Nominal Effective Exchange Rate, 2010M3–2022M5: external competitiveness remains weak, with some recent improvements. - Credit to Government and Private Sector, 2016M11–2021M11: private sector credit growth has rebounded from FY21’s lows with the help of SBP’s expanded refinancing schemes. ### Financial markets and monetary policy - SBP tightened monetary policy considerably in the past few months; market rates moved in line with the policy rate (chart references). - Emerging Market Bond Index Global (2014M2–2022M6): Pakistan’s bond spreads have widened, reflecting ongoing uncertainty. - Karachi Stock Exchange (KSE) Market Index and Volume, 2010M2–2022M7: stock market volatility increased and is more pronounced than regional peers. - Open Market Operations (OMOs), 2012M1–2022M7: liquidity injections via OMOs continue to be very high. ### Banking sector indicators - Nonperforming loans (NPLs) have declined as the economy recovers. - Bank credit composition remains oriented toward the government, leaving Pakistan behind peers in private credit relative to GDP. - Capitalization and profitability: - Regulatory capital to risk-weighted assets (recent): broadly above minimums (chart/table reference). - Return on assets (after tax) remained positive despite lower lending rates. - Liquidity: banks remain highly liquid (liquid assets to total assets and to deposits high). ### Fiscal position and public debt (selected figures from tables) - Population: 222.6 million (2020/21). - Per capita GDP: US$1,546.8 (2020/21). - Poverty rate: 21.9 percent (at national line; 2018/19). - FY2021/22–FY2022/23 program and projection highlights (selected): - Real GDP at factor cost: 3.1 -0.9 5.7 4.0 6.0 4.5 3.5 (table sequence). - Consumer prices (period average): 6.7 10.7 8.9 9.4 12.1 7.8 19.9. - Budget balance (including grants): -7.8 -7.0 -6.0 -6.9 -7.0 -4.4 -4.6 (percent of GDP sequence). - Total general government debt excl. IMF obligations: 75.4 76.8 71.5 78.9 72.5 74.9 65.4 (percent of GDP sequence). - General government and government guaranteed debt (incl. IMF): 82.0 84.5 77.9 86.7 78.9 82.1 72.1 (percent of GDP sequence). - Gross reserves (in millions of U.S. dollars): 7,274 12,175 17,297 21,211 9,821 20,678 16,226. - In months of next year's imports of goods and services: 1.7 2.4 2.5 3.2 1.5 3.0 2.3. ### External sector and financing needs - Current account balance (in percent of GDP): -4.2 -1.5 -0.5 -4.0 -4.7 -3.5 -2.5 (sequence). - Balance on goods (selected years, US$ millions): -27,612 -21,109 -28,188 -36,686 -40,140 -35,514 -32,856. - Exports, f.o.b. (US$ millions): 24,257 22,536 25,630 30,078 31,877 31,642 35,900. - Imports, f.o.b. (US$ millions): 51,869 43,645 53,818 66,764 72,017 67,157 68,756. - Financial account (US$ millions): 11,759 6,479 7,726 14,806 10,355 11,525 12,682. - Gross external financing needs (in millions of U.S. dollars): 25,552 23,430 21,551 30,417 34,331 35,068 30,757 (Table 3b). - End-period gross official reserves (millions of U.S. dollars): 7,274 12,175 17,297 21,211 9,821 20,678 16,226 (Table 3a memo). ### Program financing and schedule (selected) - On approval and earlier purchases: - Initial approval: July 3, 2019 — 716 million SDR (35.2 percent of quota). - Subsequent purchases/reviews listed through September 2, 2022 in the proposed schedule. - Proposed augmentation and rescheduling: - Proposed augmentation of EFF: SDR 720 million (around 36 percent of quota) referenced in staff recommendation paragraph and SDR denominated augmentation entries in schedules/tables. - Proposed total under revised schedule (Table 9b): Total 4,988 million SDR, 245.593 percent of quota (table totals). ### Debt composition and creditor breakdown (selected figures) - Total debt stock (2020/21, US$ million): 275,760 (100 percent). - External debt (2020/21, US$ million): 99,116 (35.9 percent of total). - Multilateral creditors: 41,726 (15.1 percent of total). - Bilateral creditors: 37,657 (13.7 percent of total). - Bonds: 8,615 (3.1 percent of total). - Commercial creditors: 10,287 (3.7 percent of total). - Domestic debt (2020/21, US$ million): 176,644 (64.1 percent of total). - T-Bills: 42,404 (15.4 percent of total). - Bonds: 98,108 (35.6 percent of total). - NSS/Other: 26,163 (9.5 percent of total). - Debt service (selected): Total debt service (2020/21, US$ million) and percent of GDP series provided in table (specific entries preserved in source tables). *Source: 1pakea2022002 - 44.* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### External risks - Russia’s invasion of Ukraine leads to escalation of sanctions and other disruptions - Relative Likelihood: High - Time Horizon: Short Term - Expected Impact: High - Expected effects: - Financial volatility raises risk aversion, causing financing pressures and capital outflows from emerging markets, including Pakistan. - Spending pressures and/or lower growth, weaken 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. - Rising and volatile food and energy prices - Relative Likelihood: High - Time Horizon: Short Term - Expected Impact: High - Expected effects: - 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. - Tighter global financial conditions and capital outflows from emerging markets, including Pakistan. - Spending pressures and/or lower growth, weaken the underlying fiscal position. - Weaker confidence and supply disruptions drag on economic growth. - Policy response: - Allow energy prices increases to be passed through to end-users. - Press ahead with reforms of the energy sector. - Scale up targeted social assistance. - Maintain financial stability to weather external shocks. - Resist pressures to weaken fiscal discipline and preserve fiscal and debt sustainability. - Build fiscal and external buffers. - Allow exchange rate flexibility to absorb external shocks and facilitate adjustment. - Widespread social discontent and political instability - Relative Likelihood: High - Time Horizon: Short to Medium Term - Expected Impact: High - Expected effects: - Spending pressures and/or lower growth, weaken the underlying fiscal position. - Weaker confidence and supply disruptions drag on economic growth. - Policy response: - Scale up targeted social assistance. - Resist pressures to weaken fiscal discipline and preserve fiscal and debt sustainability. - Build fiscal and external buffers. - Outbreaks of lethal and highly contagious COVID-19 variants - Relative Likelihood: Medium - Time Horizon: Short Term - Expected Impact: Medium - Expected effects: - 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. - Abrupt growth slowdown in China - Relative Likelihood: Medium - Time Horizon: Short Term - Expected Impact: Medium - Expected effects: - Disruptions in trade channels leading to lower exports and supply disruptions. - Tighter financial conditions and capital outflows. - Weakening global demand decreases commodity prices. - Policy response: - Maintain market-determined exchange rate to support competitiveness, while intervening only during disorderly market conditions. - Maintain financial stability. - Preserve fiscal and debt sustainability. - De-anchoring of inflation expectations in the U.S. and/or advanced European economies - Relative Likelihood: Medium (for U.S.)/Medium/Low (for Euro area) - Time Horizon: Short to Medium Term - Expected Impact: Medium - Expected effects: - 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. - Natural disasters related to climate change - Relative Likelihood: Medium - Time Horizon: Medium to Long Term - Expected Impact: Medium - Expected effects: - 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 commodity price levels and volatility, hence 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 - Expected effects: - 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 (including anti-corruption agencies) 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 - Expected effects: - 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 - The balance of risks is tilted to the downside. - Note on RAM interpretation: - “Low” is meant to indicate a probability below 10 percent, “medium” a probability between 10–30 percent, and “high” a probability between 30–50 percent. - “Short term” and “medium term” indicate risks could materialize within one year and three years, respectively. - The RAM shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). Non-mutually exclusive risks may interact and materialize jointly. *Source: Annex I. Risk Assessment Matrix (excerpts).* ### 6. The authorities continue engaging external creditors to secure financing to meet the ### 1pakea2022002 - 6. The authorities continue engaging external creditors to secure financing to meet the ### External financing steps and creditor engagement - In late-2021 the authorities secured a US$3 billion loan from Saudi Arabia. - A deferred oil financing facility (US$1.2 billion) became operational in FY22Q3. - China renewed (and augmented) the US$4.5 billion swap agreement (US$3 billion at the time of EFF approval). - China renewed maturing commercial loans, though some at shorter maturity and with delays in the roll-over process creating uncertainty in the marketplace. - Deposits through China’s State Administration of Foreign Exchange stand at US$4 billion. - To ensure that external financing needs are covered the authorities are seeking additional financial support from their traditional bilateral partners. ### Near-term financing risks and public amortization pressures - Near-term financing risks remain elevated, reflecting the large size of public sector amortization needs. - The authorities continue engaging external creditors to secure financing to meet the program debt sustainability objectives. ### Public DSA — selected baseline indicators and projections (as presented) - Nominal gross public debt: 63.4 (2020); 84.5 (2021); 77.9 (2022); 78.9 (2023); 72.1 (2024); 66.9 (2025); 65.3 (2026); 62.4 (2027); 60.7 (cumulative? as listed) - Public gross financing needs: 26.5 (2020); 25.4 (2021); 19.8 (2022); 23.5 (2023); 21.4 (2024); 18.1 (2025); 19.6 (2026); 17.5 (2027); 17.2 (additional line) - Real GDP growth (in percent): 4.2 (2020); -0.9 (2021); 5.7 (2022); 6.0 (2023); 3.5 (2024); 4.2 (2025); 4.6 (2026); 5.0 (2027); 5.0 (final column) - Inflation (GDP deflator, in percent): 6.8 (2020); 9.9 (2021); 10.3 (2022); 13.3 (2023); 9.9 (2024); 10.0 (2025); 7.7 (2026); 6.5 (2027); 6.5 - Effective interest rate (in percent) 4/: 7.8 (2020); 8.1 (2021); 7.5 (2022); 7.5 (2023); 8.4 (2024); 7.3 (2025); 7.4 (2026); 7.6 (2027); 7.8 - Change in gross public sector debt: 2.7 (2020); 2.5 (2021); -6.6 (2022); 1.0 (2023); -6.8 (2024); -5.2 (2025); -1.6 (2026); -2.9 (2027); -1.7 (cumulative?); -17.2 (cumulative) - Identified debt-creating flows (sum): 2.4 (2020); 2.1 (2021); -5.6 (2022); -5.9 (2023); [blanks for later years]; -10.4; -5.3; -3.9; -3.2; -2.6; -31.3 (cumulative line) - Primary deficit: 1.9 (2020); 1.5 (2021); 1.1 (2022); 2.3 (2023); -0.2 (2024); -0.6 (2025); -0.7 (2026); -0.7 (2027); -0.3; -0.1 (cumulative) - Primary (noninterest) revenue and grants: 12.6 (2020); 13.3 (2021); 12.4 (2022); 12.1 (2023); 12.4 (2024); 12.8 (2025); 12.9 (2026); 12.9 (2027); 12.8; 75.9 (cumulative) - Primary (noninterest) expenditure: 14.5 (2020); 14.8 (2021); 13.5 (2022); 14.5 (2023); 12.2 (2024); 12.2 (2025); 12.2 (2026); 12.2 (2027); 12.5; 75.9 (cumulative) - Automatic debt dynamics 5/: -0.3 (2020); 0.6 (2021); -8.6 (2022); -8.3 (2023); -10.2 (2024); -4.7 (2025); -3.2 (2026); -2.6 (2027); -2.3; -31.3 (cumulative) - Of which: real interest rate: 0.4 (2020); -1.6 (2021); -2.7 (2022); -4.4 (2023); -7.9 (2024); -2.1 (2025); -0.5 (2026); 0.4 (2027); 0.4; -14.1 (cumulative) - Of which: real GDP growth: -2.3 (2020); 0.7 (2021); -4.2 (2022); -3.9 (2023); -2.2 (2024); -2.6 (2025); -2.7 (2026); -2.9 (2027); -2.8; -17.2 (cumulative) - Exchange rate depreciation 7/: 1.6 (2020); 1.5 (2021); -1.8 (2022); [ellipsis thereafter] - Other identified debt-creating flows: 0.8 (2020); -0.1 (2021); 1.9 (2022); 0.0 (2023); 0.0 (2024); 0.0 (2025); 0.0 (2026); 0.0 (2027); 0.0 - Residual, including asset changes 8/: 0.3 (2020); 0.4 (2021); -1.0 (2022); 6.9 (2023); 3.6 (2024); 0.1 (2025); 2.3 (2026); 0.4 (2027); 0.9; 14.1 (cumulative) (Note: figures are taken from the presented Public DSA tables and charts as of July 08, 2022.) ### External Debt Sustainability Framework — key external indicators (2017–27 table highlights) - Baseline: External debt (in percent of GDP): 24.8 (2017); 27.1 (2018); 33.5 (2019); 37.7 (2020); 34.9 (2021); 32.5 (2022); 37.0 (2023); 36.2 (2024); 35.0 (2025); 32.7 (2026); 30.2 (2027) - Change in external debt: 1.1 (2017); 2.3 (2018); 6.4 (2019); 4.2 (2020); -2.8 (2021); -2.4 (2022); 4.5 (2023); -0.8 (2024); -1.2 (2025); -2.3 (2026); -2.6 (2027) - Current account deficit, excluding interest payments: 2.9 (2017); 4.6 (2018); 3.1 (2019); 0.2 (2020); -0.2 (2021); 3.7 (2022); 1.5 (2023); 1.4 (2024); 1.4 (2025); 1.4 (2026); 1.4 (2027) - External debt-to-exports ratio (in percent): 301.3 (2017); 314.3 (2018); 353.1 (2019); 404.0 (2020); 387.8 (2021); 313.9 (2022); 316.5 (2023); 319.6 (2024); 313.1 (2025); 292.6 (2026); 271.2 (2027) - Gross external financing need (in billions of US dollars): 22.0 (2017); 28.5 (2018); 26.6 (2019); 19.8 (2020); 14.8 (2021); 34.3 (2022); 30.8 (2023); 36.6 (2024); 35.7 (2025); 38.4 (2026); 39.1 (2027) - Gross external financing need (in percent of GDP) series includes: 6.5 (2017); 8.0 (2018); 8.3 (2019); 6.6 (2020); 4.2 (2021); [additional values shown in table] ### Stress tests and scenario outcomes (selected) - Stress tests presented include: Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Shock; Contingent Liability Shock. - Example scenario values (excerpted): - Primary Balance Shock: Real GDP growth 6.0 (2022); 3.5 (2023); 4.2 (2024); 4.6 (2025); 5.0 (2026); 5.0 (2027). Primary balance -2.3 (2022); -1.1 (2023); 0.4 (2024); 0.6 (2025); 0.7 (2026); 0.3 (2027). - Real Interest Rate Shock: Effective interest rate 7.5 (2022); 8.1 (2023); 9.5 (2024); 11.0 (2025); 12.7 (2026); 13.6 (2027). - Real Exchange Rate Shock: Inflation 13.3 (2022); 30.5 (2023); 10.0 (2024); 7.7 (2025); 6.5 (2026); 6.5 (2027). - Combined Macro-Fiscal Shock and Contingent Liability Shock projections shown with implied higher effective interest rates and changed primary balances across 2022–2027. ### Policy commitments, program context, and technical assistance (selected) - The authorities continue engagement with external creditors to meet program debt sustainability objectives and are seeking additional bilateral support. - Annex III lists IMF technical assistance activities (IMF FYs 2019/20–2022/23) across Fiscal Affairs Department (FAD), Legal Department (LEG), and Monetary and Capital Markets Department (MCM) addressing: medium-term tax policy; public financial management; revenue administration; SDG costing; state-owned enterprise law and governance; AML/CFT; bank resolution framework; central bank law reform; debt management; cyber risks. - Appendix I (Letter of Intent, Islamabad, August 16, 2022) confirms commitment to the policies and objectives of the economic program supported by the IMF Extended Arrangement under the Extended Fund Facility (EFF), and notes macroeconomic challenges including higher inflation, elevated spreads, and wider current account deficit following the war in Ukraine and a change in government on April 11 (Mian Muhammad Shehbaz Sharif became prime minister after April 10 no-confidence motion). *Source: IMF staff (Public DSA tables, figures, and related text as presented in the provided content).* ### 3. To cushion our economy and citizens from these shocks, the previous government granted a ### 1pakea2022002 - 3. To cushion our economy and citizens from these shocks, the previous government granted a ### Prior actions and reversal of the February relief package - The previous government granted a 4-months relief package in February that included broad-based subsidies, fuel tax cuts, new tax exemptions and a tax amnesty; elements remained in place into June 2022. - Four prior actions (PA) implemented for this review: - FY23 budget: Parliament approved the FY23 budget including a personal income tax (PIT) reform on June 29, 2022; the President signed it into law on June 30, 2022 to take effect on July 1, 2022. The Ministry of Finance published a Statement of Contingent Liabilities on June 10, 2022; the budget bill was laid before and approved by the National Assembly on June 10 and June 29, 2022 respectively. - Provincial budgets: Federal government signed Memoranda of Understanding (MoUs) with all four provincial governments on provincial fiscal targets consistent with the FY23 budget on July 29, 2022. - Reversal of the February relief package: - Eliminated post-tax fuel subsidies on June 16, 2022 and the PRs 5/kwh blanket power subsidy from June 1, 2022. - Increased the petroleum development levy (PDL) on petrol by PRs 10/liter and on diesel by PRs 5/liter both on July 1, 2022 and on August 1, 2022. - Committed (Finance Minister’s approval on August 2, 2022) to implement monthly PDL increases of PRs 10/liter for petrol and PRs 5/liter for diesel on September 1, 2022, followed by increases of PRs 5/liter per month for both fuels until the PDL reaches PRs 50/liter in January 2023 (petrol) and April 2023 (diesel). - Catch-up in power tariffs: - Notified on July 5, 2022 the full subsidy reform markup (PRs 0.20/kwh) to take effect from July 5, 2022. - Notified on July 25, 2022 a three-stage increase related to the combined FYs22-23 annual rebasing (AR): first stage PRs 3.50/kwh to take effect on July 25, 2022; second stage PRs 3.50/kwh on August 1, 2022; third stage PRs 0.91/kwh on October 1, 2022. ### Program performance to end-June 2022 - Quantitative targets and performance criteria: - Met 6 of 8 quantitative performance criteria (QPCs): ceiling on net domestic assets (NDA) of the SBP; ceiling on SBP’s stock of net foreign currency swaps/forward position; ceiling on net government budgetary borrowing from the SBP; ceiling on amount of government guarantees; continuous PCs on zero new flow of SBP credit to the government and zero external public payment arrears. - Missed 2 QPCs: floor on net international reserves (NIR); ceiling on the primary budget deficit (due to the relief package and energy sector spending pressures). - Missed three continuous PCs: non-intensification of exchange restrictions/non-modification of multiple currency practices (MCP) (cash margin requirement extended on April 7, 2022); non-imposition of import restrictions for balance of payments purposes (import ban on luxury and nonessential items on May 19, 2022); non-imposition of exchange restrictions (prior approval requirement for initiating payments for imports of certain goods on May 20, 2022). - Indicative targets (ITs): - Met 2 of 6 ITs: floor on net tax revenue collection; floor on gross issuance of longer-term debt instruments. - Missed 4 ITs: floor on targeted cash transfers spending (BISP) — slower enrollment into UCT and earlier-than-programmed phasing-out of emergency cash transfer; floor on health and education spending — less vaccine procurement and lower education spending; ceiling on net accumulation of tax refund arrears — administrative delays; ceiling on power sector payment arrears — delayed tariff adjustments and higher-than-expected generation and financial costs. - Structural benchmarks (SBs): - Completed 3 of 10 SBs: parliamentary adoption of the OGRA Act Amendments for the gas sector (in time); issuance of regulation requiring collection/publication of beneficial ownership information from companies with large procurement contracts by PPRA (delayed, mid-May 2022); adoption of measures to strengthen AML/CFT framework to support exit from FATF list (delayed, June 2022). - Missed SBs include two continuous SBs on not granting further tax amnesties and avoiding new preferential tax treatments (breaches allowed to lapse via sunset clauses), parliamentary adoption of new SOE law, and preparation of a full PIT reform in line with Fund advice. The PIT redraft in the FY23 budget reduces number of slabs and yields PRs 33 billion (0.04 percent of GDP), below the 0.3 percent of GDP yield anticipated in the MEFP dated December 17, 2021. ### Macroeconomic outlook and risks - Growth and inflation projections: - Real GDP: provisional real GDP growth of 6 percent in FY22; expected to moderate to around 3½ percent in FY23; projected to rise gradually to 5 percent over the medium term. - Headline CPI inflation: projected to peak in FY23 Q1, reaching 18-20 percent in FY23; core inflation currently above 10 percent y-o-y; inflation projected to decline significantly in FY24, falling to the 5–7 percent target range by end-FY24. - External sector: - Current account deficit: widened to around 4.5 percent of GDP in FY22; expected to decline to around 3 percent in FY23; settle at about 2 to 3 percent of GDP in the medium term. - Reserve cover: expected to improve but remain low; external financing to rely mostly on official and multilateral creditors, supplemented by external commercial bank loans and issuance of Eurobonds and international Shariah-compliant Sukuks as market conditions allow. - Risks: - Very high risks from delays in tax and energy sector reforms, geopolitical tensions (war in Ukraine and Afghanistan), monetary tapering in advanced economies, continuing COVID-19 risks, and climate-related disasters. ### Fiscal outcomes for FY22 and FY23 policy measures - FY22 outcomes: - Realized underlying primary deficit of 1.6 percent of GDP in FY22 (compared to a program target of 0 percent of GDP). - Contributing factors: new expenditures including wage increases, energy sector subsidies, the 4-month relief package (additional PRs 150 billion, 0.2 percent of GDP), new spending commitments worth PRs 90 billion in FY22, additional power sector arrears clearance of PRs 123 billion. - Actions to limit slippage included reversing the February relief package (removal of post-tax fuel subsidies and PRs 5/kwh blanket power subsidy in June 2022) and curtailing public investment saving PRs 150 billion from slower federal PSDP execution and PRs 384 billion from lower-priority provincial PSDP projects. - FY23 budget objectives: - Target underlying primary surplus of 0.4 percent of GDP via revenue and spending measures. - Tax policy measures: - PIT reform included in budget law to simplify PIT and increase receipts by PRs 33 billion (0.04 percent of GDP) by reducing number of rates and slabs and removing exemptions for pensions. - Fuel levy (PDL) increases implemented and committed as PA (see Prior actions). Average PDL rates over FY23 projected as PRs 40/liter for petrol and PRs 32/liter for diesel. - Increase in customs duty and additional customs duty on crude oil noted (text truncated in source). ### Requests to the IMF and program monitoring - Requests to IMF Executive Board: - Retention of exchange restrictions and MCP inconsistent with Article VIII Sections 2(a) and 3 for a period of twelve months, maintained temporarily due to BOP difficulties. - Waivers of nonobservance for: - Two missed end-June 2022 PCs: floor on NIR of the SBP; ceiling on the general government primary budget deficit. - Three missed continuous PCs: non-imposition/non-intensification of exchange restrictions, non-modification of MCPs, and non-imposition of import restrictions for BOP purposes. - Completion of the combined seventh and eighth review and related purchase in the amount of SDR 894 million. - To facilitate implementation and meet higher FY23 financing needs: - Extension of the EFF until end-June 2023 (with new quarterly PCs and new structural benchmarks). - Augmentation of access by SDR 720 million (around 36 percent of quota), bringing total access to 245.6 percent of quota. - Program monitoring: - Program to be monitored through quarterly reviews, prior actions (PAs), quantitative performance criteria (QPCs), indicative targets (ITs), and structural benchmarks (SBs) as described in attached MEFP and TMU. - Commitments: - Authorities will consult with the IMF on adoption of additional measures and supply timely and accurate data for program monitoring. - Authorities consent to IMF publication of this letter, the MEFP, the TMU, and accompanying Executive Board documents. *Source: 1pakea2022002 — Memorandum and associated letter (IMF).* ### 2.5 percent to 5 percent in the budget, with a commitment not to reduce this rate below ### 1pakea2022002 - 2.5 percent to 5 percent in the budget, with a commitment not to reduce this rate below ### Revenue measures and targets - Bolstering revenue through an assortment of 17 measures to add PRs 608 billion in additional revenue. - Federal Excise Duty increase of PRs 1/stick on Tier I and Tier II cigarettes (up to PRs 50 billion). - Customs duty increases on various products (PRs 59 billion), including an increase from 2.5 to 5 percent for crude oil. - Direct taxes on high incomes (PRs 256 billion), including: - super tax of between 1 and 4 percent for individuals earning over PRs 150 million (PRs 120 billion); - 10 percent on high earnings from certain sectors (PRs 80 billion). - Five different direct taxes on immoveable property targeting deemed income and capital gains (PRs 118 billion). - Lining up contingency measures if monthly revenue underperforms against Q1 FY23 and subsequent targets: - Immediately set the GST on fuel products to a rate sufficient to raise necessary revenue up to the standard rate of 17 percent. - Further streamline GST exemptions including on sugary drinks (PRs 60 billion), and other unwarranted exemptions such as those benefitting exporters. - Increase Federal Excise Duty on Tier I and Tier II cigarettes by at least PRs 2/stick with immediate effect to raise at least another PRs 120 billion. - Other revenue commitments: - Recommitment to not launch any future tax amnesties or grant any further tax exemptions/concessions through Statutory Regulatory Orders (SROs) without prior National Assembly approval. - Continue work towards harmonization of the services sales tax across provincial jurisdictions, with support from the World Bank. ### Expenditures and subsidy policy - Spending caps and austerity: - Cap spending at 16.9 percent of GDP. - Budget a contingency of 0.25 percent of GDP to hedge against shocks. - Approve austerity measures including bans on purchases of furniture and vehicles (except for development projects, and protecting health and education), cuts on avoidable travel, and reduce consumption of utilities by 10 percent. - Commodity support prices will not exceed international prices. - Ensuring cost-recovering fuel prices: - Increase the PDL to a target level of PRs 50 /liter by January for petrol, and April for diesel. - Once fully unsubsidized prices are reached, establish an automatic pricing mechanism in consultation with Fund Staff. - Limiting power subsidies: - Energy subsidies contained to PRs 570 billion, of which PRs 225 billion will be for the tariff differential subsidy (TDS). - Remainder include subsidies for KE and various packages (PRs 130 billion), PHPL amortization (PRs 35 billion), and IPP clearance (PRs 180 billion). - Protecting social spending: - Commit to PRs 316 billion for regular BISP programs, supported by a quantitative target under the EFF-supported program. - Mitigating spending risks: - If monthly fiscal operations indicate spending running higher than Q1 FY23 and subsequent targets, trigger immediate remedial action including contingency revenue measures. ### Provincial fiscal management and guarantees - Corroborating provincial fiscal targets: - Memoranda of Understanding (MoUs) signed with all four provincial governments in July 2022 on their respective provincial FY23 fiscal targets consistent with FY23 general government fiscal targets. - Monitor and share fiscal outcomes on a provincial and quarterly basis (TMU Table 3). - Limiting guarantees: - Laid before the National Assembly a Statement of Contingent Liabilities listing all guarantees expected to be issued in FY23, which will be treated as a ceiling. - Proposed guarantee envelope ensures guarantees as a percentage of GDP remain on a modest downward trajectory. ### Revenue administration reforms and targets - Income tax refund arrears and clearance: - As of end-June 2022, accumulated PRs 366 billion in income tax refund arrears, a 67 percent increase over the fiscal year. - Will clear income tax arrears until the stock is reduced to PRs 225 billion by end-September 2022. - Revenue administration priorities and actions: - Simplify tax filing and expand e-services for taxpayers. - Accelerate resolution of refunds and administrative appeals. - Strengthen the large taxpayer office. - Develop an overarching compliance strategy and set up a Central Risk Management Unit and a Compliance Risk Management Committee at the central level. - Systematic identification and assessment of compliance risks. - Adopt a more project-based approach to addressing specific high-risk areas in tax compliance. - Strengthen data collection and analysis. - December 2021: established a single filing portal removing the need to file separately with five different tax administrations. ### Public financial management (PFM) and procurement transparency - Treasury and cash management: - Effort to fully operationalize treasury single account (TSA-2) by end-December 2022. - Created the Treasury and Cash Management Unit and the Cash Forecasting Unit in the Federal Treasury Office in Islamabad. - Developing monthly and quarterly cash forecasts since January 2022 with technical assistance by the ADB; units to be utilized by end-December 2022. - Issued guidelines on annual and multiannual commitment control systems in March 2022. - COVID-related spending transparency and e-procurement: - Maintain highest levels of transparency in all COVID-related spending programs. - PPRA publishes key information of COVID-related awarded procurement contracts; S.R.O. 591(I)/2022 (May 14, 2022) requires collection for publication of beneficial ownership information from companies awarded public procurement contracts for PRs 50 million and above. - With World Bank support, establish an e-procurement system covering federal and provincial procurement; pilot implementation with the Ministry of Health and Ministry of Education expected by end-August 2022, full rollout by mid-2023. - AGP completed audit reports of key government agencies for FY21; audit reports on procurement of COVID-related supplies expected to be published by end-August 2022. - Public Accounts Committee to continue hearings on AGP audit report for COVID-related procurement and social payments during FY20. ### Debt vulnerabilities, Medium-Term Debt Strategy, and market instruments - Debt outlook and drivers: - Debt-to-GDP ratio at end-FY22 projected to increase slightly to 78.9 from 77.9 percent a year earlier. - Principal drivers: larger-than-anticipated fiscal deficit and significant exchange rate depreciation (more than 30 percent over FY22). - Going forward, debt levels and gross financing needs relative to GDP expected to gradually decline on the back of strict fiscal and monetary discipline. - Risks: higher interest rates, uncertainties in international commercial and capital markets, dependence on commercial banks as holders of government securities. - Medium-Term Debt Strategy (MTDS) and risk management: - Update and implement MTDS with benchmarks for refinancing risk, interest rate risk, currency risks, and the share of Sharia-compliant instruments. - Met FY21 target for share of fixed rate debt; expect demand for fixed-rate instruments to strengthen. - Commit to floor on cumulative gross issuance of PIBs, Sukuks, and Eurobonds (Indicative Target) with all quarterly targets met in FY22. - Lengthening domestic debt maturity and new instruments: - During FY22 Q1–3, consistently reduced T-Bill issuance; recent stronger reliance on T-Bills but expect solid demand for longer-term instruments. - Expanded Naya Pakistan Certificates tapping Pakistani emigrants abroad. - Placed a US$1 billion Eurobond in July 2021 (multi-tenor 5-, 10-, and 30-year instruments). - Issued US$1 billion international Sukuk in January 2022. - Cabinet (June 21, 2022) paved way for further Sukuk issuances once market conditions stabilize. - Modernized domestic instruments: - Reintroduced 15-, 20-, and 30-year fixed rate Pakistan Investment Bonds (PIBs). - Reintroduced Shariah Compliant Sukuks of longer tenors (5 years). - Introduced new long-term instruments (including 3- and 5-year floating rate PIBs). - Imposed ban on institutional investments in National Savings Schemes with effect from July 1, 2020. - Discontinued sale of some prize bonds to improve transparency of investor base. - Explore further instruments: green bonds to overseas investors, gender bonds, Panda bonds (Renminbi-denominated). - Debt management office (DMO): - Amendments to the Fiscal Responsibility and Debt Limitation Act 2005 approved in National Assembly (May 2022) and Senate (June 2022), and signed into law by the President to establish a DMO. - Interim: Finance Division assigned additional functions to existing Debt Policy and Coordination Office; hiring of additional staff initiated. - Setting up front office/middle office/back office of new DMO to be completed by end-November 2022. - Committed to filling vacant director-level positions by end-December 2022. - Migration of relevant functions to DMO from other government agencies completed in March 2022. - Enhanced cooperation with Economic Affairs Division via Working Group established in February 2021 to ensure accurate compilation and reporting of debt-related statistics. ### Poverty reduction and social protection (BISP and related programs) - FY22 BISP allocation and execution: - Increased BISP’s budget allocation for FY22 to PRs 250 billion, an almost 30-percent increase over FY21 budget execution. - Under-executed the FY22 budget envelope and missed the IT on BISP spending at end-June 2022 by about PRs 15 billion due to earlier-than-expected end of Ehsaas Emergency Cash (EEC) and slower enrolment in Kafalat UCT program. - Permanent expansions and stipend increases: - Targeted expansion of Kafalat beneficiary base to 7.7 million households by mid-June 2022 (objective was 8 million families). - Programmed permanent 8.3 percent increase in the 6-monthly Kafalat stipend to PRs 13,000 per family on February 1, 2022. - Additional permanent 7.7 percent increase in the 6-monthly Kafalat stipend to PRs 14,000 per family on March 1, 2022 as part of previous government’s February relief package (worth PRs 8 billion). - Exceptional broadened BISP spending (SFSD): - Launched Sasta Fuel Sasta Diesel (SFSD) one-off cash transfer of PRs 2,000 per family in June 2022. - Served 7.6 million Kafalat families and 1 million non-Kafalat families at a total budgetary cost of PRs 16.8 billion. - Program rationalization: - Retired Ehsaas Rashan Riyat Program (ERR). - Kept Kamyab Pakistan Program (KPP) in the piloting phase. *Source: 1pakea2022002 - 2.5 percent to 5 percent in the budget, with a commitment not to reduce this rate below* ### 15. In FY23, we are reinforcing our efforts to bring more people into the BISP safety net. ### 15. In FY23, we are reinforcing our efforts to bring more people into the BISP safety net. ### BISP spending and program expansion (FY23) - Increase total BISP spending: PRs 364 billion set aside to cover programs. - Regular BISP programs: PRs 316 billion budgeted to: - Execute all regular BISP programs. - Implement a targeted expansion of the UCT Kafalat base by another 1.3 million families to 9 million beneficiary families (new end-June 2023 SB). - Review the UCT Kafalat program by end-September 2022 to ensure the stipend is adjusted for inflation in FY22 by end-December 2022. - Build on World Bank advice and seek ways to find fiscal space to implement a meaningful improvement of the still low BISP Kafalat generosity level. - Review the conditional education and stunting cash transfers to better align them with actual child schooling and food costs. - Reinstate the quarterly disbursement schedule of the Kafalat stipend. - Elevate the IT on regular targeted cash transfer spending by BISP to a PC (Table 1) and contain it explicitly to all spending on regular BISP programs targeted at families with a PMT score below that applied to the UCT program (Kafalat), which is currently 32. - Context on generosity: The current generosity level is about 9.3 percent of the average consumption of a bottom quintile family, relative to an international best practice of about 25 percent. - Special FY23 SFSD support for vulnerable lower-middle class: - Extend the new SFSD scheme into FY23 to provide a monthly benefit of PRs 2,000 to 2 million non-BISP Kafalat beneficiaries (with a PMT score below 37, worth PRs 48 billion) with a sunset at end-FY23. - NSER and enrollment: - Keep the NSER live and regular BISP enrollment open. - Continue working with the World Bank on established live registry points in all regions to allow re-declaration after shocks (including personal circumstances or regional climate disasters) and to have eligibility decisions for UCT and CCTs checked. ### Monetary, exchange rate, and financial sector policies - Policy objectives: - Maintain a market-determined exchange rate. - Lower inflation towards target. - Rebuild foreign exchange reserves. - Exchange rate and reserves: - Exchange rate depreciated by 16 percent between end-December 2021 and end-June 2022. - Reserves have fallen to about 1.5 months of imports. - Reserve rebuilding objective: at least 2.2 months of import coverage by end-FY23. - Forex sales will not be used to prevent a trend depreciation driven by fundamentals. - Inflation and monetary tightening: - Headline inflation reached 24.9 percent in July 2022. - Core inflation is in excess of 10 percent. - Policy rate increased by 125 bps to 15 percent on July 7, 2022, bringing cumulative tightening since September 2021 to 800 bps. - Interest rates on EFS and LTFF raised by 700 bps and 500 bps, respectively, since April 7, 2022; these rates are linked to the policy rate and will adjust automatically. - Medium-term inflation objective: 5–7 percent. - Future adjustments depend on inflation data, exchange rate developments, external position strength, and fiscal-monetary policy mix. - Refinancing schemes and SBP involvement: - Outstanding amount for all facilities as of end-June 2022: PRs 1,607 billion, or 17.4 percent of private sector credit. - Assessment found EFS boosts exports but aligning refinancing rates closer to market rates is needed. - Gap between the policy rate and interest rate on LTFF/EFS facilities reduced to 5 percentage points. - Plan to transfer LTFF/EFS facilities to Ex-Im Bank with parameters: - Transition period of no more than 5 years. - No implicit subsidization of Ex-Im Bank through the SBP. - Expeditious resolution of operational constraints at Ex-Im Bank. - Working group created in March 2022 with representatives from the Ministry of Finance, Ministry of Commerce, SECP, SBP, and Ex-Im Bank. - SBP committed not to introduce further schemes while phasing out existing refinancing facilities. - Financial sector health and bank recapitalization: - Banks remain well capitalized and profitable; non-provisioned NPLs at 0.7 percent as of end-March 2022. - Three small banks remain undercapitalized. - Outstanding amount for all facilities (repeated): PRs 1,607 billion as of end-June 2022. - First-stage recapitalization of two private banks delayed; public offer made on March 18, 2022, but completion delayed due to a legal dispute. - One bank expected to achieve positive capital by end-September 2022 if equity injection proceeds. - Second bank identified an investor and announced intention for equity injection on May 31, 2022. - Requirement: first-stage recapitalization of both banks complete by end-March 2023 (end-May 2022 SB reset to end-March 2023). - Initiate orderly resolution of either or both banks by end-May 2023 should they remain undercapitalized (new end-May 2023 SB). - Public sector bank privatization progress slow; Privatization Commission Board recommended delisting from privatization program; SBP informed Federal Government that the bank cannot be rehabilitated and should be resolved; SBP will commence resolution with Ministry of Finance approval. - Strengthen bank resolution and crisis management frameworks, including deposit insurance, aligning with international best practice. - Submit draft law, in line with IMF staff recommendations, to the Cabinet by end-October 2022 (new end-October 2022 SB), with aim of parliamentary adoption before end of program. - Adopt by end-June 2023 a comprehensive strategy to address high levels of NPLs in some banks, including requiring bank-specific plans to reduce them, and to write off fully provisioned NPLs (new end-June 2023 SB). - AML/CFT commitments: - Completed all action items in 2018 Action Plan, including terrorist financing investigations and prosecutions of senior leaders of UN-designated terrorist groups (Immediate Outcome 9) in June 2022 (end-March 2022 SB). - Completed all 7 action items in 2021 AML/CFT Action Plan ahead of committed deadlines. - SBP carried out field inspections of 7 of the 19 participating financial institutions in the tax amnesty program for the construction sector and the AML/CFT thematic inspection, covering 80% of the designated bank accounts opened under the program. - Thematic inspection report completed in June 2022, with strategic analysis inputs from the Financial Monitoring Unit. - By end-September 2022, SBP will share key findings and recommendations with the banking sector and relevant competent authorities, and implement enforcement actions including changes in regulatory framework, as appropriate. - Exchange and import restrictions for BOP reasons: - New and intensified measures introduced since the sixth EFF review; committed to phase out and eliminate them by end-June 2023. - Request approval for all existing exchange measures subject to Article VIII. - Cash margin requirements: - On April 7, 2022, extended items subject to a 100-percent cash margin requirement (CMR) on imports by 177 items and made the CMR non-remunerated, breaching continuous PCs on non-intensification of exchange restrictions and non-modification of MCP. - Reduced the CMR to 25 percent where credit terms of import are more than 90 days and eliminated CMR where credit terms are more than 181 days on August 5, but remaining CMR on newly introduced items expires on December 31, 2022. - Import ban: - On May 19, 2022, banned import of 33 categories of luxury and nonessential items (including cars, mobile phones, and home appliances) to preserve FX reserves. - Ban breached continuous PC on non-imposition of import restrictions for BOP purposes. - Ban partially repealed in August 2022 and remainder to be repealed in October 2022. - Import payment authorization: - As of May 20, 2022, banks required SBP permission before initiating transactions for importing certain goods, including car and mobile phone parts destined for local assembly; list extended on July 5, 2022. - Permission granted selectively due to low reserve buffers; measure breaches continuous PC on non-imposition of exchange restrictions. - Requirement will be terminated by end-August, in consultation with the IMF and based on market conditions. ### Energy sector policies and circular debt management - Deterioration in energy sector finances in recent years: arrears accumulating, cash constraints, load shedding increasing, and high implicit fiscal cost. - Circular debt (CD) developments: - New power payment arrears accumulated through FY22: PRs 536 billion (0.8 percent of GDP), exceeding end-June 2022 indicative target (IT) of PRs 166 billion under the EFF-supported program (included in cabinet-approved updated CDMP approved in early March 2022). - End-FY22 CD stock slightly decreased from historical high in FY21 to PRs 2,253 billion (3.4 percent of GDP), helped by budget CD stock payments of PRs 564 billion. - FY22 measures to restructure power sector: - Better targeting energy subsidies: - Cabinet approved second step of subsidy reform for residential consumers in December 2021 (supported by World Bank). - Removal of previous-slab benefit and increase in effective tariff of unprotected slabs by PRs 0.54/kwh (corresponds to increase of weighted-average tariff by PRs 0.20/kwh). - New implied tariff structure determined by NEPRA on March 18, 2022; kept awaiting notification until FY23 (¶23.a). - Resumed regular tariff adjustments: - NEPRA notified QTA for FY22Q1 in early June 2022: PRs 0.57/kwh for 3 months. - NEPRA notified QTA for FY22Q2 in early July 2022: PRs 1.55/kwh for 3 months. - NEPRA determined combined annual rebasing (AR) for FY22 and FY23: PRs 7.91/kwh on June 2, 2022; awaiting government notification until FY23 (¶23.a). - Strengthened collaboration between Ministry of Energy, Ministry of Finance, NEPRA, and DISCOs to improve data submission pace and quality and reduce regulatory processing time. - Reducing circular debt stock (PRs 564 billion reduction until end-June 2022) through two stock operations: - Settlement of unguaranteed CPPA-G payables to power producers: PRs 384 billion paid in return for renegotiated and revised PPAs terms: - PRs 135 billion to complete arrears clearance with 20 IPPs in November 2021. - PRs 64 billion for first installment to another 13 IPPs in January 2022. - PRs 96 billion in June 2022 (all with one-third in cash and remainder in debt instruments). - PRs 89 billion to government power plants (GPPs) in April and June 2022 (in cash). - PRs 50 billion in arrears to IPPs covered by the CPEC Arrangement in March 2022. - Debt instruments used: 10-year floating-rate PIBs and 5-year sukuks (in equal parts). - Conversion of government-guaranteed debt held by Power Holding Private Limited (PHPL) into public debt: assumed PRs 130 billion in maturing PHPL debt, bringing PHPL debt stock down to PRs 800 billion (about 1.2 percent of GDP) at end-June 2022. - Tariff and capacity payment issues: - Falling behind on capacity payments due to high fuel prices; striving to reduce capacity payments via PPA renegotiations or lengthening duration of bank loans. - Ongoing objectives: - Continue restructuring power sector to ensure financial viability and contain additional fiscal costs. *Italicized source attribution line.* ### 23. Going forward, we will continue to persevere with the implementation of our ### 23. Going forward, we will continue to persevere with the implementation of our ### Power sector: tariff adjustments, subsidies, and structural reforms - Removed the budget-financed blanket subsidy of PRs 5/kwh on June 1, 2022 (¶8). - Implementing power tariff adjustments in a timely manner; notified the pending combined FYs22–23 AR as a three-stage adjustment and the subsidy reform as a one-stage adjustment in late and early July 2022, respectively (¶22.a, PA for completing this review): - First-stage AR increase (PRs 3.50/kwh) took effect on July 25 and the full subsidy reform markup (PRs 0.20/kwh) on July 5, 2022. - Second-stage AR increase (PRs 3.50/kwh) took effect on August 1, 2022. - Third-stage AR increase will take effect on October 1, 2022 (PRs 0.91/kwh), followed by automatic catch-up increases through the QTA for FY23Q1 and FPA for July to fully recover the shortfall from the delayed implementation of the first stage beyond July 1. - The third-stage of the combined FY22–23 AR will take effect on October 1, 2022 (new end-September 2022 SB). - Objectives of timely regular tariff adjustments: - Help address acute revenue shortfalls in the power sector. - Alleviate burden on small consumers in protected slabs who face high energy prices through historically high monthly FPAs. - Achieve cost recovery and increase progressivity of the new tariff structure for residential consumers. - Rationalizing power subsidies through better targeting: - Commenced, with World Bank support, work on subsidy rationalization for tube-wells for large agricultural users in March 2022. - Due to field survey delays, plan to initiate consultative process and submit a concrete reform proposal to cabinet by November 2022. - Accelerating medium-term cost-reducing structural reforms (with World Bank and ADB support) aimed at reducing commercial and technical losses, improving governance and PPA terms, and introducing greater competition. In FY23: - Renegotiate PPA terms in return for clearing unguaranteed CPPA-G arrears; settle up to PRs 180 billion earmarked for IPPs and GPPs with revised PPA terms, using the established contract structure (Footnote 13). - Convert expensive government-guaranteed PHPL debt into cheaper public debt: - Created fiscal space to settle PRs 35 billion of the PRs 165 billion falling due from the budget and roll over the public guarantee for the remaining PRs 130 billion. - Other reforms to pursue: - Increasing private participation in DISCOs to improve governance and efficiency. - Seeking NEPRA’s approval of a Transmission System Expansion Plan (TSEP) to accommodate increased share of variable and cheaper renewable energy. - Seeking NEPRA’s approval of the updated Grid Code and Commercial Code to govern trading in the new wholesale market and improve distribution efficiency. - Fiscal principles and constraints: - Strive to reduce capacity payments as arrears are paid, either by renegotiating PPAs or lengthening bank loan durations, depending on budget space and CDMP implementation progress. - Same principle for assumption of PHPL amortization by the federal budget. - Continue to refrain from netting out cross-arrears (unless independently audited); using “non-cash” settlements; and issuing government guarantees (such as for PHPL-issued sukuks to transfer CPPA-G payables to PHPL). ### Gas sector: circular debt, pricing, and reforms - Estimated gas sector circular debt stock increased from PRs 620 billion at end-FY21 to about PRs 719 billion at end-March 2022 (about 1 percent of GDP), composed of PRs 547 billion in system gas arrears and about PRs 172 billion in RLNG arrears. - Main drivers of increase: - Non-implementation of upward revisions in gas sale prices in line with OGRA determination of prescribed prices under the ERRs of SSGCL and SNGPL. - Increase in RLNG tariff differential and diversion costs reflecting diversion of costly RLNG to domestic (residential) consumers during last winter months. - Accumulation of RLNG tariff differential over four winter seasons starting in FY19 until FY22. - Wider concept of gas CD stock (including SUIs' tax adjustments/refunds, tariff-related recoveries stuck in courts, and receivables of SUIs, OGDCL, and PPL from the power sector) grows to over PRs 1,230 billion at end-March 2022. - Measures to improve sector performance: - Monitoring and managing circular debt: - Compile detailed and verified gas CD stock statistics. - Establish a quarterly gas CD reporting system and improve data management and projection capacity. - Devise a gas CDMP with salient elements including regular adjustments of end-user gas prices per established formulas and measures to reduce UFG losses (through infrastructure improvements, network rehabilitation, and theft controls). - Enacting OGRA Act amendments which came into effect on March 1, 2022 (end-June 2022 SB) to support timely notification of OGRA end-user gas price determinations. - Regularly updating end-user gas prices: - Received OGRA’s determination of the annual ERR for FY22 on June 3, 2022 (Footnote 17). - In process of implementing more than the prescribed increase in consumer gas prices by end-August 2022 to contain CD flow, address some of the CD stock, and improve liquidity of gas companies, while minimizing impact on smaller consumers. - This will be the first end-user gas price adjustment since September 2020. - Need more time than the amended OGRA Act’s 40 days to work out fair distribution of increase across consumer categories. - Continuing collaboration with World Bank on mechanism for regular end-user gas price updates, while also rationalizing gas subsidies and implementing structural pricing changes implied by recently enacted WACOG bill. - Quantitative impacts from ERR and price changes: - OGRA's ERR determines an increase in the prescribed average end-user gas price by some 45 percent to PRs 928 per MMBtu (Footnote 17). - Expected generation of about PRs 666 billion for the SUI companies in FY23 (SNGPL and SSGCL), which is PRs 120 billion higher than their ERR for FY23; the surplus revenue would make up for partial recovery of previous year's losses (Footnote 18). ### Structural policies: SOEs, business environment, and housing/construction - Focus areas: (1) reform SOEs; (2) improve business environment; (3) enhance governance. - SOE governance, transparency, efficiency, and fiscal risk limitation: - Enhancing SOE legal and regulatory framework: - National Assembly adopted new SOE law in July 2022; awaiting Senate approval (end-June 2022 SB, reset to end-September 2022). - Law will: (1) ensure SOE operations are grounded on commercial footing, including by defining what constitutes a commercial SOE; and (2) regulate oversight and ownership arrangements. - Working with ADB support to finalize further regulatory reforms by end-December 2022, including: - Seeking cabinet adoption of an SOE ownership policy to operationalize SOE law principles. - Amending SOE-dedicated acts for four selected SOEs to make the new SOE law applicable: - National Highway Authority; Pakistan Post; Pakistan National Shipping Corporation; Pakistan Broadcasting Corporation. - Strengthening monitoring of SOEs: - Establishing a Central Monitoring Unit (CMU) within MoF to improve SOE performance functions and provide better aggregate SOE analysis; aim to operationalize CMU by January 2023 (new end-January 2023 SB). - Increasing transparency: - SOEs continuously audited by external auditors. - Auditor General requested to conduct special audits, including of SSGCL, HESCO, and PESCO. - Advancing privatization and SOE support: - Working toward debt recapitalization and refinancing of two RLNG power plants; after resolution of inter-ministerial issues, process expected completed by end-2022; thereafter initiate equity sale with proceeds to be channeled to debt reduction and poverty programs. - Advancing privatization of: - House Building Finance Company Limited (development finance institution): aim to complete privatization by end-March 2023. - First Women Bank Limited (public bank): complete 2018–20 outstanding annual audits by end-November 2022 and 2021 annual audit by end-December 2022, with aim to complete privatization by end-June 2023. - Improving competitiveness and business environment: - Implement approved national tariff policy based on time-bound strategic, infant, and greenfield industry protection; rationalize tariffs to boost competitiveness for ‘Made in Pakistan’ products, including phasing out tariffs on capital goods, intermediate products, and raw materials. - Steps to improve business environment: - Simplify procedures to start a business; introduce a single portal for company registration and digital integration of federal and provincial entities. - Streamline approval process for FDI. - Improve trading across borders by reducing customs-related processing time and reducing hours to prepare import/export documentation. - Simplify and harmonize tax payment process through a simple and fully automated regime for paying taxes, contributions, and fees. - Launch a communication drive to disseminate information regarding reforms undertaken. - Address structural deficiencies in housing and construction sector: - Identified impediments: land title documentation; real estate regulatory authorities; availability of long-term financing; foreclosure laws; credit scoring. - Established a working group in June 2022 to produce a comprehensive strategy paper with solutions by end-December 2022 to help increase private sector lending to the sector. ### Governance and anti-corruption measures - Strengthening effectiveness of anticorruption institutions: - Issue regulations to establish an electronic asset declaration system (end-March 2022 SB, reset to end-September 2022) that is: - Comprehensive (covering assets beneficially owned or located abroad). - Centrally-held with the Federal Board of Revenue. - Covering federal civil servants of BPS 17 to 22. - Accessible to entities authorized by law (including banks for limited customer due diligence purposes) and effectively verified. - Institutionalize public access for annual declarations for all members (elected and unelected) of the federal government cabinet of Pakistan. - Finance (Supplementary) Act of 2022 authorizes FBR to provide access to asset declarations of politically exposed persons and public servants in BPS-17 and above (including their spouses, children, benamidars, or when they are the beneficial owner). - FBR, together with Establishment Division, SBP and Financial Monitoring Unit, will issue regulations to facilitate access to law enforcement and banks. - Undertaking the 2nd review cycle under the UNCAC implementation mechanism and will publish the full report including findings, analysis, and recommendations. - Establishing a task force by the Ministry of Law and Justice (in consultation with Ministry of Finance and with inputs from independent experts and civil society) to complete and publish a comprehensive review of the institutional framework of anticorruption institutions (including NAB) with proposals for legislative amendments as appropriate (new end-January 2023 SB). Task force will recommend structural reforms to strengthen independence, prevent political influence and persecution, and provide transparency and accountability controls against abuse. - Enhancing AML tools to support anti-corruption: - Support financial institutions and reporting institutions to improve capacity to identify politically exposed persons and apply enhanced due diligence. - Augment Financial Monitoring Unit with additional analyst positions to process increasing suspicious transaction reports. - Provide training on mutual legal assistance and trade-based money laundering to enhance financial investigation capacities of law enforcement agencies. - Continue pursuing application for membership in the Egmont Group of Financial Intelligence Units. ### Financing and program monitoring - Current projections with policies outlined in this MEFP: - Gross external financing needs for FY23 will amount to approximately US$33 billion (including the current account). - About US$22 billion is amortization to multilateral and bilateral official as well as commercial creditors. - Financing secured/planned to close the gap: - Secured US$7 billion as rollovers of existing and US$4 billion in additional financing commitments from bilateral, multilateral, and commercial partners. - Key bilateral creditors have at least maintained their exposure to Pakistan in line with program financing commitments. *IMF staff report excerpt (Content unit: 1pakea2022002 - 23).* ### 30. Implementation of the policies under the program will continue to be monitored ### 30. Implementation of the policies under the program will continue to be monitored ### Monitoring framework and instruments - Implementation will be monitored through prior actions (PAs), quantitative performance criteria (QPCs), indicative targets (ITs), continuous performance criteria (PCs), structural benchmarks (SBs), and schedule of reviews, as envisaged in MEFPs dated June 19, December 2, 2019, March 9, 2021, December 17, 2021, and January 28, 2022, and the current MEFP. - The attached Technical Memorandum of Understanding (TMU) defines the quantitative performance criteria and indicative targets under the program. - The quantitative targets for end-September 2022, end-December 2022, and end-March 2023—along with continuous PCs and ITs—are set out in Table 1. The PAs and SBs are set out in Table 2. ### Key quantitative performance criteria and indicative targets (overview from MEFP Table 1) - Performance Criteria (selected list from the TMU overview): - 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 (stock, billions of Pakistani rupees). - Ceiling on the amount of government guarantees (stock, billions of Pakistani rupees). - Floor on targeted cash transfers spending (BISP) (cumulative, billions of Pakistani rupees). - Continuous Performance Criteria (selected): - No new flow of SBP's credit to general government. - Zero ceiling on the accumulation of external payment arrears by the general government. - Indicative Targets (selected): - 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). - Floor on gross issuance of PIBs, Sukuks, and Eurobonds (cumulative, billions of Pakistani rupees). ### Selected Table 1 numerical outcomes and statuses (as reported) - Floor on net international reserves of the SBP (millions of U.S. dollars): - Program end-September: -5,450; Adjusted CR 22/27: -3,242; Actual: -3,210; Status: Met. - Program end-December: -6,000; Adjusted CR 22/27: -5,481; Actual: -7,790; Status: Not Met. - Program end-March: -5,100; Adjusted CR 22/27: -4,653; Actual: -10,784; Status: Not met. - Ceiling on net domestic assets of the SBP (stock, billions of Pakistani rupees): - Program end-September: 9,850; Adjusted CR 22/27: 9,704; Actual: 9,158; Status: Met. - Program end-December: 10,233; Adjusted CR 22/27: 10,326; Actual: 9,986; Status: Met. - Program end-March: 10,792; Adjusted CR 22/27: 10,895; Actual: 10,850; Status: Met. - Ceiling on SBP's stock of net foreign currency swaps/forward position (negative, millions of U.S. dollars): - Program end-September: 4,000; Adjusted CR 22/27: ...; Actual: 3,998; Status: Met. - Program end-December: 4,000; Adjusted CR 22/27: 4,000; Actual: 4,000. - Ceiling on the general government primary budget deficit (cumulative, excl. grants, billions of Pakistani rupees) (selected entries showing noncompliance): - Program end-September: -300; Adjusted CR 22/27: -239; Actual: -28 1; Status: Met. - Program end-December: -389; Adjusted CR 22/27: -292; Actual: 275; Status: Not met. - Program end-March: 25; Adjusted CR 22/27: 267; Actual: 1,900; Status: Not met. - Ceiling on net government budgetary borrowing from the SBP (stock, billions of Pakistani rupees): - Program (multiple test dates): 6,049; Adjusted CR 22/27: 6,506; Actual end-September: 5,245; Status: Met. - Program end-March: 6,049; Adjusted CR 22/27: ...; Actual: 5,077; Status: Met. - Cumulative floor on targeted cash transfers spending (BISP) (billions of Pakistani rupees) — conversion note: - The quantitative indicative target on BISP spending will be converted into a quantitative performance criterion from September 2022 onwards. - Cumulative floor on general government budgetary health and education spending (billions of Pakistani rupees) (examples showing noncompliance): - Program end-September: 783; Actual: 729; Status: Not met. - Program end-December: 1,287; Actual: 1,198; Status: Not met. - Program end-March: 2,014; Actual: 1,796; Status: Not met. - Floor on net tax revenues collected by the FBR (cumulative, billions of Pakistani rupees): - Program end-September: 2,852; Actual: 2,901; Status: Met. - Program end-December: 4,343; Actual: 4,365; Status: Met. - Program end-March: 6,100; Actual: 6,126; Status: Met. - Ceiling on net accumulation of tax refund arrears (cumulative, billions of Pakistani rupees): - Program end-September: 11; Actual: 51; Status: Not met. - Program end-December: 6; Actual: 127; Status: Not met. - Program end-March: 0; Actual: 147; Status: Not met. - Ceiling on power sector payment arrears (cumulative flow, billions of Pakistani rupees): - Program end-September: 67; Actual: 357; Status: Not met. - Program end-December: 184; Actual: 456; Status: Not met. - Program end-March: 166; Actual: 536; Status: Not met. - Gross issuance of PIBs, Sukuks, and Eurobonds (cumulative, billions of Pakistani rupees): - Program end-September: 2,450; Actual: 2,969; Status: Met. - Program end-December: 3,650; Actual: 4,818; Status: Met. - Program end-March: 4,900; Actual: 6,267; Status: Met. ### Structural conditionality (selected items from Table 2) - Prior Actions (examples): 1. FY23 budget. Parliamentary approval of a FY23 budget, including a personal income tax reform and in line with IMF staff agreement to meet program targets. Status: Met. 2. Provincial budgets. Signature by the federal and provincial governments of Memoranda of Understanding (MoUs) on provincial fiscal targets consistent with the FY23 budget. Status: Met. 3. Relief package reversal (multi-step PDL and subsidy eliminations with specified PRs per liter and PRs/kwh adjustments across July–January/April 2023). Status: Met. 4. Power price catch-up (stage increases: PRs 3.50/kwh, PRs 0.20/kwh, and PRs 0.91/kwh at specified dates). Status: Met. - Structural Benchmarks (examples with dates and statuses): - Fiscal: 1. Commit to not grant further tax amnesties. Continuous. Status: Not met. 2. Avoid the practice of issuing new preferential tax treatments or exemptions. Continuous. Status: Not met. 3. Preparation of draft personal income tax (PIT) legislation. end-Feb. 2022. Status: Not met. - Monetary and Financial: 4. Adoption of measures to strengthen AML/CFT framework to support exit from FATF list. end-Mar. 2022. Status: Not met. Implemented with delay in June 2022. 5. Preparation of a plan by Ministry of Finance and State Bank of Pakistan to establish a Development Finance Institution. end-Apr. 2022 end-Dec. 2022. Status: Not met. 6. Completion of the first-stage recapitalization of the two private sector banks that are undercapitalized. end-May 2022 end-Mar. 2023. Status: Not met. - Energy Sector, SOEs, and Governance: 7. Parliamentary approval of new SOE law in line with staff recommendations. end-Jun. 2022 end-Sep. 2022. Status: Not met. 8. Adoption by parliament of amendments to the OGRA Act. end-Jun. 2022. Status: Met. Signed into effect by the President on March 1, 2022. 9. Establish a robust asset declaration system with a focus on high-level public officials. end-Mar. 2022 end-Sep. 2022. Status: Not met. 10. Issuance of PPRA regulations to require collection and publication of beneficial ownership information for contracts PRs 50 million and above. end-Mar. 2022. Status: Not met. Implemented with delay in May 2022. - New Structural Benchmarks (selected and dated): 1. Targeted increase of the BISP Kafalat beneficiary base to 9 million families using the NSER. end-Jun. 2023. 2. Finalization of the combined annual rebasings (AR) for FY22 and FY23 to take effect on October 1, 2022. end-Sep. 2022. 3. Submission to NEPRA of petitions for (i) FY23-July FPA by end-August; and (ii) FY23-Q1 QTA by end-October. end-Sep. 2022. 4. Adoption of a comprehensive strategy to address high levels of NPLs in some banks, require bank-specific plans, and write-off fully provisioned NPLs. end-Jun. 2023. 5. Initiate orderly liquidation (resolution) of either or both undercapitalized private sector banks by end-May 2023 if still undercapitalized. end-May 2023. 6. Submission to Cabinet of amendments to align Pakistan’s early intervention, bank resolution, and crisis management arrangements with international good practices. end-Oct. 2022. 7. Operationalization of a Central Monitoring Unit (CMU) within the Ministry of Finance. end-Jan. 2023. 8. Publication of a comprehensive review of the anticorruption institutional framework by a task force with independent experts and civil society participation. end-Jan. 2023. ### Technical Memorandum of Understanding (TMU): definitions, exchange rates, and adjustments - Purpose: - The TMU sets out definitions of quantitative performance criteria, indicative targets, and—if needed—prior actions and structural benchmarks; and the respective reporting requirements used to monitor developments for the EFF program described in the authorities' LOI dated August 16, 2022 and the attached MEFP. - Authorities will provide necessary data to the IMF as soon as it becomes available. Definitions in the TMU will be adjusted to reflect any changes in program design and accounting classifications introduced during the program period. - Program exchange rate: - The program exchange rate of the Pakistani rupee to the U.S. dollar is set at PRs 141.3172 per U.S. dollar. - Text Table 1: Program exchange rates (Units of currency per U.S. dollar): - EUR0.896456 - JPY111.699717 - CNY6.741081 - GBP0.769292 - AUD1.428981 - CAD1.346196 - THB32.035948 - MYR4.141502 - SGD1.362695 - INR69.267944 - SDR0.723019 - Definitions (selected): - Net international reserves (NIR) of the SBP: U.S. dollar value of difference between usable gross international reserve assets and reserve-related liabilities, evaluated at program exchange rates. - On April 16, 2019, the NIR of SBP are estimated at negative US$15,557 million. - Usable gross international reserves: readily available claims on nonresidents denominated in foreign convertible currencies controlled by monetary authorities; includes holdings of foreign currencies, SDRs, reserve position in the IMF, and holdings of fixed and variable income instruments. Exclusions listed explicitly (claims on residents; assets in nonconvertible currencies; precious metals; illiquid assets; assets pledged or collateralized; assets not readily available for intervention; balances at foreign branches of non-investment rated domestic banks). - Reserve-related liabilities of the SBP: all foreign exchange liabilities to residents (except general government) or nonresidents, including specific categories (foreign currency liabilities with remaining maturity ≤ one year; foreign exchange liabilities arising from derivatives on net outstanding basis; outstanding IMF credits to Pakistan; foreign exchange deposits with SBP from specified entities). SDR allocations and accrued interest on reserve-related liabilities are excluded. - Aggregate net position in foreign exchange derivatives: aggregate net positions in forwards and futures in foreign currencies of the SBP and general government vis-à-vis domestic currency. At end-April 2019, SBP's aggregate net derivative position was negative US$8,055 million. - Gross sale and net purchase of foreign exchange: definitions for outright and swap sales/purchases by SBP, measured on a net daily basis. - Adjustment mechanism for the NIR floor: - The floor on NIR will be adjusted upward (downward) by the cumulative excess (shortfall) in: a. cash inflows from multilateral and bilateral creditors, commercial borrowing, and bond issuance relative to projected inflows (Table 1). Cumulative cash inflows defined as external disbursements (including grants) from official multilateral creditors and official bilateral creditors and external bond placements and other commercial borrowings usable for financing the central government budget; b. the actual stock of NIR at end-June 2019 relative to the projected amount. The stock of NIR of SBP at end-June 2019 is projected at negative US$17,743 million; and c. the use by the SBP of the foreign assets related to commercial consortium loan to make import payments relative to amounts expected under the baseline (Text Table 2). - Text Table 2. Use by SBP of foreign assets related to commercial consortium loan (Cumulative flows from the start of the fiscal year; millions of Renminbi): - End-Sep 2022: 0 - End-Dec 2022: 0 - End-Mar 2023: 0 - Net domestic assets (NDA) definition highlights: - NDA of the SBP are defined as the difference between reserve money minus the NIR of the SBP (NIR valued at the program exchange rate and expressed in Pakistani rupee). - Reserve money (RM) is defined as the sum of: (i) currency outside schedule banks (deposit money banks); (ii) schedule banks' domestic cash in vaults; (iii) schedule banks' required and excess rupee and foreign exchange deposits with the SBP; and (iv) deposits of the rest of the economy with the SBP, excluding those held by the federal and provincial governments and the SBP staff retirement accounts. *Source: Pakistan — MEFP and attached Technical Memorandum of Understanding (Tables and text as provided in the source PDF).* ### 14. Consistent with the NIR target adjustment mechanism (as defined above), the ceiling on the ### 14. Consistent with the NIR target adjustment mechanism (as defined above), the ceiling on the ### NIR-target adjustment to NDA ceiling - The ceiling on the NDA will be adjusted downward (upward) by the cumulative excess (shortfall) in: - a. cash inflows from multilateral and bilateral creditors, and commercial borrowings and bond issuances relative to the projected inflows (Table 1) and evaluated at the program exchange rate - b. the actual stock of NIR at end-June 2019 relative to the projected amount (see above) and evaluated at the program exchange rate - c. the use by the SBP of the foreign assets related to commercial consortium loans to make import payments relative to the amounts expected under the baseline (Text Table 2) and evaluated at the program exchange rate ### B.3. Ceiling on SBP's Stock of Net Foreign Currency Swap/Forward Position - Definition: - The stock of net foreign currency swap/forward positions is the aggregate net positions in forwards and futures in foreign currencies of the SBP vis-à-vis the domestic currency (including the forward leg of currency swaps). - It will be evaluated at the program exchange rate. - Key statistic: - At end-April 2019, the SBP's aggregate net FX derivative position was negative US$8,055 million. ### B.4. Ceiling on the General Government Primary Budget Deficit Excluding Grants - Definition (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 the federal and provincial budgets. - General government overall budget deficit (excluding grants) measured as the cash deficit from below the line, defined as the sum of: - a. net external budget financing, excluding valuation changes, evaluated at actual average quarterly exchange rates; - 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 the net domestic nonbank financing, excluding valuation changes. These comprise: - (i) privatization receipts (either received directly or transferred from the privatization accounts to the general government budget, including from abroad and in foreign currency); - (ii) change in the stock of issued government securities held outside the general government and the banking system, net of valuation changes; - (iii) change in net deposits and reserves received by the general government (public accounts deposits); - (iv) any other government borrowing from domestic nonbank sources net of repayments; - minus (v) change in general government deposits with nonbank financial institutions; - d. total external grants to the federal and provincial governments, defined as the sum of project grants, cash external grants for budgetary support, capital grants reflecting the principal amounts of external debt cancellation or swaps, and other grants. External grants are evaluated at actual average quarterly exchange rates. - Net external budget financing (excluding valuation changes and all external financing counted as reserve liabilities of the SBP) defined as the sum of: - a. external budget loans to the general government, including those on-lent to financial institutions and companies (public or private) and external emergency relief lending. It comprises those with: - (i) medium- and long-term maturity from official multilateral sources (including IMF budget support), official bilateral sources, and private sector sources (e.g., bonds and non-residents’ purchases of PIBs, Naya Pakistan Certificates, and Banao Certificates); and - (ii) short-term maturity, net of foreign portfolio investment excluding non-residents’ purchases of Naya Pakistan Certificates and Banao Certificates but including non-residents’ purchases of domestic T-bills; and - b. net external debt amortization flow of the general government, which is the change in its stock of external debt service arrears net of the debt amortization due on its external budget loans (with the latter accounting for the impact of any rescheduled, relieved, or accelerated amortization, including that related to debt swaps or debt cancellation recorded as capital grants). ### Adjustment mechanism for the ceiling on general government primary deficit (excluding grants) - The ceiling will be adjusted on a cumulative basis since the beginning of the fiscal year: - a. downward (upward) by any shortfall (excess) in external project financing relative to the program projections evaluated in Pakistani rupee terms at actual average quarterly exchange rates (see Table 1). External project financing is defined as disbursements from bilateral and multilateral creditors to the general government for specific project expenditure; - b. downward by any underexecution in the targeted cash transfers (BISP) relative to their indicative program target; - c. downward by any excess in the flow of power sector payment arrears above the respective indicative program targets, excluding non-recoveries and excess line losses (see Text Table 4); - d. downward by any increase in the stock of budgetary arrears on social payments (such as wages, pensions, social benefits) accumulated since the beginning of the fiscal year; - e. downward by any excess in the flow of tax refund arrears (as defined below) relative to their respective indicative program targets; - f. upward by any shortfall in actual SBP profit transfers 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: 0 300 300 - g. upward by up to PRs 180 billion for the clearance of CPPA arrears to IPPs in FY23. ### B.5. Ceiling on Net Government Budgetary Borrowing from the SBP - Definition: - Net government budgetary borrowing from the SBP (including provincial governments) is defined as SBP claims on the general government minus general government deposits with the SBP. - Those claims include government securities, treasury bills, treasury currency, and debtor balances, whereas those claims exclude accrued profits on government securities. - Government deposits with the SBP exclude the Zakat Fund (Table 2). ### B.6. Ceiling on the Amount of Government Guarantees - Scope: - Applies to the stock of publicly guaranteed debt for which guarantees have been issued by the central government. - Includes both domestic and external government guarantees. - External government guarantees will be converted into Pakistani rupees at the program exchange rate. - Excludes guarantees issued by the Ministry of Finance for the SBP borrowing from the IMF. ### B.7. Floor on Targeted Cash Transfers Spending (BISP) - Scope: - Applies to the cumulative targeted cash transfers spending by the Benazir Income Support Program (BISP), i.e., all spending on BISP programs targeted at families with a poverty-means tested (PMT) score below that applies to the unconditional cash transfer program (Kafalat). ### C. Continuous Performance Criteria - C.1. No New Flow of SBP's Credit to General Government - No new flow of SBP's direct credit to the general government, including purchases of public debt securities on the primary market. - Applies on a continuous basis throughout the program period. - C.2. Zero Ceiling on the Accumulation of External Payment Arrears by the General Government - External payment arrears defined as all unpaid debt-service obligations of the general government 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 ceiling on the accumulation of external payment arrears is set at zero. - The performance criterion applies on a continuous basis throughout the program period. - C.3. 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. ### D. Indicative Targets - D.1. Floor on General Government Budgetary Health and Education Spending - Applies to the cumulative budgetary spending on health and education by the federal and provincial governments. - D.2. Floor on Net Tax Revenues Collected by the Federal Board of Revenue (FBR) - 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 (including income tax) 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. - D.3. Ceiling on Net Accumulation of Tax Refund Arrears - Applies to the cumulative flow of tax refund arrears. - The stock of tax refund arrears is the amount of tax refund claims not settled within a specified time period after submission to the FBR. - Stocks: - The stock of tax refund arrears as of end-December 2020 was PRs 499 billion and at end-June 2022 PRs 366 billion. - D.4. Ceiling on Power Sector Payment Arrears - Power sector payment arrears defined as power sector payables in arrears arising 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 mechanism: - The stock of payment arrears includes payables of PRs 2.3 trillion (of which PRs 800 billion held at PHPL) as of end-FY22. - 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. - D.5. Gross Issuance of PIBs, Sukuks, and Eurobonds - Floor applies to the cumulative issuance starting from the beginning of the fiscal year. - Defined as the total acceptance of the bids of each auction of PIBs, GoP Ijara Sukuks across all maturities (both at fixed and floating rate), and that of Eurobonds evaluated at the program exchange rate. - For bonds sold below par the issuance value is defined as the actual amount received rather than the face value. ### Program reporting requirements - Authorities will provide all needed data to the IMF in line with Article VIII, Section 5 of the IMF Articles of Agreement as deemed necessary. - Performance is monitored from data supplied by: - SBP, Ministry of Finance, FBR, Pakistan Bureau of Statistics, Ministry of Energy (Power and Petroleum Division), and other agencies as outlined in Table 3. - The authorities will transmit promptly any data revisions and other information necessary to monitor the arrangement with the IMF. ### Selected numeric tables and projections (excerpts) - Text Table 4. Pakistan: Flow of Power Sector Payment Arrears (Cumulative flows from start of fiscal year; billions of Pakistani Rupees) - Target / Target / Target (columns) - Total flow: -208 -157 30 - Operational part: 127 200 263 - DISCOs' losses and inefficiency: 50 78 101 - DISCOs' under-recoveries: 77 123 161 - FY2022/23 end-Sep end-Dec end-Mar - Table 1. Pakistan: Projected Disbursements (Millions of U.S. dollars) — projected gross inflows by quarter: - Jul‐Sep 2022: Multilateral and bilateral disbursements 3,667; of which: in cash 3,485; of which: Saudi oil facility and IDB commodity loans 928; of which: project support 498 - Oct‐Dec 2022: Multilateral and bilateral disbursements 7,558; of which: in cash 7,289; of which: Saudi oil facility and IDB commodity loans 960; of which: project support 672 - Jan‐March 2023: Multilateral and bilateral disbursements 4,694; of which: in cash 4,560; of which: Saudi oil facility and IDB commodity loans 647; of which: project support 2 - Apr‐June 2023: Multilateral and bilateral disbursements 3,634; of which: in cash 3,503; of which: Saudi oil facility and IDB commodity loans 226; of which: project support (blank) - Commercial borrowing by quarter: 415; 2,449; 2,220; 2,000 - Gross inflows by quarter: 4,282; 11,207; 7,114; 6,834 - of which: in cash: 4,100; 10,938; 6,980; 6,703 - Note: Cumulative excess/shortfall of flows cumulats from July 1, 2022 onwards. - Note 1/ Assumes that 65 percent of project loans and 50 percent of project grants were received in cash. - Note 2/ Includes Naya Pakistan Certificates (NPC). NPC flows are recorded on a net basis. - Table 2. Pakistan: Government Sector (Budgetary Support) (End-of-period stocks, millions of Pakistani Rupees) — selected items (columns include dates from 30-Jun-19 through 31-Mar-22): - A. Central Government (sample entries): - 30-Jun-19: 12,586,952 - 31-Mar-22: 18,655,098 - 1. Scheduled Banks (sample entries): - 30-Jun-19: 5,753,677 - 31-Mar-22: 12,444,273 - 2. State Bank (sample entries): - 30-Jun-19: 6,833,275 - 31-Mar-22: 6,210,825 - B. Provincial Governments (sample entries): - 30-Jun-19: -990,484 - 31-Mar-22: -2,100,769 - C. Net Govt. Budgetary Borrowings From Banking System (sample entries): - 30-Jun-19: 11,596,468 - 31-Mar-22: 16,554,329 - Memorandum item: - 1. Accrued Profit on SBP & BSC holding of MRTBs & MTBs: 2,912 (30-Jun-19) ... 190,417 (31-Mar-22) *Source: IMF staff summary of the program text provided in the source content.* ### 3. Outstanding amount of MTBs (Primary market; discounted ### 3. Outstanding amount of MTBs (Primary market; discounted value) ### Outstanding amounts and net government borrowings - Outstanding amount of MTBs (Primary market; discounted value): 4,363,090 5,243,197 4,259,110 4,803,332 4,956,617 4,497,227 4,429,945 5,205,372 5,979,180 6,044,578 4,828,373 4,165,284 - Net Govt. Borrowings (Cash basis) From Banking System: 11,545,893 11,422,889 11,587,632 12,147,705 13,471,051 13,721,969 14,022,001 14,268,802 15,247,857 15,222,347 15,516,953 16,311,995 - (i) From SBP: 6,688,958 4,845,786 5,842,019 5,925,475 6,455,179 6,089,030 5,884,619 5,126,777 5,273,953 4,972,729 5,245,062 5,126,529 - (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 10,271,891 11,185,466 ### Reporting and monitoring requirements (selected items) - State Bank of Pakistan (SBP) - SBP balance sheet Summary: Weekly — First Thursday of the following week - SBP balance sheet Summary at program exchange rates; and by official exchange rates: Monthly — Within 15 days of the end of each month - Monetary survey 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 — Within the first 30 days of each month. - International reserves By (i) program exchange rates; and (ii) at actual official exchange rates: Daily — The following working day - International reserves Inflows/outflows into/out of Naya Pakistan Certificates: Daily — 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 — 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 — Within one day - Foreign exchange market SBP operation against the domestic currency in swap/forwards by (volumes): Daily — 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 — Within one day - Foreign exchange market Breakdown of short, long, counterparts, of the swap/forward contracts: Monthly — Third working day of the following month - Foreign exchange market Outstanding swap/forward positions by maturity buckets, and counterparties: Monthly — 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 — 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 — Within 15 days of the end of each quarter - Interbank money market Daily interbank repo volume and interest rate of trades: Daily — Within one day - SBP operations Repo (reverse repo) operations, open market operations: Weekly — First Monday of the following week - Bank liquidity Excess reserves, in local currency: Bi-weekly — 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 — Last working day of the fortnight - Banking data 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 — Within 25 working days of the end of each month. - Banking data Loan maturities: Quarterly — Within 45 days of the following quarter - Banking data Regularity capital deposit requirement deposits of foreign and domestic schedule banks with the SBP (account numbers 33052 and 330506): Monthly — Within 15 days of the end of each month - Banking indicators Core Financial Stability Indicators (FSIs), including but not limited to capital adequacy; asset composition and quality; profitability; liquidity; open FX positions – in aggregate and bank-by-bank (without names): Quarterly — Within 45 days of the following quarter - Banking indicators Liquidity data and deferred/restructured loans: Weekly — 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: in aggregate for the system and bank by bank (without names, but with consistent identifiers across datasets): Monthly — Within five days of the end of each month - Banking data Holdings of government securities – in aggregate and bank-by-bank (without names, but with consistent identifiers across datasets): Monthly — 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 — Within 60 days - Transfers Workers’ remittances: Monthly — Within 25 days of the following month - Other monetary data The SBP survey, ODCs and DCs published in IFS: Monthly — Within 45 days of the end of each month - SBP refinance schemes Outstanding position under SBP refinance schemes (by program): Monthly — Within 25 days of the end of each month - Balance of payments Detailed export and import data: Monthly — Within 28 days of the end of each month - Ministry of Finance (MOF) - External debt Disbursements and stock of outstanding short-term and contracting or guaranteeing and outstanding stock of medium-and long-term external debt of the government, the SBP, and state-owned companies; any stock of arrears on external debt service and outstanding stock of government guarantees and external arrears: Monthly — Within 25 days of the following month - 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 and in kind: Quarterly — Within 15 days of the end of each quarter - Domestic debt Domestic debt composition: Monthly — Within 25 days of the end of each month - Domestic debt T-Bill and PIB Bid sheet from domestic debt auctions: Daily — Within 1 day of each T-Bill and PIB auction - Federal government State budget: Monthly — Within 30 days of the end of each month - Federal government Government guarantees - issued and executed (reported separately). Name of entity receiving the guarantee and the value of the guarantee: Quarterly — Within 15 days of the end of each quarter - Consolidated general government Federal and provincial governments (including fiscal outcomes broken down by province): Quarterly — Within 45 days of the end of each quarter - Consolidated general government Federal and provincial governments: Annual — Within 180 days of the end of each year - Federal government Fiscal financing sources: Detailed quarterly financing plan for the coming 12 months including projections for domestic public securities (issuance and maturities), external financing, SBP profits, short-term borrowing, other financing schemes, and borrowing from the SBP: Monthly — One month in advance - General government Total general government budgetary spending on health and education broken down into spending by the federal and provincial governments: Monthly — Within 15 days of the end of each month - Federal government Stock of government borrowing from the SBP: Quarterly — Within the first five days of each quarter. - Pakistan Bureau of Statistics (PBS) - SPI, CPI, WPI Detailed monthly price indices: Monthly — Within five days of the following month - CPI Index of core inflation: Monthly — Within 21 days of the end of each month - Federal Board of Revenue (FBR) - Revenue collection Total revenue collected separately by the tax administration and customs administration, including revenue by individual tax, and social contributions: Monthly — Within seven days of the end of each month - Tax arrears By category: Monthly — Within seven days of each month - By type of tax: Monthly — Within seven days of the end of each month - All tax refund claims in arrears Itemized by tax category (GST, income, customs duties, etc.): Monthly — Within seven days of the end of each month - Automated GST refunds Detailed data, by type of tax, of outstanding tax credits for all types of tax revenues: Quarterly — Within seven days of the end of each month - Number of refunds that were processed automatically (share of total refunds); total value of automated and automatic refunds and offsets; average waiting time (days) to receive refund: Quarterly — Within seven days of the end of each month - Large taxpayers Data on the number of taxpayers and amount of taxes managed by the large taxpayer units (LTUs): Quarterly — Within seven days of the end of each month - Import data Total value of recorded imports; Total value of duty-paid recorded imports; Number of total transactions involving recorded imports; Number of total transactions involving non-duty free recorded imports: Quarterly — Within 30 days of the end of each quarter - Audits Percentage of selected companies and identified revenue from audits: Quarterly — Within 45 days of the end of each month (monthly data provided on a quarterly basis) - Other reporting (selected) - Ministry of Water and Power: Key Power Sector Statistics (Cumulative Monthly Subsidy Position (Rs. Billion); PEPCO Month End Payables and Receivables Positions And Aging Schedule, PR. Billion; Receivables Positions - Total and DISCO-wise Break-up; CPPA/PEPCO Month-wise Consolidated Cash Flow; AT&C Statistics; TDS Claims by DISCOs and Total; Inter Corporate Circular Debt Sheet Prepared by Ministry of Finance; DISCOs Consolidated Income Statement; Net Electrical Output & Power Purchase Price by Source, GWh; Generation, Demand and Shortfall for FY10 to date; Net Electrical Output (MkWh) Plant and Fuel-wise Detail; Working Capital Loans For each loan type): Monthly/Quarterly — various timing requirements (e.g., Monthly — Within 30 days; Quarterly — Within 30 days) - Ministry of Petroleum and Natural Resources: Gas prices; Gas sales by consumers: Quarterly on monthly frequency — Within 30 days from the end of the quarter; UFG losses: Quarterly — Within 30 days from the end of the quarter - BISP Targeted cash transfers Coverage (number of beneficiaries paid) and payment by conditional and unconditional transfers: Quarterly — Within 30 days from the end of the quarter - Ministry of Finance Financial statements Financial statements (cash flow, income statement, and balance sheet) and operational indicators for Pakistan Railways, Pakistan Steel Mills and Pakistan International Airline: Quarterly — Within 30 days from the end of the quarter ### Staff statement highlights (August 29, 2022) - Purpose: Update Executive Board on developments following issuance of the Staff Report for the Combined Seventh and Eighth Reviews under the Extended Arrangement under the Extended Fund Facility. - Key governance development: - On August 19, 2022, the government appointed Jameel Ahmad as SBP governor for a five-year term. This follows the expiration of the previous governor’s term on May 4, 2022. Mr. Ahmad was until recently Chairman of the Board of Directors of the Deposit Protection Corporation and has held senior positions at the SBP, including as deputy governor. - Recent data and macro outlook: - Economic activity: Industrial production remained strong through July and inflation remains elevated (headline inflation reached 24.9 percent, y-o-y in July, while core inflation ticked up to 12 percent). Authorities’ policy adjustment is expected to gradually bring inflation down over the coming months, though persistently high commodity prices could moderate the pace of the decline. - Fiscal developments: Final data for the FY22 outturn released on August 19, 2022. The underlying primary deficit is estimated at -2.3 percent of GDP—somewhat higher than the expected -1.6 percent of GDP presented in the Staff Report—reflecting larger-than-initially-assessed provincial expenditure (mostly capital expenditure). - Recent policy measures (since adoption of the FY23 budget in late June 2022): - Revenue: Change in the tax collection system for small retailers in August to increase administrative efficiency; compensatory measures including an increase in federal excise duties on tobacco and cigarettes instituted through a Presidential Ordinance issued on August 22, 2022. Resulting small positive net budgetary impact: PRs 18 billion (0.02 percent of GDP). - Expenditure: Cabinet confirmed an end to the concessional tariff for export-oriented industries on August 19, 2022. - Monetary policy: - Monetary Policy Committee left the policy rate unchanged at 15 percent on August 22, 2022 (cumulative 800 bps since last September). MPC reiterated commitment to data-dependent policy setting. - External sector: - International reserves: US$7.8 billion (1.2 months of imports) in mid-August 2022. - Exchange rate: Depreciated almost 17 percent in July but by August 22 had appreciated by almost 10 percent. - Trade measures: Government fully removed the import ban on luxury and nonessential items on August 19, 2022. ### Authorities’ statement (excerpt) - Authorities thanked the mission team and Executive Board for support and emphasized intent to strengthen macroeconomic resilience and accelerate inclusive and sustainable growth. - Prior actions taken to restore macroeconomic and external sustainability: - (i) Parliamentary approval of the FY23 budget, including a personal income tax (PIT) reform signed into law on June 30, 2022; - (ii) signing of MOUs by provinces on provincial fiscal targets consistent with the FY23 budget; - (iii) reversal of the February relief package by eliminating fuel and power subsidies, restoration of fuel taxes along with fuel-cost adjustment; - (iv) increase in electricity base tariffs. ### Recent economic performance and outlook (selected figures) - Growth: - After contracting by 0.9 percent in FY20, the economy rebounded to grow by 5.7 percent in FY21 and by 6 percent in FY22. - Authorities expect real GDP growth to moderate to 3-4 percent in FY23. - Growth is expected to rise to above 5 percent over the medium-term on account of stronger investment and improved market confidence supported by an appropriate macroeconomic policy mix. - Inflation and vulnerabilities: - July 2022 headline CPI inflation: 24.9 percent (y-o-y) versus 8.4 percent in July 2021. - Core inflation: 12 percent (y/y) in urban and 14.6 percent (y/y) in rural areas. - Energy inflation increased sharply with complete pass-on of global oil prices to domestic prices, gradual increase in Petroleum Development Levy (PDL) rates and increase in electricity base tariffs and fuel cost adjustment. *Source: Staff Statement by the Staff Representative on Pakistan, Executive Board Meeting on Pakistan’s Seventh and Eighth Reviews Under the Extended Arrangement Under the Extended Fund Facility, Requests for Waivers of Nonobservance of Performance Criteria, and for Extension, Augmentation, and Rephasing of Access, August 29, 2022.* ### 70.1 and 61.2 percent (y/y) in July 2022 in urban and rural areas, respectively. In addition, inflation ### 1pakea2022002 - 70.1 and 61.2 percent (y/y) in July 2022 in urban and rural areas, respectively. In addition, inflation ### Inflation outlook and expectations - Headline inflation: "70.1 and 61.2 percent (y/y) in July 2022 in urban and rural areas, respectively." - Inflation expectations: household expectations remain elevated; business expectations have declined recently. - Short- to medium-term projection: - Expected to remain in the range of "18-20 percent in FY23". - Expected to fall to the medium-term target range of "5-7 percent by end-FY24". - Supportive factors cited for disinflation: fiscal consolidation, monetary tightening, moderating growth, normalization of global commodity prices, and beneficial base effects. ### External sector, reserves, and financing - Terms-of-trade and global financial tightening have increased external vulnerabilities. - Current account: - "The current account deficit has widened to 4.6 percent of GDP in FY22." - Projected to decline to "around 3 percent of GDP in FY23" and settle at "about 2.5 percent of GDP in the medium-term." - Foreign exchange reserves: - Declined to "$9.8 billion at end-June 2022 from $17.3 billion at end-June 2021." - "Stood at $7.9 billion as of August 12, 2022." - Reserve cover expected to remain "at about two and a half months of imports." - External financing: will continue to rely mostly on official and multilateral creditors, and on issuance of Eurobonds and Sukuks as market conditions allow. ### EFF program performance and policy actions - Program performance: - "Six of the eight end-June quantitative performance criteria (QPCs) were met." - Two missed end-June QPCs: floor on net international reserves (NIR) and ceiling on the primary budget deficit. - These two QPCs were also missed at end-March 2022. - Corrective measures taken by authorities: - Passed an ambitious budget for a primary surplus. - Increased the policy rate by "800 bps to 15 percent". - Eliminated post-tax fuel subsidies; increased fuel taxation and electricity tariffs. - Structural measures progress (some delays noted): - Parliament adopted amendments to the OGRA Act for the gas sector (in time). - PPRA regulations for collecting and publishing beneficial ownership information issued in mid-May 2022. - Measures taken to strengthen the AML/CFT framework. - Planned issuance of regulations for a comprehensive electronic asset declaration system (original end-March 2022 SB, reset to end-September 2022). - Authorities’ requests to the Fund: - Extension of the EFF until "end-June 2023" with new quarterly PCs and resets. - Augmentation of access by "SDR 720 million (around 36 percent of quota)", bringing total access to "245.6 percent of quota." ### Fiscal policy, consolidation, and debt sustainability - Past consolidation: - Achieved "1.8 percent of GDP during FY20" owing to strong revenue collections. - Further improvement of "0.4 percent of GDP in FY21." - Public debt-to-GDP ratio fell by "around 2.5 percent of GDP between FY19 and FY21." - FY22 and FY23 fiscal outcomes and plans: - Underlying primary deficit of "2.3 percent of GDP in FY22" against a programmed zero balance. - FY23 budget aims for an underlying general government primary surplus of "0.4 percent of GDP", a consolidation "of over 2.5 percent of GDP." - Measures include new taxation and sharp spending cuts while protecting social spending for the most vulnerable (elevation of related IT target to a QPC). - Authorities submitted a list of all public guarantees expected in FY23 and set a ceiling; budget bill approved on June 29, 2022. - Public debt projections: - Supported by planned fiscal adjustment and reforms, public debt projected to fall "by 7 percentage points to 72.1 percent of GDP by end-FY23." - Projected to follow a downward trajectory towards "60 percent of GDP by FY27", with external debt declining to "25 percent of GDP." ### Monetary policy, exchange rate, and financial sector - Exchange rate and FX pressures: - Exchange rate depreciated "by 16 percent between end-December and end-June 2022." - FX interventions limited to containing disorderly market conditions. - Monetary policy: - SBP raised its key policy rate "by 800 basis points since September 2021 to 15 percent through July 7, 2022, (including 525 bps increases since April)." - SBP described as more proactive and aggressive than most peers; monetary policy to remain data-driven. - Import and FX restrictions: - SBP imposed cash margin requirements on imports of non-essential items since late-September 2021 (noted as an intensification of exchange restrictions). - SBP imposed a requirement for prior approval of initiating payments for imports of certain goods in late-May 2022 (noted as an exchange restriction). - Authorities intend to eliminate these measures when market conditions allow and request Board approval for existing measures subject to Article VIII. - Banking sector health: - System remains adequately capitalized and profitable. - Non-performing loans (NPLs) "are contained at 7.8 percent" with non-provisioned NPLs "remaining low at 0.7 percent as of end-March 2022." - SBP tightening of prudential regulations for consumer financing and close monitoring continue. ### Energy sector policies - NEPRA and tariff adjustments: - Amendments to the NEPRA Act adopted by Parliament in June 2021; NEPRA has determined and automatically notified overdue quarterly tariff adjustments; further adjustments notified in several stages in July 2022. - Subsidy reform: - Authorities concur subsidy reform needs to continue to protect the vulnerable, introduce fairness, and reduce fiscal costs; committing to entering the third stage of a multi-year subsidy reform plan supported by the World Bank. - Efficiency and generation: - Efforts with WB and ADB to reduce commercial and technical losses (including smart metering and cutting off delinquent consumers). - Reform plan includes expanding cheaper and cleaner energy generation per the Alternative and Renewable Energy Policy. - Gas sector: - Amendments to the OGRA Act adopted by Parliament in March 2022 (end-June 2022 SB) to improve efficiency. ### Social protection and poverty reduction - FY23 social spending: - FY23 budget allocation for regular BISP spending raised to "PRs 316 billion", marking "an almost 40 percent increase over its FY22 execution level." - Plan to expand unconditional cash transfers Kafalat program to "9 million families by end-FY23 (new end-June 2023 SB)" using the NSER finalized in October 2021. ### AML/CFT developments - Commitment to international FATF/APG standards: - Pakistan "has successfully completed all action items in its 2018 Action Plan," including the last item on terrorist financing investigations and prosecutions in June 2022, paving the way for exit from the FATF list (end-March 2022 SB). - Completed all "7 action items in its 2021 AML/CFT Action Plan" ahead of committed deadlines. - Authorities will continue to ensure sustainability and effectiveness of AML/CFT efforts. ### State-Owned Enterprises (SOEs) - Privatization and governance: - Planned privatizations could not proceed due to uncertainty, but governance, transparency, and efficiency improvements continued while limiting fiscal risks. - New SOE law submitted to Parliament, "adopted by the National Assembly in July 2022 and is now awaiting Senate approval (end-June 2022 SB, reset to end-September 2022)." - Once enacted, the law will define state ownership rationale, commercial footing for SOEs, and oversight/ownership arrangements. - Monitoring and institutional reforms: - With ADB support, further regulatory reforms to be finalized by "end-December 2022." - Establishing a Central Monitoring Unit (CMU) within the MoF to improve SOE performance; aim to operationalize the CMU by "January 2023 (new end-January 2023 SB)." ### Concluding remarks - Authorities view the EFF program as a robust policy anchor to safeguard macroeconomic stability, support a smooth economic recovery, and facilitate inclusive medium-term growth while protecting the poor. - Based on actions taken and commitments to program targets, authorities seek Executive Directors’ support to complete the combined seventh and eighth review under the EFF with associated waivers and for extension, augmentation, and rephasing of access to meet balance of payments and fiscal financing needs and to catalyze donor support. *Source: IMF staff report content provided in the PDF chapter/section.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1pakea2022002.pdf_