## 1pakea2023001 ## Source details **Canonical URL:** [1pakea2023001](https://www.imf.org/-/media/files/publications/cr/2023/english/1pakea2023001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1pakea2023001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1pakea2023001.pdf.json) --- ### Executive summary: shocks, outcomes, and program purpose - Pakistan hit by severe shocks: 2022 floods, commodity shock from the war in Ukraine, tightening external and domestic financing conditions, and policy backsliding. - Economic outcomes and pressures: - Growth stalled; post-pandemic recovery halted. - Inflation surged to 38 percent in May 2023. - International reserves declined to about ¾ month of imports (US$4.2 billion) by late-June 2023; mid-January 2023 reserves were about US$3 billion (½ month coverage). - Fiscal and external pressures became acute; debt sustainability at risk. - Social and political environment: - Social discontent rose; political tensions escalated in May 2023. - Program objective: - Authorities requested a 9-month Stand-By Arrangement (SBA) of SDR 2,250 million (111 percent of quota or about US$3.0 billion) to stabilize the economy, rebuild buffers, anchor policies, and catalyze creditor support. ### Macroeconomic deterioration and outlook - Key indicators and staff assessments: - Real GDP: PBS provisional FY23 growth +0.3 percent; IMF staff assesses FY23 real GDP could decline by 0.5 percent. - Large-scale manufacturing: production dropped by 9.4 percent in first ten months of FY23 (yoy). - Diesel and gasoline sale volumes dropped by 28 and 17 percent (yoy), respectively. - Consumer credit growth slowed to 2.8 percent (yoy) in April 2023 from 23.9 percent (yoy) in May 2022. - Sovereign bond spreads tightened above 3,500 bps; Fitch and Moody’s revised sovereign ratings to CCC- and Caa3 in February. - Inflation and monetary policy: - Core inflation: 22.8 percent (yoy) in May 2023; core urban/rural 20 and 26.9 percent (yoy) cited elsewhere. - Headline inflation: 38 percent in May 2023; declined to 29.4 percent in June 2023. - SBP policy rate: cumulative increase of 825 bps since FY23 began; policy rate at 22 percent after June 26 hike. - External balance: - Current account: narrowed to US$2.9 billion in first eleven months of FY23 (vs US$17.5 billion in FY22). - Staff projects FY23 CAD of about US$4 billion; CAD around US$6½ billion in FY24. - Medium-term CAD target: around 2 percent of GDP. - Growth and inflation projections (FY20–FY28 rows reproduced): - Real GDP growth: FY20: -0.9; FY21: 5.8; FY22: 6.1; FY23: -0.5; FY24: 2.5; FY25: 3.6; FY26: 4.5; FY27: 5.0; FY28: 5.0. - Consumer prices (period average, % change): FY20: 10.7; FY21: 8.9; FY22: 12.1; FY23: 29.6; FY24: 25.9; FY25: 11.4; FY26: 7.4; FY27: 6.5; FY28: 6.5. ### Fiscal position, FY24 budget, and revenue measures - FY23/FY24 fiscal snapshot: - FY23 primary surplus: PRs 586 billion in FY23H1; FY23 primary deficit expected to reach 1.0 percent of GDP for the year as a whole. - Interest bill: 6.6 percent of GDP, absorbing 2/3 of tax revenue. - FY24 budget targets a primary surplus of PRs 401 billion (0.4 percent of GDP). - Tax revenues targeted to 10.3 percent of GDP on measures worth over PRs 254 billion. - Contain primary expenditure to PRs 12,976 billion (11.9 percent of GDP); contingency for emergencies PRs 250 billion. - Major FY24 revenue measures (expected yields): - Increase maximum PDL to PRs 60 per liter (PRs 79 billion). - Increase in PIT (2.5 percentage points and merging top brackets) (PRs 30 billion). - GST and FED on fertilizers and FED on sugary drinks (PRs 34 billion and PRs 8 billion). - Advance tax increases on immovable property (2%→3%) (PRs 46 billion). - Broadening second-home tax for non-filers (PRs 19 billion). - Advance tax on builders/developers (PRs 15 billion). - Increase additional GST on unregistered business deliveries from 3 to 4 percent (PRs 23 billion). - Fiscal targets from program table (selected percent of GDP figures, budget versus program): - Revenue and grants: 12.4; 12.2; 11.4; 12.3. - Tax revenue: 11.0; 10.8; 10.0; 10.3. - Expenditure: 16.9; 19.1; 18.9; 19.8. - Overall balance (excl. grants): -4.5; -6.9; -7.6; -7.5. - Primary balance (excl. grants): 0.2; -0.5; -1.0; 0.4. ### Energy sector: circular debt, FY24 CDMP, and reforms - FY23 energy pressures: - CD stock rose to PRs 2.5 trillion (3 percent of GDP) by end-March 2023. - CD flow overruns of PRs 387 billion (0.5 percent of GDP) relative to CDMP from early-FY23. - FY24 projections and budgeted support: - Budgeted FY24 power subsidy: PRs 976 billion (0.9 percent of GDP). - FY24 CD flow: PRs 392 billion (0.4 percent of GDP). - Expected end-FY23 CD stock: PRs 2,374 billion (2.2 percent of GDP). - Key reform actions to be in updated FY24 CDMP: - Notify FY24 annual rebasing (AR) as per NEPRA (end-July 2023 SB). - Regular implementation of AR, QTAs, and monthly FPAs; protect poor consumers through lifeline slabs. - Better targeting subsidies—next step on tube-well reforms by end-2023. - Reduce commercial and technical losses; renegotiate PPAs in return for clearing unguaranteed CPPA arrears. - Convert publicly-guaranteed PHPL debt into cheaper public debt along a 10-year plan. - Note: each month of delaying a PRs 1 per kWh adjustment adds about PRs 8½ billion to arrears stock. - Gas sector measures: - Mid-February 2023 gas price hike averaging 75 percent per OGRA; update tariff slab system to ensure cost recovery. - Implement WACOG and regular biannual end-user price adjustments; improve UFG losses. ### Monetary and exchange rate policy - Monetary stance and reforms: - Policy rate at 22 percent after cumulative hikes; SBP committed to maintain tight policy and avoid new refinancing schemes. - SBP agreed operationally to phase out EFS and LTFF over a 5-year transition; commercial banks to provide subsidized export credit via on-budget subsidy administered by Ex‑Im Bank; implementation begins July 2023 with subsidy allocation PRs 5.7 billion in FY24 budget. - Exchange rate and FX market: - Staff recommends return to market-determined exchange rate and elimination of administrative import controls. - Authorities withdrew December 2022 prioritization circular on June 23, 2023 (Prior Action). - Authorities aim to restore full market determination and keep interbank–open market premium within ±1.25 percent on average (continuous SB). - Program requests temporary approval of an exchange restriction and MCP for program duration with commitment to remove before program end (end-April 2024 requested). ### Banking sector and financial stability - Soundness indicators and risks: - CAR 16.3 percent at end-March 2023 (regulatory minimum 11.5 percent including 1.5 percent buffer); CAR deteriorated by 0.7 percent since end-Dec 2022. - NPLs rose to 7.8 percent; provisioning 90.7 percent. - Four banks undercapitalized; these four account for 2.2 percent of sector assets. - Banks’ sovereign exposure increased to 51.6 percent of assets at end-March 2023. - Banks provided 50 percent of government financing in FY23H1. - Supervisory actions and commitments: - Ensure time-bound recapitalization or orderly exit for undercapitalized banks. - Submit draft amendments on early intervention, resolution, and crisis management frameworks to parliament by end-Dec 2023. - Postpone extension of deposit insurance to microfinance banks until vulnerabilities addressed. - Continue AML/CFT work; Pakistan exited FATF list; SBP issued AML/CFT fines. ### Poverty, social protection, and BISP - FY23 BISP execution and emergency response: - FY23 BISP spending about PRs 404 billion (0.4 percent of GDP); UCT Kafalat stipend adjusted by 25 percent to PRs 8,750 per family per quarter (effective Jan 1, 2023). - One-off emergency transfer PRs 25,000 to more than 2.7 million flood-affected BISP families in FY23Q1. - Enrollment accelerated by 1 million families, now covering 9 million families (live NSER). - FY24 BISP: - Allocation PRs 472 billion (0.4 percent of GDP), about 1/3 above FY23 executed regular spending; will absorb additional 300,000 families from July 1, 2023 and regular inflation adjustment (end-Jan 2024 SB). - Policy recommendations: - Broaden tax base to create fiscal space for social spending. - Use higher BISP envelope strictly targeted and monitored through a QPC under SBA to improve generosity and expedite CCT enrollments. - Replace untargeted energy price protection with targeted BISP support over time. ### Climate vulnerabilities, 2022 floods, and adaptation priorities - 2022 floods impacts (Box 1): - Affected 33 million people (14 percent of population); more than 1,700 confirmed dead; nearly 2.2 million houses damaged (one-third beyond repair). - Transport damage: 400 bridges and 13,000 km of roads. - 45 percent of cropland inundated and 1.2 million livestock killed. - Authorities’ fiscal response: PRs 452 billion in flood relief and reconstruction; one-off emergency cash transfers PRs 25,000 to over 2 million vulnerable families. - PDNA estimates total damage and losses US$30 billion (about 8.5 percent of GDP); rebuilding needs US$16.8 billion (about 4.5 percent of GDP). - Donors pledged US$10.9 billion at Jan 2023 conference; only a small fraction disbursed to-date. - Climate trends and projections: - Since pre-industrial times, annual mean temperatures increased by about 1.2°C. - Projected mean temperature rise of 1.3–4.9°C by the 2090s. - Hydrological hazards dominate: about 70 percent of climate events 2000–22; floods account for over 90 percent of affected people and about 93 percent of material damage among recorded climate events. - Without adaptation, combined climate risks could cause up to 20 percent GDP loss per year by 2050 (World Bank 2022b). - Policy priorities: - Finalize and implement National Adaptation Plan (NAP) by end-2024. - Prioritize “no-regret” adaptation investments: social protection, flood protection, water/irrigation management, early warning systems, resilient infrastructure. - Reprioritize public spending (e.g., remove untargeted energy subsidies) and mobilize international adaptation finance. - Strengthen PFM, public investment management, SOE governance, and build fiscal buffers and PFM flexibility for disasters. ### Debt, capacity to repay, and program financing risks - Fund exposure and schedule: - Fund exposure reaches SDR 6,123 million (301 percent of quota) with purchases linked to the request; would peak at SDR 6,673 million in March 2024 (329 percent of quota) if all purchases completed. - SBA schedule (Table 9): July 12, 2023: 894 million SDR; Dec 1, 2023: 528 million SDR; March 1, 2024: 828 million SDR; total SDR 2,250 million. - Debt and reserves projections (selected): - Gen. gov. debt (incl. IMF, %GDP): FY23 77.4; FY24 70.9; FY25 68.5; FY26 67.3; FY27 65.1; FY28 63.1. - Gross official reserves (US$ bil): FY23 4.1; FY24 9.0; FY25 12.9; FY26 14.1; FY27 15.3; FY28 15.7. - Gross official reserves (months of next year's GNFS imports): FY23 0.7; FY24 1.4; FY25 1.8; FY26 1.9; FY27 1.9; FY28 1.9. - Risks to capacity to repay: - Delayed reforms, high public debt and gross financing needs, low gross reserves, SBP’s net FX derivative position, decline in inflows, sociopolitical risks, and adverse global conditions. - Staff view: restoring external viability hinges on strong policy implementation beyond the SBA, timely external financing, and credible financing assurances. - DSA and stress outcomes: - Baseline: public debt projected to decline gradually from Actual 2022: 76.1 to 63.1 by 2028, contingent on policy implementation. - Staff assesses overall risk of sovereign stress as high; margin for policy slippage is very small. ### Program conditionality, monitoring, and technical assistance - Program modalities and safeguards: - Arrangement covers July 12, 2023–April 11, 2024; SDR 894 million disbursed upon approval; remaining phased across two purchases. - Monitoring via QPCs, ITs, SBs; two reviews (Nov 2023 and Feb 2024) tied to end-Sep 2023 and end-Dec 2023 criteria. - Prior Actions met: parliamentary approval of FY24 budget and withdrawal of FX prioritization circular. - Staff supports temporary approval of specified exchange restriction and MCP for program duration. - Key QPCs/continuous performance criteria and indicative targets (selected numeric test values): - Floor on SBP net international reserves (millions of U.S. dollars): -14,550 (end-Sep 2023); -13,800 (end-Dec 2023). - Ceiling on SBP net foreign currency swaps/forward position (negative, millions US$): 4,200; 4,000. - Ceiling on net government budgetary borrowing from SBP (PRs, stock): 4,708; 4,708. - Ceiling on general government primary budget deficit (cumulative, excl. grants, PRs, billions): -87; -1,232. - Cumulative floor on BISP targeted cash transfers (PRs, billions): 87.5; 185.5. - Structural benchmarks include notification of FY24 AR (end-Jul 2023), CMU SOE report (end-Nov 2023), Climate-PIMA adoption (end-Dec 2023), QNA compilation (FY24Q1) and revised FY23 estimates (end-Nov 2023). - Technical assistance agenda: - FAD, LEG, MCM support on tax policy, PFM, SOE law, AML/CFT, debt management, bank resolution, and Climate-PIMA among others. ### Core policy recommendations and essential conditions - Fiscal: - Maintain small primary surpluses with strong revenue mobilization; broaden tax base; reverse declining tax-to-GDP ratio; strict budget execution and restraint of current expenditure. - Protect and strengthen targeted social spending (BISP) and fully execute health and education budgets. - Monetary and exchange: - Keep monetary policy tight to support disinflation and anchor expectations; ensure forward-looking positive real policy rates. - Return to market-determined exchange rate; eliminate administrative FX controls and MCPs as BOP conditions allow. - Energy, SOEs, and structural: - Implement energy-sector reforms to ensure cost-recovery tariffs, reduce circular debt, renegotiate PPAs, and accelerate cost-reducing investments. - Strengthen SOE governance, debt transparency, and reduce state footprint where feasible. - Advance business climate reforms, anticorruption measures, and improve public investment management and climate resilience. - External financing: - Timely disbursement of multilateral and bilateral financing is critical; credible financing assurances crucial to restore reserves and program credibility. - Risks and mitigation: - Risks exceptionally high; require steadfast implementation, continuous external support, and rapid structural reforms to maintain sustainability. *Source: 1pakea2023001 (IMF).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - Pakistan’s economy was buffeted by significant shocks over the past year: the severe impact of the floods, the commodity shock from the war in Ukraine, and the tightening of external and domestic financing conditions together with policy backsliding. - Economic outcomes and pressures: - Growth stalled and the post-pandemic recovery halted. - Inflation surged to 38 percent in May 2023. - International reserves declined to about ¾ month of imports (US$4.2 billion). - Fiscal and external pressures have become acute, putting debt sustainability at risk. - Social and political environment: - Social discontent rose and political tensions escalated in May, with institutional fissures becoming apparent. - Climate and disaster impacts (Box 1: Climate Vulnerabilities): - The 2022 floods affected 33 million people (14 percent of the population) in half of Pakistan’s 160 districts. - Over 1,700 people were confirmed dead and 500,000 people were relocated to relief camps. - Nearly 2.2 million houses were damaged (one-third beyond repair). - Transport infrastructure damage included 400 bridges and 13,000 km of roads. - The floods inundated 45 percent of Pakistan’s cropland and killed 1.2 million livestock. - Authorities’ fiscal response included PRs 452 billion (equivalent to about 0.5 percent of GDP) in flood relief and reconstruction and a one-off emergency cash transfer of PRs 25,000 to more than 2 million vulnerable families. - Estimated aggregate losses and rebuilding needs: total damage and losses of US$30 billion (about 8.5 percent of GDP) and rebuilding needs of US$16.8 billion (about 4.5 percent of GDP). - Donors pledged US$10.9 billion at a January 2023 conference on Climate Resilient Pakistan; to-date only a small fraction has been disbursed. ### Program objectives and policy pillars - To address the challenges and sustain macroeconomic stability, the authorities have renewed policy efforts and are seeking support under a new Stand-By Arrangement (SBA). - Program objectives: - Support immediate efforts to stabilize the economy and rebuild buffers. - Anchor policies to restore confidence and catalyze multilateral and bilateral creditor support. - Recognize that resolving structural challenges and long-term balance of payments pressures will require continued adjustment and creditor support beyond the program period; a possible successor arrangement could help anchor needed medium-term policy adjustment. - Key policy pillars include: - (i) an appropriate FY24 budget to support needed fiscal adjustment; - (ii) a return to a market-determined exchange rate and proper functioning of the foreign exchange (FX) market to absorb balance of payment (BOP) pressures and eliminate FX shortages; - (iii) adequately tight monetary policy to support disinflation and anchor expectations; - (iv) continuation of structural efforts to strengthen energy sector viability, SOE governance, and the banking sector, while supporting efforts to build Pakistan’s climate resilience. ### Program modalities and external financing - The authorities have requested a 9-month Stand-By Arrangement (SBA) in the amount of SDR 2,250 million (111 percent of quota or about US$3.0 billion). - The authorities believe the SBA can play a crucial role in rebuilding confidence by anchoring policies during the upcoming period and providing a framework to catalyze support from multilateral and bilateral creditors, which is crucial for meeting large financing needs in FY24. - The SBA is intended to support policy anchoring ahead of national elections due in the Fall and until a new government is formed. - The recent Extended Fund Facility (EFF) expired on June 30, 2023; the new SBA will build on Pakistan’s recent EFF-supported program and help address BOP needs. ### Recent program history and performance under the 2019–23 EFF (Box 2) - The EFF (approved July 2019) aimed at decisive fiscal consolidation, exchange rate flexibility, energy sector reforms, scaling up social spending, and structural reforms (SOE performance, governance, business climate). - Program phases: - Early phase: considerable success stabilizing the economy, building buffers, and raising international reserves. - Pandemic phase: Fund support instrumental in buffering the shock, with temporary fiscal stimulus and expanded social safety nets. - Extended stop-and-go phase: program repeatedly went off-track amid a sequence of shocks (COVID-19, war in Ukraine, 2022 floods) and policy reversals. - Key events: - Important reform: amendments to the State Bank of Pakistan (SBP) Act to strengthen central bank independence and mandate. - Following the spike in commodity prices after the Russian invasion of Ukraine, large unbudgeted fuel subsidies and FX interventions contributed to external imbalances. - The authorities requested an extension of the EFF through June 2023; a review could not be completed and the EFF expired on June 30, 2023. - Multilateral and official bilateral support remained critical as external market financing dried up and credit ratings weakened. ### Risks and required actions - Risks are exceptionally high given complex and multifaceted economic challenges. - Key risk drivers: - Limited and insufficient external financing. - Continued policy slippages and weak confidence. - Large gross financing needs driven mostly by debt service payments. - Essential conditions to reduce risks and maintain macroeconomic stability: - Steadfast and consistent implementation of agreed policies under the program. - Continued financial support from external partners. - Structural reforms to address long-term BOP pressures, energy sector viability, SOE governance, banking sector resilience, and climate adaptation and resilience measures. *Source: EXECUTIVE SUMMARY (1pakea2023001).* ### 4. Macroeconomic conditions deteriorated considerably in FY23, halting the post- ### 1pakea2023001 - 4. Macroeconomic conditions deteriorated considerably in FY23, halting the post- ### Macroeconomic deterioration: key findings - Real GDP: PBS provisional estimates for FY23 in May put real GDP growth at +0.3 percent; IMF staff assesses real GDP could decline by 0.5 percent in FY23. - Large-scale manufacturing: production dropped by 9.4 percent in the first ten months of FY23 (yoy). - Fuel and cement: Diesel and gasoline sale volumes dropped by 28 and 17 percent (yoy), respectively; cement sales remain anemic. - Consumer credit: Growth slowed to 2.8 percent (yoy) in April 2023, down from 23.9 percent (yoy) in May 2022. - Confidence and risk premia: Consumer and business confidence weakened sharply amid economic and political uncertainty, rising risk premia, and speculation about a possible sovereign debt default. ### Exchange rate, reserves, and external pressures - Reserves: International reserves declined to about US$3 billion (½ month of import coverage) in mid-January 2023. - Exchange rate actions: The exchange rate was allowed to depreciate by almost 10 percent on January 26, 2023. - Informal market and restrictions: Informal efforts (moral suasion on banks) and later import-payment restrictions and crawl-like behavior from October 2022 through end-January 2023 fueled FX interbank pressures, expanded the FX black market, and disrupted timely imports of key inputs. - Reserve replenishment: International reserves were replenished to US$4.2 billion by late-June 2023 on the back of support from key bilateral partners. - Sovereign spreads and ratings: Sovereign bond spreads tightened above 3,500 bps; Fitch and Moody’s revised sovereign ratings to CCC- and Caa3, respectively, in February. ### Inflation and monetary policy - Inflation: Core inflation reached 22.8 percent (yoy) and headline inflation reached 38 percent in May 2023 (record high). - SBP policy rates: Cumulative policy rate increase of 825 bps since the beginning of FY23, with the last hike bringing policy rates to 22 percent. - Monetary policy actions: SBP kept policy rate unchanged in MPC meetings in August, October, and early June before hiking rates in November, March, April, and late June. ### External balance and current account - Current account: Narrowed to US$2.9 billion in first eleven months of FY23 (compared to US$17.5 billion in FY22), driven by imports contracting by -24 percent. - FY23 CAD projection and outlook: Staff projects a CAD of about US$4 billion in FY23, around US$5.3 billion less than projected at the time of the combined 7th–8th EFF reviews, and increasing to around US$6½ billion in FY24. - Medium-term CAD target: CAD should remain moderate at around 2 percent of GDP over the medium term. ### Fiscal position and developments - Primary surplus: Primary surplus reached PRs 586 billion in FY23H1, falling short of the budget target by 0.4 percent of GDP. - Revenue and deficit: Despite February measures, the budget deficit is projected to reach 1 percent of GDP in FY23. Total tax revenue is projected at 9.9 percent of GDP (below the 10.8 percent target in the February Supplementary Finance Bill). - Interest burden: Interest bill reached 6.6 percent of GDP and absorbed 2/3 of tax revenue. - Mini-budget (February 2023) measures: - Additional revenue of PRs 170 billion (0.2 percent of GDP; annualized 0.5 percent of GDP) from: a 1 percent GST standard rate increase (PRs 60 billion); higher FED on cigarettes (PRs 60 billion); other measures (PRs 50 billion). - Expenditure measures: reduction in non-social spending (PRs 161 billion), curtailment of federal development expenditure by ¼ percent of GDP. - PDL increases largely in line with June 2023 budget path. - Import suppression impact: Suppression of imports undermined the revenue base, damaging import-related sales tax and customs duty revenue and contributing to closure of industrial plants. - Market funding conditions: Several undersubscribed Treasury auctions in FY23; domestic debt issuance tilted toward floating rate instruments. ### Energy sector pressures and measures - Power sector circular debt: CD stock rose to PRs 2.5 trillion (3 percent of GDP) by end-March 2023. - CD flow overruns: CD flow overruns of PRs 387 billion (0.5 percent of GDP) relative to the CDMP from early-FY23. - Actions to contain CD and subsidies: Measures from March 2023 contained FY23 budget subsidy to 1.1 percent of GDP and CD flow to 0.4 percent of GDP; measures worth 0.2 percent of GDP in FY23 helped catch up deferred tariff adjustments, expanded base and level of debt service surcharge, and removed new unbudgeted subsidies. - Gas sector: CD stock in the gas sector grew rapidly and is almost on par with the power sector. Drivers: delayed biannual tariff adjustments (since September 2020), high operational losses (UFG), collection shortfalls, and uncovered subsidies. - Gas price adjustment: Authorities implemented a gas price hike in mid-February 2023 of, on average, 75 percent as determined by OGRA in January 2023 and introduced an updated tariff slab system to ensure full cost recovery, affordability, and efficiency. ### Program objectives and policy pillars - Four policy pillars emphasized in discussions supporting the proposed SBA: 1. An appropriate FY24 budget to support needed fiscal adjustment. 2. A return to a market-determined exchange rate and proper functioning of the FX market. 3. Adequately tight monetary policy to support disinflation and anchor expectations. 4. Continuation of structural efforts to strengthen energy sector viability, SOE governance, and the banking sector, while supporting climate resilience. ### Outlook, projections, and risks - Real GDP growth projections (FY20–FY28 row reproduced exactly): - FY20: -0.9 - FY21: 5.8 - FY22: 6.1 - FY23: -0.5 - FY24: 2.5 - FY25: 3.6 - FY26: 4.5 - FY27: 5.0 - FY28: 5.0 - Inflation projections (consumer prices, period average, % change): - FY20: 10.7 - FY21: 8.9 - FY22: 12.1 - FY23: 29.6 - FY24: 25.9 - FY25: 11.4 - FY26: 7.4 - FY27: 6.5 - FY28: 6.5 - Fiscal and debt projections: - Gen. gov. overall balance (incl. grants, %GDP): FY23 -7.6; FY24 -7.5; FY25 -6.6; FY26 -5.2; FY27 -4.6; FY28 -4.2. - Gen. gov. primary balance (underlying, excl. grants, %GDP): FY23 -0.8; FY24 0.4; FY25 0.4; FY26 0.4; FY27 0.4; FY28 0.4. - Gen. gov. debt (incl. IMF obligations, %GDP): FY23 77.4; FY24 70.9; FY25 68.5; FY26 67.3; FY27 65.1; FY28 63.1. - Reserves and adequacy metrics: - Gross official reserves (billions of US$): FY23 4.1; FY24 9.0; FY25 12.9; FY26 14.1; FY27 15.3; FY28 15.7. - Gross official reserves (months of next year's GNFS imports): FY23 0.7; FY24 1.4; FY25 1.8; FY26 1.9; FY27 1.9; FY28 1.9. - Gross official reserves (% IMF reserve adequacy metrics): FY23 16.7; FY24 36.9; FY25 48.1; FY26 50.4; FY27 53.9; FY28 52.5. - Outlook narrative: - Growth is expected to pick up moderately in FY24 to about 2.5 percent, with return to potential (5 percent) over the medium term assuming sustained policy implementation and adequate financial support. - Headline inflation is expected to remain above 25 percent in FY24, with end-of-period inflation falling below 20 percent only in FY24Q4; eop inflation is projected to fall to single digits only in mid-FY26. - Public debt can remain sustainable over the medium term under decisive implementation of program policies and adequate financing; any further downward revisions could push debt towards unsustainability. - Downside risks (exceptionally high): - Risks include policy slippages, delays in external financing disbursements from IFIs and bilateral creditors, spillovers from Russia’s invasion of Ukraine (high food and fuel prices), tighter global financial conditions, weak capacity, vested interests, sociopolitical tensions, tenuous political coalition with elections looming, and elevated domestic financing needs that may overstretch the financial sector. - Delays on structural reforms (financial sector, undercapitalized banks, reducing SBP involvement in refinancing schemes) could hamper financial stability and monetary policy effectiveness. - The lasting macroeconomic impact of floods could be larger than currently estimated; climate change mounting risks. ### Fiscal policy assessment and recommendations - Maintain small primary surpluses in coming years with strong revenue efforts to create space for priority social and development spending and to strengthen debt sustainability. - Urgent actions needed to: - Broaden tax base and reverse the declining tax-to-GDP ratio. - Address implementation gaps (e.g., track-and-trace for cigarettes) that undermine revenue measures. - Restore market-based FX determination and eliminate import-payment restrictions to reopen supply chains and revive activity. - Ensure adequately tight and credible monetary policy to bring inflation down and anchor expectations. - Continue structural reforms to strengthen energy sector viability, reduce circular debt, improve SOE governance, and stabilize the banking sector. - External financing: Timely disbursement of committed multilateral and bilateral financing is critical to stabilize reserves and secure the recovery path. *Source: 1pakea2023001 (IMF).* ### 11. The FY24 budget aims ### 11. The FY24 budget aims ### Fiscal framework and headline targets - The budget approved by parliament on June 25 targets a primary surplus of PRs 401 billion, 0.4 percent of GDP (Prior Action (PA)). - Tax revenues are targeted to strengthen to 10.3 percent of GDP on the back of measures worth over PRs 254 billion (almost ¼ percent of GDP). - Containing primary expenditure to PRs 12,976 billion (11.9 percent of GDP) while preserving space for priority social and development spending. - The budget includes a contingency for emergencies of PRs 250 billion. - Authorities committed not to use "supplementary grants” via executive fiat to authorize spending over what has been legislatively appropriated by parliament outside of severe natural disasters (MEFP ¶6). ### Revenue measures (detailed measures and expected revenue) - Increase in the maximum PDL; PRs 79 billion. - The maximum will be raised to PRs 60 per liter, with a path to reach an average rate of PRs 55 per liter over FY24. - Increase of personal income tax (PIT); PRs 30 billion. - The Finance Act 2023 increases rates as of July 2023 by 2.5 percentage points: (i) for wage earners on their taxable annual income in Pakistan: excess of PRs 2.4 million; and on all income for persons earning income from business activities. In addition, the top two brackets for PIT are merged. - Rationalization of tax exemptions for fertilizer; PRs 34 billion. - Instead of an exemption, the Finance Act 2023 levies GST at a rate of 5 percent on diammonium phosphate (DAP) fertilizer. In addition, all fertilizers, including DAP and Urea, are subjected to FED at the rate of 5 percent. - Increase of FED on sugary drinks; PRs 8 billion. - The rate is doubled to 20 percent. - Increases of the advance tax on the purchase and sale of immovable property yielding PRs 46 billion. - The rate is increased from 2 percent to 3 percent. - Broadening of the base of the tax on second homes and other high-wealth items for non-filers; PRs 19 billion. - This tax at an effective rate of 1 percent was enacted from July 2022, with a threshold of PRs 25 million and first homes excluded. The Finance Act 2023 abolished the threshold and exclusion of first homes for non-filers, with no changes for those on the active taxpayer list. - Increase in the advance tax for builders and developers based on land size of the project under development; PRs 15 billion. - Increase of the additional GST on deliveries to businesses that are not registered for VAT; PRs 23 billion. - The additional rate is increased from 3 to 4 percent. ### Budget composition and macro aggregates (selected figures from the program table) - Revenue and grants: 12.4, 12.2, 11.4, 12.3 (Percent of GDP) — Budget (Jun. 2022), Program (mini-budget, Feb. 2023), Projection Program (budget, Jun. 2023) — presented as the table headings indicate. - Tax revenue: 11.0, 10.8, 10.0, 10.3 (Percent of GDP). - Federal: 10.1, 9.8, 9.2, 9.5 (Percent of GDP). - o/w FBR: 8.9, 8.9, 8.5, 8.6 (Percent of GDP). - o/w PDL: 1.00, 0.80, 0.60, 0.8 (Percent of GDP). - Non-tax revenue: 1.4, 1.4, 1.4, 1.9 (Percent of GDP). - Federal: 1.1, 1.2, 1.2, 1.8 (Percent of GDP). - o/w SBP profits: 0.40, 0.40, 0.41, 1.0 (Percent of GDP). - Expenditure: 16.9, 19.1, 18.9, 19.8 (Percent of GDP). - Interest: 4.8, 6.3, 6.6, 7.9 (Percent of GDP). - Current primary: 9.9, 10.5, 10.3, 9.8 (Percent of GDP). - Federal current primary: 5.6, 6.0, 5.7, 5.5 (Percent of GDP). - Subsidies: 0.8, 1.4, 1.3, 1.1 (Percent of GDP). - Power sector: 0.7, 1.1, 1.1, 0.9 (Percent of GDP). - Petroleum and gas: 0.10, 0.10, 0.10, 0.0 (Percent of GDP). - Grants: 0.0, 0.0, 0.0, 0.0 (Percent of GDP). - BISP: 0.40, 0.50, 0.50, 0.4 (Percent of GDP). - Provision for emergencies: 0.20, 0.20, 0.00, 0.2 (Percent of GDP). - PSDP and net lending: 2.3, 2.3, 2.1, 2.2 (Percent of GDP). - Federal PSDP: 0.80, 0.70, 0.60, 0.8 (Percent of GDP). - o/w Provincial: 1.51, 1.51, 1.51, 1.3 (Percent of GDP). - Overall balance (excl. grants): -4.5, -6.9, -7.6, -7.5 (Percent of GDP). - Primary balance (excl. grants): 0.2, -0.5, -1.0, 0.4 (Percent of GDP). ### Public Financial Management and structural fiscal reforms - Strengthening revenue administration: - Creation of a Compliance Risk Management (CRM) framework in FY23 to allow Compliance Improvement Plans (CIPs) to yield results in FY24. - Efforts to expand the PIT base by another 300,000 persons using data on withholding tax of businesses, third-party data, and physical surveys. - Plans to bring the service sector, notably retailers, into the tax net by better use of data (e.g., tax collected through electricity bills on commercial connections). - Continued roll-out of track-and-trace essential to secure full benefit of recent taxation changes, notably FED on cigarettes. - Enhancing Public Financial Management (PFM): - Advancing the delayed full operationalization of a central monitoring unit (CMU) within the Ministry of Finance and issuance of its first periodic report on the performance of SOEs to the government (end-November 2023 SB). - Plan to fully operationalize the treasury single account (TSA-2) by end-October 2023. - Development of monthly and quarterly cash forecasts since January 2023 by the Treasury and Cash Management Unit and Cash Forecasting Unit in the Federal Treasury Office in Islamabad, with technical assistance from the Asian Development Bank (ADB). - New guidelines issued March 2022 on annual and multiannual commitment control systems; further TA will provide recommendations for additional improvements. - TA on climate public investment management assessment (Climate-PIMA) to strengthen public investment management capacity, particularly for climate-related public investment (¶24). - Strengthening spending transparency: - With World Bank support, the Public Procurement Regulatory Authority (PPRA) piloted the e-procurement system to the health and education ministries in March 2023; full roll-out to federal and provincial levels planned. - PPRA implementing May 2022 regulations on publication of beneficial ownership information in procurement contracts above PRs 50 million. - Improving debt management: - New Debt Management Office (DMO) formally in place following Amendments to the Fiscal Responsibility and Debt Limitation Act, supported by World Bank and IMF TA, but important resources to make it fully functional are lacking. - Cabinet approval of DMO rules and appointment of a new Director General in February 2023. - Critical needs: (i) provide adequate resources for DMO staffing and expeditiously fill vacant positions, including at the director-level; and (ii) effectively empower the DMO to implement the agreed medium-term debt management strategy (MTDS), updated annually. - With resumption of appropriate macro policy settings, key priorities include lengthening the maturity profile of public debt and managing the cost-risk trade-off of fixed-rate versus floating-rate long-dated debt. - Recommendation to work with international partners to develop the local bond market and prepare contingency plans to deal with possible payment issues. - Need for greater recording and reporting of contingent liabilities and SOE debts, including guaranteed debts for commodity operations, to improve fiscal planning and debt management. ### Poverty reduction and social protection - FY23 BISP spending: - Authorities spent about PRs 404 billion (0.4 percent of GDP) on regular and exceptional BISP schemes in FY23, exceeding the FY22 executed level by more than 70 percent. - UCT Kafalat stipend inflation adjustment of 25 percent to PRs 8,750 per family and quarter, effective from January 1, 2023. - Exceptional one-off emergency cash transfer of PRs 25,000 to more than 2.7 million flood-affected regular BISP families in FY23Q1. - Faster-than-envisaged enrollment of 1 million newly identified families into the UCT Kafalat program (now covering 9 million families) on the basis of the live National Socio-Economic Registry (NSER). - Education and health care spending remained below budgeted targets because of weak budget planning and execution. - FY24 BISP allocation and priorities: - BISP budget allocation increased to PRs 472 billion (0.4 percent of GDP) in FY24, about 1/3 above the executed regular BISP spending in FY23 (excluding one-off transfers for floods). - The increase will accommodate all current BISP programs and absorb: (i) an additional 300,000 families in the UCT Kafalat program from July 2023; and (ii) the regular inflation adjustment of the UCT Kafalat stipend from January 2024 (end-January 2024 SB). - Policy recommendations to protect vulnerable groups and raise social spending: - Create fiscal space for substantially ramping up social spending through more resolute revenue mobilization from the more affluent parts of society. - Use a higher BISP envelope—strictly targeted at the most vulnerable and monitored through a QPC under the SBA-supported program—to: (i) achieve a more meaningful UCT Kafalat generosity level; (ii) accelerate enrollment into the conditional cash transfer (CCT) schemes for child education and health; (iii) align CCT stipends with actual schooling and food costs; and (iv) ensure adequate budgetary contingency for exogenous shocks (including climate events). - Over the longer term, replace the protection of the most vulnerable built into power and gas price structures with a targeted BISP scheme. - Fully execute budgeted health and education spending (monitored through an IT under the SBA-supported program) and substantially increase resources over time to improve socio-economic outcomes. - Persist with administrative efforts to ensure: (i) NSER remains alive and covers all poor; (ii) BISP enrollment stays open; (iii) re-declaration of BISP beneficiaries’ status becomes regular on a triannual basis; and (iv) BISP payments become fully electronic. - Boost structural reforms (¶23f) to lay foundations for resilient growth and create opportunities for the middle class, youth, and women. ### Monetary policy and exchange rate framework - Monetary policy context: - Multiple pauses in the policy rate tightening cycle and a dramatic increase in the size of SBP’s open market operations (OMOs) resulted in loose monetary policy conditions as inflation rose to a five-decade high and inflation expectations de-anchored. - Over 90 percent of consumers expected higher prices over the next 6 months in SBP’s May survey. - The Monetary Policy Committee increased the policy rate by 100 bps on June 26, bringing it to 22 percent. - Interest rates on SBP’s two main refinancing schemes (EFS and LTFF) similarly increased, maintaining the gap with the policy rate at 3 percentage points. - Policy guidance and recommended stance: - A tighter monetary policy stance is critical to reduce inflation, re-anchor expectations, and support external sector rebalancing through the exchange rate. - SBP agreed to maintain a tight monetary policy stance—higher rates and prudent use of liquidity injections—as needed, given incoming data, to achieve real positive interest rates, on a forward-looking basis, and place inflation and inflation expectations on a clear downward path. - SBP committed not to introduce new refinancing schemes and to keep the outstanding credit of the refinancing facilities below their current limits. - To enhance monetary policy transmission and strengthen governance and transparency, a new framework has been developed under which SBP’s operational involvement in the two largest refinancing schemes (EFS and LTFF) is set to cease at the end of a 5-year transition period. Commercial banks would extend credit to export industries at preferential rates, supported by an on-budget subsidy administered via Ex-Im Bank, and obtain liquidity at market rates via SBP’s regular open market operations instead of refinancing at below-market rates. With implementation set to begin in July 2023, the required subsidy allocation has been included in the FY24 budget. - Exchange rate and external sector recommendations: - Reducing external imbalances and rebuilding reserves requires permanently ending administrative controls and returning to a market-determined exchange rate. - Reliance on administrative measures to manage imports since May 2022 and the tightly controlled exchange rate since September 2022 caused significant damage to growth and exacerbated external pressures by dissuading inflows, especially remittances. - Staff recommended unwinding the January 2022 shortening of the period for repatriation of export proceeds as macroeconomic and BOP stability is restored. - Authorities have withdrawn the circular on prioritization in providing FX for certain types of imports issued in December 2022 (PA); the circular was withdrawn on June 23, 2023. - Authorities are working toward restoring market determination of the exchange rate; restoring full market determination is expected to ensure that the interbank–open market premium remains within a ±1.25 percent range on average (continuous SB). - Authorities remain committed to removing the remaining exchange restriction and multiple currency practice (MCP) when BOP conditions stabilize by the end of the program; they requested more time to eliminate these remaining restrictions when BOP conditions permit by the end of the SBA in April 2024. *Source: IMF staff summary of chapter "11. The FY24 budget aims" from the provided content.* ### 19. The banking sector appears stable, but the full impact of the economic downturn has yet ### 19. The banking sector appears stable, but the full impact of the economic downturn has yet to materialize ### Banking sector: current soundness and risks - As of end-March 2023, banks’ capital adequacy ratio (CAR) was 16.3 percent, above the regulatory minimum of 11.5 percent (including the 1.5 percent capital conservation buffer), but CAR deteriorated by 0.7 percent compared to end-December 2022. - Nonperforming loans (NPLs) rose to 7.8 percent; NPL provisioning stood at 90.7 percent. - 11 out of 32 banks report NPLs above 10 percent. - Four banks remain undercapitalized; currently four banks (two privately and two publicly owned) with 2.2 percent of total banking sector assets are below the regulatory minimum of 11.5 percent. - If the minimum CAR were restored to 12.5 percent, one additional bank would be close to the minimum (per end-March 2023 data). - Banks’ sovereign exposure increased from 48 percent of assets at end-FY21 to 51.6 percent at end-March 2023. - Banks accounted for 50 percent of the government’s financing in FY23H1. - Amid heightened FX market pressures, some banks temporarily breached net open position limits; heightened monitoring is warranted. ### Financial stability monitoring, supervisory actions, and governance (MEFP ¶14) - Key policy recommendations and agreed actions: - Ensure close monitoring of the financial sector given potential reverberations from the economic downturn and external financing challenges. - Supervisor to ensure all commercial and microfinance banks meet minimum capital requirements and take timely, resolute action to address capital shortfalls or regulatory non-compliance through: - Time-bound recapitalization plans, or - Ensuring orderly market exit where necessary. - Strict adherence to regulatory limits for banks’ foreign currency exposure; return to a market-determined exchange rate would alleviate banks’ need to resort to negative net open positions. - Postpone envisioned extension of deposit insurance framework to microfinance banks until sector vulnerabilities are addressed. - Authorities’ commitments: - Ensure the two undercapitalized private sector banks enter resolution if not fully capitalized. - Move ahead with resolving one public sector bank after cabinet ratification to delist and liquidate it. - Work with shareholders of a mid-sized public sector bank that became undercapitalized as of end-December 2022 to make it capital-compliant by end-September 2023. - Address high levels of NPLs in some banks through bank-specific plans and allow write-off of fully provisioned NPLs. - Submit draft amendments revising early intervention, resolution, and crisis management frameworks (including deposit insurance) to parliament by end-December 2023 (drafts were submitted to cabinet in November 2022). - AML/CFT progress: - Authorities completed AML/CFT action plans and exited the FATF list. - SBP conducted a thematic AML/CFT inspection related to the tax amnesty for the construction sector and issued fines against financial institutions for AML/CFT shortcomings. ### Energy sector: acute liquidity pressures and circular debt (CD) - Situation overview: - Energy sector faces severe liquidity pressures and over-accumulation of payment arrears (circular debt), aggravated by lack of cost-reflective pricing, currency depreciation, and repeated unbudgeted subsidies. - FY23 saw further deterioration with unexpected additional budgetary subsidy needs, higher-than-expected arrears accumulation, binding liquidity constraints, and increased load shedding. - FY24 fiscal and CD projections (as stated): - Budgeted FY24 power subsidy: PRs 976 billion (0.9 percent of GDP). - FY24 CD flow: PRs 392 billion (0.4 percent of GDP). - FY24 CD stock payments: PRs 392 billion (0.4 percent of GDP). - Expected end-FY23 CD stock: PRs 2,374 billion (2.2 percent of GDP). - Key power sector reform measures (to be reflected in an updated FY24 CDMP expected July 2023): - Notification in full (and, if needed, retrospectively from July 1, 2023) of the FY24 annual rebasing (AR) as per NEPRA’s imminent determination (end-July 2023 SB). - Modest near-term measures to improve distribution efficiency (primarily collection). - Acceleration of medium-term cost-reducing reforms (MEFP ¶16), including: - Timely alignment of power tariffs with cost recovery levels while protecting poor consumers through lifeline and protected tariffs; regular implementation of one AR, four quarterly tariff adjustments (QTAs), and twelve monthly fuel price adjustments (FPAs) per FY. - Better targeting of power subsidies: entering the third stage of a multi-year subsidy reform plan (World Bank-supported) and submitting a subsidy rationalization reform plan for tube-wells for large agricultural users by end-2023. - Reducing commercial and technical losses, lowering generation costs, improving governance and PPA terms, increasing competition, greening the energy mix, and renegotiating remaining PPAs in return for clearing unguaranteed CPPA arrears. - Convert publicly-guaranteed PHPL debt into cheaper public debt (along the 10-year repayment plan) and expand renewable energy capacity. - Note: Each month of delaying a PRs 1 per kWh adjustment adds about PRs 8½ billion to the stock of arrears. - Natural gas sector recommendations: - Persevere with regular biannual end-user gas price adjustments per established formulas and timelines, while sparing protected slabs. - Work with the World Bank to prepare OGRA guidelines to implement the weighted-average cost of gas pricing (WACOG) law adopted in March 2022 for the next OGRA determination. - Create reliable CD data, management, and projection capacity. - Implement cost-reducing reforms to reduce UFG losses through infrastructure improvements, network rehabilitation, and theft control. ### Structural policies: addressing long-standing bottlenecks - Main constraints identified: - Inadequate social spending, uneven playing field for SOEs and private firms, corruption, red tape (excessive regulation and licensing), weak business climate (obstacles to paying taxes, difficulties trading across borders, registering property), and climate change vulnerability. - Timely provision of key macroeconomic data is critical. - Priority reform actions (MEFP ¶20): - Strengthen SOE governance, transparency, and efficiency: - New SOE law enacted in early 2023; next steps with ADB support include developing a new ownership policy; amending several SOE-dedicated Acts (end-November 2023 SB, ¶12); advancing operationalization of a CMU within MoF (end-November 2023 SB, ¶12); gradually reducing state footprint (divestment of two LNG-based power plants, one development finance institution, and one small public bank); and continuing regular timely audits of key SOEs. - Boost business environment, job creation, and investment by simplifying procedures to start a business, streamlining FDI approvals, improving trading across borders, reducing customs processing times, and simplifying tax payment processes; improve product market access and ICT adoption. - Strengthen anticorruption institutions: - FBR issued regulations in February 2023 granting banks access to asset declarations of high-level federal civil servants for AML/CFT customer due diligence. - A task force reviewing the anti-corruption institutional framework has commenced work; publication and proposals for legislative amendments will be delayed. - Staff encourages seeking capacity development support for institutional governance reforms. - Climate change resilience: - Climate-related spending already amounts to about 1 percent of GDP (nascent green budgeting). - Focus on “no-regret” measures pending National Adaptation Plan (expected by end-2024), including strengthening PFM to enhance capital expenditure efficiency through a Climate-PIMA supported by IMF TA, culminating in cabinet approval of a Climate-PIMA and PIMA action plan (end-December 2023 SB). - Prioritize resilience-boosting policies: strengthening social spending, building back better after 2022 floods, executing updated flood safety projects, and transforming the agri-food system. - Further capacity building supported by UNEP and others to advance needs assessments and resilience strategies for vulnerable sectors (agriculture, power, transport). - Timely macroeconomic data improvements: - PBS progressing on Quarterly National Accounts (QNA) compilation and publication. - Authorities agreed to compile and disseminate QNA starting with FY24Q1 and publish revised annual estimates for FY23 (end-November 2023 SB). ### Program modalities and capacity to repay - Arrangement and access: - Authorities requested a 9-month SBA equivalent to SDR 2,250 million, or 110.8 percent of quota (about US$3.0 billion), covering July 12, 2023 through April 11, 2024. - SDR 894 million to be disbursed upon approval; remaining amount phased among two remaining purchases. - Two Prior Actions implemented: passage of an appropriate FY24 budget; withdrawal of the circular on prioritization in providing FX for certain imports by SBP. - Program monitoring and modalities: - Performance monitored through quantitative performance criteria (QPCs), indicative targets (ITs), structural benchmarks (SBs) as detailed in Tables 1 and 2 of the MEFP, and quarterly reviews including regular assessment of financing commitments. - Exchange restrictions and MCP: - Staff supports temporary approval of an exchange restriction (limitation on advance payments for imports against LCs and advance payments up to a certain amount per invoice without LCs for eligible items, imposed in 2018) and an MCP (arising from potential deviation of more than 2 percent between previous day’s weighted average customer exchange rates and spot market rates). - Approval proposed for program duration; restrictions are non-discriminatory and maintained for BOP reasons; authorities committed to remove them before program end. - Financing and risks: - Program is fully financed but with exceptionally high risks. - Bilateral creditors expected to maintain exposure; commitments for US$3.7 billion of additional financing expected from Saudi Arabia and the UAE. - Commitments from multilateral institutions, including the Islamic Development Bank, and pledges at the Geneva conference provide financing assurances. - Financing risks remain exceptionally high due to large public sector external rollover needs, sizable current account deficit, difficult external environment for Eurobond issuance (recent downgrades and high spreads), and limited reserve buffers to cover delays in scheduled inflows. *Source: IMF staff report (content unit 1pakea2023001).* ### 29. Capacity to repay. Pakistan’s capacity to repay the Fund is subject to significant risks and ### 29. Capacity to repay. Pakistan’s capacity to repay the Fund is subject to significant risks and ### Capacity to repay: exposure and risks - Fund exposure reaches SDR 6,123 million (or 301 percent of quota and about 108 percent of projected gross reserves at end-September 2023) with purchases linked to the request. - With completion of all purchases under the arrangement, the Fund’s exposure would peak at SDR 6,673 million in March 2024 (or 329 percent of quota and about 109 percent of projected gross reserves at end-March 2024). - Key downside risks that could jeopardize repayment capacity and debt sustainability: - Delayed adoption of reforms. - High public debt and gross financing needs. - Low gross reserves and SBP’s sizeable net FX derivative position. - Recent decline in inflows. - Sociopolitical factors. - Uncertainty about global economic and financial conditions amid several successive shocks. - Restoring external viability is critical to ensure Pakistan’s capacity to repay the Fund and hinges on: - Strong policy implementation, including beyond the proposed SBA. - Timely external financing. - Adequate execution of firm and credible financing assurances as an essential mitigating factor. - In the absence of the proposed SBA, capacity to repay the Fund would be strained. ### Safeguards assessment (SBP) - An update safeguards assessment of the SBP will be completed before the first review. - The last safeguards assessment was completed in 2019 and noted broadly sound safeguards at the SBP. - Amendments to the central bank legal framework enacted in early 2022: - Prohibit the SBP from conducting quasi-fiscal activities, which will require the refinance schemes to be phased out or transferred to another institution (¶16, MEFP ¶12). - Require compliance with timelines for appointments of senior executives as per the amended SBP Act to strengthen independent oversight and ensure operational readiness. - Recent governance and staffing concerns: - Since FY23H1 there have been new vacancies on the SBP Board, including among directors serving on the Monetary Policy Committee, which were not filled within the requisite timeline. - As of end-June 2023 a deputy governor position has been vacant for more than 30 days. ### Historical program performance: 2019–23 EFF - The incomplete and uneven policy implementation under the 2019–23 EFF was a missed opportunity to set the economy on a sounder footing. - The EFF aimed to: - Strengthen fiscal and external sustainability. - Advance structural and institutional reforms for stronger and more balanced growth. - Emphasize social protection to garner support for policies. - Early program progress included fiscal adjustment, transitioning to a flexible and market-determined exchange rate, and establishing a more modern and independent central bank; however, progress did not persist. - Unprecedented shocks undermining program outcomes: - 2020 COVID-19 pandemic. - 2022 floods. - Other factors that weakened program commitment and outcomes: - Pressure from vested interests for tax privileges and against broadening the tax base. - Inability to tackle deep-seated issues in the energy sector. - Pursuit of expansionary policies to stimulate growth quickly. - Use of FX interventions to prevent exchange rate depreciation. - When external environment worsened in 2022 after Russia’s war in Ukraine (commodity price spikes, tighter financial conditions), Pakistan faced: - Exhausted buffers. - Shortages of FX and goods. - Acute economic challenges due to unorthodox policies and complex domestic political tensions. ### Objectives and conditions of the new SBA - The new SBA aims to rebuild confidence and entrench stability by: - Containing the budget and external deficits. - Bringing inflation under control. - Restoring proper functioning of the exchange market. - Rebuilding reserve buffers. - Advancing critical reform efforts. - Success conditions: - Strong and sustained ownership. - Firm implementation. - Significant external financial support. - Program monitoring to support external financing, restored FX market functioning, and stronger policies to recover remittances in FY24 and other inflows (including FDI) thereafter. ### Fiscal policy and public finances - The FY24 budget’s consolidation is an important step to protect fiscal sustainability. - Supported measures: boost revenue mobilization and restrain non-priority spending, while protecting social assistance. - Required actions: - Strict budget execution to reduce risks to macroeconomic stability and fiscal sustainability. - Current expenditure restraint. - Strong efforts to mobilize revenue through better tax administration. - Beyond FY24: build a more progressive, simple, efficient, and fair tax system to generate adequate space for development and social spending, including building resilience to climate shocks. - Improved public financial management to improve the efficiency of scarce resources. ### Social protection and poverty reduction - Effectively reducing poverty and enhancing social protection requires higher targeted social spending. - Staff observations and recommendations: - Welcomed strengthening of BISP through targeted expansion of the beneficiary base and continued inflation adjustments to the benefit level. - Called for sustained efforts to increase the generosity of BISP stipends and ensure enrollment of all deserving families into the CCT schemes. ### Monetary policy - Monetary policy needs to remain tight, proactive, and data-driven. - The recent policy rate hike is welcome; tightening should continue if needed to reduce inflation and facilitate external rebalancing. - Short-term objective: the forward-looking real policy rate should return to positive territory to re-anchor expectations and achieve the SBP’s inflation objective over the medium term. - Implementing the plan to phase out the refinancing schemes will: - Strengthen monetary policy traction. - Bring transparency to these schemes. - Importance of strengthening and protecting SBP independence. ### Exchange rate policy - Exchange rate must be allowed to be market determined to: - Absorb external shocks. - Maintain competitiveness. - Help rebuild international reserves by incentivizing inflows. - Key actions to restore FX market functioning: - Allow price signals to function unimpeded. - Abstain from informal influence in the market, including through import management and LC approval guidance. - Use appropriate monetary and fiscal policies and strong reform implementation to build confidence in the rupee and resolve external imbalances. ### Financial sector stability - Maintaining financial stability requires close oversight and swift action to address undercapitalized financial institutions. - Recommendations for SBP: - Accelerate the recapitalization process using its existing powers. - Strengthen bank resolution and crisis management frameworks; expedite the draft law currently under discussion in the cabinet for further legislative process. - Fill out institutional autonomy granted under the recently amended SBP Act. - Pakistan’s successful exit from the FATF list is welcome; efforts to mitigate ML/TF risks, including from tax evasion, corruption, and other financial crimes should be sustained. ### Energy sector reforms - Decisive action is essential to restore the viability of the energy sector to reduce unsustainable spillovers onto the budget, financial sector, and real economy. - Immediate steps and required measures: - Maintain recently adopted energy measures, especially the full surcharge hike and strict limitation of energy subsidies to the vulnerable. - Ensure timely alignment of energy tariffs with cost structures as per NEPRA’s and OGRA’s formulas (while protecting the vulnerable). - Implement reforms to reduce operational, generation, and CD-related financial costs in line with the current power and emerging gas CDMP to put tariffs on a downward trajectory. ### Structural reforms - Structural reforms remain essential to lay the foundation for strong, resilient, and inclusive growth. - Priority areas: - Tangible progress on SOE governance and anti-corruption institutions. - Improvements in the business environment and investment climate. - Adaptation to climate change. ### Risks and mitigation - Risks remain exceptionally high and tilted to the downside on both domestic and external fronts. - External headwinds: tight global financial conditions and still elevated food and fuel prices due to the war in Ukraine. - Domestic risks: difficult sociopolitical climate, including persistent political volatility, which could undermine policy implementation and Pakistan’s adjustment path and growth potential. - Other risk factors: advanced economy financial tightening, geopolitical tensions, and wavering reform efforts could affect availability of external financing. - Materialization of downside risks could tip Pakistan towards an unsustainable debt situation. - Mitigating elements: close program monitoring, supportive technical assistance (TA), and financing assurances from key lenders. *Source: IMF staff appraisal excerpt (section 29–40).* ### 41. While recognizing these risks, staff supports the authorities’ request for a 9-month SBA ### 1pakea2023001 - 41. While recognizing these risks, staff supports the authorities’ request for a 9-month SBA ### IMF staff decision and conditional measures - Staff supports the authorities’ request for a 9-month SBA with access equivalent to SDR 2,250 million (about 111 percent of quota). - Staff supports approving the exchange restriction and the MCP because they are temporary, non-discriminatory, and implemented for BOP reasons. ### Macroeconomic performance and external position - Recent trajectory: - The economy rebounded in FY21 and kept momentum through FY22, helped by expansive macro policies, but this contributed to a widening current account balance. - Foreign reserves started declining sharply in FY22, putting pressure on the exchange rate; SBP’s derivative position has widened. - External competitiveness remains weak, some recent improvements notwithstanding. - Private sector credit growth has decelerated in FY23. - Selected headline indicators (from Table 1 and Figure summaries): - Population: 231.6 million (2022/23). - Main exports: Textiles (US$19.3 billion, 2021/22). - Unemployment: 6.2 percent (2021/22). - Poverty rate: 21.9 percent (at national line; 2018/19). - Per capita GDP: US$1,642 (2021/22). - Real GDP at factor cost (annual): 3.1; -0.9; 5.8; 6.1; -0.5; 2.5; 3.6 for the sequence shown in Table 1 row (years spanning 2018/19–2024/25). - Consumer prices (period average): 6.7; 10.7; 8.9; 12.1; 29.6; 25.9; 11.4 (same multi-year sequence). - Gross reserves (in millions of U.S. dollars): 7,274; 12,175; 17,297; 9,821; 4,056; 8,982; 12,888 (multi-year sequence). - Current account balance (in percent of GDP): -4.2; -1.5; -0.8; -4.6; -1.2; -1.8; -1.7 (multi-year sequence). ### Monetary and financial sector developments - Monetary policy and market rates: - SBP started to gradually tighten monetary policy in September 2021. - Market rates have moved in line with the policy rate amid heightened uncertainty and external pressures. - Six-month treasury bill rate (period average) examples: 10.2; 11.9; 7.3; 12.6 (from Table 1). - Market indicators and liquidity: - Pakistan’s bond spreads have widened, reflecting ongoing uncertainty; stock market volatility increased. - Liquidity injections via OMOs continue to be very high. - Banking system indicators (Table 6 highlights): - Regulatory capital to risk-weighted assets: 14.9 (2013) rising to 17.0 (2022 dec.). - Nonperforming loans (NPLs) to gross loans: 13.3 (2013) down to 7.3 (2021) and 7.3 (2022 dec. shown as 7.3/7.3 in table sequence). - Provisions to NPLs: 78.4 (2013) to 89.5 (2022). - Return on assets (after tax): 1.1 (2013) and 1.0 (2022). - Liquid assets to total assets: 48.6 (2013) to 56.6 (2022). - Loans/Deposits: 49.5 (2013) to 50.4 (2022). - Monetary aggregates and banking system (Table 5): - Broad money (end-period examples, in billions PRs): 17,798; 20,908; 24,298; 27,603; 31,274; projections 31,704; 31,993; 32,972; 35,808. - Reserve money examples (in billions PRs): 6,573; 7,680; 8,663; 9,327; 10,959; projected 10,876; 10,931; 11,925; 12,876. - NFA, banking system (in percent of broad money): -8.1; 5.6; 5.9; -6.1; -5.1; -1.7; 0.9; 2.9; 1.6 (multi-quarter sequence). - Budget support (in percent of broad money) and budgetary support levels are material contributors to NDA and broad money ratios (detailed values in Table 5). ### Fiscal outlook and public debt dynamics - General government budget (Tables 4a/4b key figures and ratios): - Revenue and grants (in billions PRs): 4,934; 6,306; 6,933; 8,076; 9,637; projections 13,426; 15,399; 17,322; 19,311; 21,579. - Expenditure (including statistical discrepancy, in billions PRs): 8,345; 9,649; 10,306; 13,291; 16,041; projections 21,590; 23,708; 24,724; 26,615; 28,986. - Overall Balance (including grants, in percent of GDP): -7.8; -7.0; -6.0; -7.8; -7.6; -7.5; -6.6; -5.2; -4.6; -4.2 (multi-year sequence, Table 4b). - Primary balance (including grants, percent of GDP): -3.0; -1.5; -1.1; -3.0; -1.0; 0.4; 0.5; 0.5; 0.5; 0.5 (medium-term trajectory in Table 2/4b). - Total security spending (percent of GDP): 2.6; 2.6; 2.4; 2.4; 2.1; 1.8; 1.7; 1.7; 1.7; 1.7. - Public debt levels: - General government and government guaranteed debt (incl. IMF; percent of GDP): 82.0; 84.5; 77.8; 80.6; 81.8; 74.9; 72.1; 70.6; 68.2; 66.1 (Table 2 and Table 8). - General government debt incl. IMF obligations (percent GDP): 77.5; 79.6; 73.5; 76.1; 77.4; 70.9; 68.5; 67.3; 65.1; 63.1 (Table 2). - Net general government debt (incl. IMF; percent GDP): 70.2; 72.9; 66.0; 69.8; 72.4; 67.1; 65.2; 64.3; 62.5; 60.8 (Table 2). ### External financing, reserves, and balance of payments - Balance of payments highlights (Table 3a & 3b): - Current account (in millions US$): -13,434; -4,449; -2,820; -17,405; -4,020; -6,424; -6,462; -7,139; -7,285; -7,945 (multi-year sequence). - Exports, f.o.b. (in millions US$): 24,257; 22,536; 25,639; 32,471; 28,062; 30,843; 33,340; 35,857; 38,628; 40,921. - Imports, f.o.b. (in millions US$): 51,869; 43,645; 54,273; 72,152; 53,951; 64,700; 68,921; 73,115; 77,632; 82,789. - Gross reserves (end-period, millions US$): 7,274; 12,175; 17,297; 9,821; 4,056; 8,982; 12,888; 14,141; 15,263; 15,747. - Gross external financing needs (in millions US$) (Table 3b / Table 8 memo): 25,552; 23,430; 22,461; 34,393; 25,593; 28,361; 27,169; 31,897; 28,889; 32,856. - Gross external financing requirement decomposition (Table 3b): - Gross External Financing Requirements (A) examples: 25,552; 23,430; 22,461; 34,393; 25,593; 28,361; 27,169; 31,897; 28,889; 32,856. - Available Financing (B) examples: 21,103; 25,497; 27,084; 25,864; 18,662; 30,269; 31,075; 33,150; 30,011; 33,340. - Remaining Financing Needs (C=A-B) examples: 4,449; -2,067; -4,622; 8,529; 6,931; -1,907; -3,906; -1,253; -1,122; -484. - Borrowing from IMF (D) examples: 0; 2,834; 500; 1,053; 1,166; 3,019; 0; 0; 0; 0. - Change in reserve assets (E=C-D) examples: 4,449; -4,901; -5,122; 7,476; 5,765; -4,926; -3,906; -1,253; -1,122; -484. ### IMF exposure, schedule, and Fund financing - Fund credit and projected drawings (Table 7 highlights): - Total projected credit outstanding (in millions of SDR): sequence includes 3,600.0; 4,393.0; 4,393.0; 4,243.0; 4,867.0; 5,192.5; 4,810.3; 5,722.2; 7,610.1; 8,002.2; 7,233.0; 6,642.5; 4,093.2; 1,560.3. - Of which ECF, SBA, and ENDA: 1,422.0; 2,250.0; 2,250.0; 2,138.3; 1,116.8; 103.5 (projected years shown). - IMF scheduled reviews and purchases (Table 9): - July 12, 2023: 894 million SDR, 44.0 percent of quota — Approval of arrangement. - December 1, 2023: 528 million SDR, 26.0 percent of quota — First review and end-September 2023 performance/continuous criteria. - March 1, 2024: 828 million SDR, 40.8 percent of quota — Second review and end-December 2023 performance/continuous criteria. - Total: 2,250 million SDR, 110.8 percent of quota. ### Debt composition and creditor structure - Key aggregated debt stock and creditor shares (Table 10 excerpts): - Total debt (US$ million): 246,780 (table header context). - External debt (US$ million): 100,524; External share percent examples: 42.2. - Domestic debt (US$ million): 146,257; Domestic share percent examples: 61.4. - Multilateral creditors (external): 44,679 (US$ million) share examples. - Bilateral creditors (external): 39,936 (US$ million). - China (component of non-Paris bilateral): 23,878 (US$ million). - General government debt incl. IMF obligations (US$ levels and percent of GDP shown in tables and memo items). - Memo: Nominal GDP: 339,818 (US$ million) shown in Table 10. ### Vulnerabilities and medium-term risks (selected indicators) - Vulnerability indicators (Table 8 key figures): - Real GDP growth (factor cost, in percent): 3.1; -0.9; 5.8; 6.1; -0.5; 2.5; 3.6; 4.5; 5.0; 5.0 (multi-year). - CPI inflation (period average, in percent): 6.7; 10.7; 8.9; 12.1; 29.6; 25.9; 11.4; 7.4; 6.5; 6.5. - Emerging market bond index (EMBI) secondary market spread (basis points, end of period): 420; 650; 518 (selected years). - Exchange rate PRs/US$ (end of period): 160.1; 168.1; 157.5; 204.8 (selected years). - GIR in billions US$: 7.3; 12.2; 17.3; 9.8; 4.1; 9.0; 12.9; 14.1; 15.3; 15.7. - GIR in percent of ST debt at remaining maturity: 46.1; 75.6; 107.7; 44.2; 19.2; 51.1; 58.2; 49.6; 66.6; 55.6. - Total gross external debt (percent of GDP): 33.2; 37.6; 35.1; 32.1; 36.4; 37.3; 36.8; 35.2; 33.5; 31.7. - Gross external financing requirement (in billions US$): 26.6; 19.8; 15.7; 33.4; 23.7; 23.4; 26.1; 29.8; 25.8; 29.8. ### Key policy implications implicitly reflected in the text and tables - Immediate external/liquidity support: - Staff support for a 9-month SBA with SDR 2,250 million access underpins near-term reserve needs and scheduled IMF purchases (see Table 9 schedule). - Temporary BOP measures: - Exchange restriction and the MCP are endorsed by staff as temporary, non-discriminatory, and BOP-focused. - Fiscal consolidation and debt sustainability: - Medium-term projections show a need to move primary balances toward small surpluses (primary balance including grants: shifts to 0.4–0.5 percent of GDP in projections) to stabilize high debt ratios (general government debt incl. IMF remains elevated in the 60–80 percent of GDP range in projections). - External financing strategy: - Large gross external financing requirements and limited gross reserves in some years imply the need for continued access to official financing and confidence-restoring policies to stabilize reserves and reduce gross financing needs. *Source: IMF content provided in the PDF chapter "1pakea2023001" (extracted content above).* ### Annex I. Pakistan’s Climate Disasters—Looking Back and Ahead ### Annex I. Pakistan’s Climate Disasters—Looking Back and Ahead in Times of Accelerating Climate Change ### Context - Pakistan’s climate varies with topography: mostly dry and hot near the coast and lowland Indus plains; cooler in the northern uplands and Himalayas. - Two key weather-altering phenomena: the monsoon in summer and the Western Disturbances in winter. - Seasonal pattern: temperatures usually peak in June; more than half of annual precipitation typically comes with the summer monsoon, with the bulk of the remainder from winter Western Disturbances. - Weather and rainfall show large sub-national and inter-annual variation, historically producing successive patterns of droughts and floods. - Sources cited include Javid et al. (2019), World Bank Climate Change Knowledge Portal (CCKP), and IMF staff calculations. ### A. Looking Back — Hitherto Manifestation of Climate Change Findings on observed climate changes: - Since pre-industrial times, Pakistan has seen annual mean temperatures increase by some 1.2°C, slightly above the global average of 1°C. - Most of that average increase occurred over the past three decades. - Annual precipitation displays a slight upward trend over the last half decade but masks sizable sub-national variation. Observed changes in extreme events and weather patterns: - On average Pakistan experienced almost 6 climate disaster events over 2000–22—an almost 2-fold increase from the preceding two decades. - The number of events caused by hydrological hazards increased the most (mainly riverine and flash floods), followed by biological hazards, climatological hazards (mainly droughts), and meteorological hazards (mainly heatwaves, storms, and landslides). - Warm-day spells increased from 9 days per year during 1980–99 to 27 days per year during 2000–20. - The number of heavy rainfall events has increased since 1960; 2010 recorded the nine heaviest 24-hour rains until end-2021. Multi-dimensional risk amplification—example: The 2022 floods - The 2022 flood was caused by extreme monsoonal rains (about 3 times the usual rainfall in August alone) and aggravated by: - short spikes of very heavy rain in August in Sindh and Baluchistan (each experiencing their wettest August ever recorded with 7–8 times their usual totals); - a preceding heatwave in March and April (the most intense, widespread and persistent in the region’s recorded history), which left drier-than-usual grounds; - glacier snow melt and glacial lake outburst floods amid the heatwave that increased water volumes in waterways. - Some attribution studies cited: the heatwave likelihood intensified by a factor of about 30; the five-day total of the monsoonal rainfall by up to 75 percent; and the intensity of the 60-day rain in Sindh and Baluchistan by 50 percent (Otto et al. 2022; Zachariah et al. 2022). Key adaptation challenges being hastened by climate stressors: - Land degradation and desertification, water stress, glacier melting, and sea-level rise. - Pakistan ranks among the 17 countries with ‘extremely-high water risk’ worldwide. - Increased melting of about 7,200 glaciers in the Hindu Kush–Karakoram–Himalayan system. - High risk from sea-level rise, prolonged cyclonic activity, and greater salt-water intrusion in Karachi. - Resulting impacts include erosion of arable land, saline intrusion in the coastal zone, attrition of surface and underground waters, destruction of coastal habitats, strained adaptation skills and infrastructure, threats to food, water, and energy security, internal migration, and loss of social cohesion. - Amplifying trends: high population growth, progressing urbanization, substantial ecosystem changes related to pollution and overexploitation of agricultural land. ### Climate Damage and Resilience Aggregate impacts and vulnerability: - According to the Global Climate Risk Index, Pakistan ranks among the top10 countries with the highest climate risk worldwide. - Recorded annual averages for climate disasters in Pakistan since 2000 until end-2022: - directly affected almost 4 million people (1.25 percent of 2022 population); - killed more than 580 people (0.002 permille of 2022 population); - caused about US$2.2 billion in inflation-adjusted material damages (0.6 percent of 2022 GDP). - Caveat: recorded figures underestimate true impacts due to data gaps (especially economic impacts and certain disaster types such as drought and heatwaves) and failure to capture indirect impacts (deaths from malnutrition, disease, and displacement). Hazard-type breakdown and dominance of hydrological hazards: - Hydrological hazards (mostly floods and some landslides) account for about 70 percent of recorded climate event occurrences in Pakistan over 2000–22. - Hydrological hazards account for over 90 percent of affected people, over 75 percent of fatalities, and some 93 percent of material damage among recorded climate events. - Across all climate-related hazards, floods have been the most impactful disaster type in Pakistan during recent decades. Flood-specific findings: - Floods made up more than 50 percent of recorded climate events during 2000–22 and have driven the majority of recorded climate damages—surpassing cumulative damages from climate-unrelated geophysical disasters except for fatalities. - Severe floods have occurred regularly: since 1970, more than half of years experienced severe hydrological disasters in terms of human damage, and six years in terms of material damages (defined as over 1 percent of GDP), mainly due to single large flood events. - Human and material impact of floods are highly correlated. Main recent flood events and magnitudes (selected figures): - Floods caused by hydrological hazards dominate frequency, affected population shares, fatalities, and material damage percentages in country comparisons (EM-DAT and IMF staff calculations used for distributions). Box 1 — The 2022 Floods (key statistics and impacts) - Heavy rains started in mid-June after an intense heatwave and intensified in late August; by early-September the floods became one of Pakistan’s worst natural disasters. - Scope of human and material damage: - Half of Pakistan’s 160 districts were heavily affected. - 33 million people affected (more than 14 percent of population). - More than 1,700 confirmed dead. - More than ½ million in relief camps alone. - Nearly 2.2 million houses damaged (one-third beyond repair). - 400 bridges and 13,000 km of roads damaged, disrupting transportation networks. - Important water and sanitation infrastructure damaged, fueling water- and sanitation-related diseases. - Agriculture: 45 percent of cropland inundated and over 1.2 million livestock dead. - UN flash appeal: targeted US$816 million; pledges of US$548 million at end-June 2023. - Post-Disaster Needs Assessment (PDNA) estimates: - total damage and loss of around US$30 billion (about 8½ percent of GDP); - rebuilding needs of US$16¼ billion (about 4½ percent of GDP). - Around half of needs fall in Sindh; Balochistan next highest. - Greatest damage to housing, agricultural operations, and transportation; more than half of losses on agriculture and livestock. - Rebuilding needs concentrated on transport infrastructure, agriculture, and housing. - International donor response: Geneva conference pledges of about US$10.9 billion for humanitarian assistance and rehabilitation projects (principally for rehabilitation needs over the next 5 years, with very limited disbursements expected in FY23). Table 1: Largest Monsoon Floods, 2000–22 (selected row for 2022) - 2022 Flood: - Damage: 30.0 (USD bln); 8.7 (Pct. GDP) - Affected People: 33.0 (Mio); 14.3 (Pct. pop.) - Fatalities: 1,739 (Count); 0.008 (Permil. pop.) - Extent: 231,264 (sq. km); 30.0 (Pct. landarea) - Duration: since mid-June Policy-relevant implications (from analysis) - Climate change has already intensified Pakistan’s main climate stresses (high temperatures, erratic precipitation, and related disasters) and increased frequency and severity of disasters, notably hydrological events. - Pakistan urgently needs to accelerate climate adaptation alongside mitigation and transition policies by boosting climate resilience to address acute threats to food, water, energy security, infrastructure, public health, and social cohesion. *Source: IMF staff—Annex I. Pakistan’s Climate Disasters—Looking Back and Ahead (excerpts and figures as presented in the source PDF).* ### 7. Pakistan’s large climate-related disaster losses reflect not only the strength of the ### 7. Pakistan’s large climate-related disaster losses reflect not only the strength of the ### A. Drivers of large climate-related disaster losses - Pakistan’s large climate-related disaster losses reflect both the strength of natural hazards and the country’s low climate resilience. - Pakistan exhibits: - High exposure: - Large population and activity concentrated in harm’s way, with the Indus River valley hosting most of the population and agricultural heartland. - Carrying water all year (fueled by meltwater and rain in the north), the semi-arid country depends on the Indus River; the Indus’s level is tied to precipitation and temperatures via glacier melting. - More than half of the country’s arable land depends on river-fueled irrigation; irrigation efficiency remains low due to water shortages, land degradation, and mismanagement of water resources (ADB 2021). - Agriculture remains the main employer (occupying more than 1/3 of the workforce). - Hydropower is an important part of the energy mix (accounting for about 27 percent of total power production). - High vulnerability: - Pronounced sensitivity to harm and lack of capacity to cope and adapt stemming from structural factors, including: - Weak and volatile inclusive growth and macroeconomic stability. - Low socioeconomic and financial development (low per capita incomes and human capital accumulation, multidimensional and widespread poverty, poor living conditions, and lack of financial inclusion). - Inadequate infrastructure and investment (including limited public spending on social safety nets, health care, and education). - Weak institutional frameworks, capacity, and regulation limiting ex-ante disaster reduction and ex-post disaster response (including appropriate river, water, and waste management; zoning and building codes). - Selected socio-economic indicators (Table 2 highlights): - Population (Mio, 2022): 227.0 - GDP (USD bln, FY22): 376.5 - GNI per capita (USD, Atlas method, 2021): 1,470 - Irrigated agricultural land (pct. share, 2020): 52.7 - Employment (pct. share, 2019) in agriculture: 36.9 - Electricity access (2020): 75.4 (pct. pop.) - Safely managed drinking water (2020): 35.8 (pct. pop.) - Human development index (HDI, 2021): 0.54 - Human capital index (HCI, 2020): 0.41 - General government debt (pct. GDP, FY22): 75.8 - General government expenditure (pct. GDP, FY22): 19.9 - Hosted refugees and asylum-seekers (mio., 2023): 1.6 - Internally displaced people (mio., 2023): 0.1 ### B. Looking ahead — projected climate changes and risks - Projected temperature and precipitation changes: - Expected mean temperature rise of 1.3–4.9°C by the 2090s (considerably above the global average). - Over the next two decades, under the SSP1-1.9 scenario (sharp emissions drop), average annual temperatures are projected to rise by 0.8 ºC (multi-model ensemble). - Average annual precipitation is not predicted to follow a significant long-term trend but is expected to show large inter-annual variability. - Over 1951–2020, the average annual mean temperature was 20.8ºC (peak 31.2ºC in July, low 7.7ºC in January); precipitation averaged 19.2 mm (peak 26.4 mm in April, low 11.5 mm in October). - Projected intensification of extremes (select projections and metrics): - Daytime temperatures projected to reach, on average, a maximum of 42.2ºC during June through August. - About 47 days surpassing the heat index at 35ºC. - Aridity: more than 70 days more of consecutive dry days across all seasons than in the past. - Drought conditions likely to continue to deteriorate despite some increases in average annual precipitation in outer decades. - Hydrological extremes (floods) likely to increase due to more intense rains, seasonal and regularity changes, and glacial melt interactions. - Potential macroeconomic and humanitarian impacts: - Without adaptation, combined climate risks could cause up to 20 percent GDP loss per year by 2050 (World Bank 2022b). - Increased climate stress would amplify pressure on human health, livelihoods, and ecosystems; reduce yields in key crops including cotton, wheat, sugarcane, maize, and rice; and increase heat-related sickness and death for urban dwellers and outdoor laborers. - Risk of damages growing in non-linear ways when physical thresholds are surpassed (e.g., water-constrained areas becoming water-short, permanent flooding, or interacting hazards like intense rains coinciding with glacial melt). ### C. Policy recommendations — priorities to strengthen climate resilience - Overarching approach: - Adaptation is the more immediate and pressing task; mitigation and transition management remain important but adaptation needs acceleration. - Finalize and implement a National Adaptation Plan (NAP) under the UNFCCC framework to embed climate change in the medium-term inclusive growth and development agenda. - NAP (currently expected by end-2024) will help understand country-specific climate risks, adaptation needs, and capacity constraints; integrate climate change into national decision-making and a wholistic medium-term macroeconomic and structural framework. - Adjusting policy framework and mobilizing climate finance: - Significant additional spending and financing needs imply a mix of domestic policy reforms and higher international support. - Domestic options include reprioritizing public spending (e.g., removing energy subsidies) and levying taxes (including an adequate level of the PDL and GST on fuel). - Better tap multilateral and bilateral financing sources and catalyze private adaptation investment to complement public sector funding. - Historical adaptation finance mobilization: cumulatively over 2002–20 Pakistan mobilized US$2.8 billion in adaptation financing (disbursement quote slightly over 60 percent). - Accelerating high-value “no-regret” investments: - Prioritize measures that are justified under all plausible climate scenarios, focusing on: - Social measures: higher and well-targeted social protection, health, and education. - Infrastructure: flood protection, water resource and irrigation management, early warning systems. - Invest in preemptive resilient infrastructure (ex-ante) rather than relying on ex-post disaster response to reduce human/material damages and adverse macroeconomic impacts. - Potential returns to adaptation (benefit-cost ratios) can range as high as 100–1,000 percent, possibly avoiding up to 50–80 percent of climate damages; realizing these benefits requires time, capacity building, and funding. - Improving structural preconditions: - Continue structural reforms that also reinforce adaptation capacity, including strengthening: - Social spending on education, health, and social protection. - Governance, transparency, and anti-corruption institutions. - Business and investment climate. - Public financial management (PFM), including e-procurement use. - Financial sector stability and prudential regulation for climate risks (particularly insurance), regulatory oversight, and stress testing. - Energy sector viability. - Improve public investment management (PIM) for project planning, selection, appraisal, procurement, and PPP frameworks; incorporate climate-risk evaluations and resilience standards in publicly funded projects. - Build fiscal buffers and PFM flexibility (e.g., escape clauses for natural disasters in budget laws) to enable prompt and adequate disaster response. - Strengthen the financial sector to pool climate-related risks and facilitate adaptive and clean investments. *Source: IMF staff analysis in chapter 7 of the Pakistan country report (excerpts provided).* ### References ### 1pakea2023001 - References ### Major evidence and themes in the references - Climate change attribution and extreme events: - Studies and reports addressing attribution of Pakistan floods and heat: “Pakistan floods: What role did climate change play?” (Clarke et al., 2022); World Weather Attribution reports (Otto et al., 2022; Zachariah et al., 2022) documenting increased likelihood of extreme monsoon rainfall and early heat in India and Pakistan. - Intergovernmental Panel on Climate Change: Climate Change 2014: Impacts, Adaptation, and Vulnerability (Working Group II, 2014). - Copernicus (2023) coverage of “Summer Hearwaves” and characterization of heatwaves and warm spells during 2020. - Observed and projected temperature and precipitation changes: - Regional and historical temperature reconstructions and trends: Marcott et al. (2013); del Río et al. (2013) on recent mean temperature trends in Pakistan. - Precipitation projections in Pakistan: Amin et al. (2017), “Comparison of future and base precipitation anomalies by SimCLIM statistical projection through ensemble approach in Pakistan.” - Water resources, glaciers, and water scarcity: - Accelerated global glacier mass loss documented in Nature (Hugonnet et al., 2021). - Regional water tower imbalances and implications: Yao et al. (2022). - Water scarcity assessments: Mekonnan and Hoekstra (2016), “Four Billion People Facing Water Scarcity”; World Resource Institute’s Aqueduct Water Risk Atlas (2021); Pakistan-focused briefs (Parry et al., 2016; Maqbool, 2022; PIDE Knowledge Brief No. 2022:60). - Impacts of disasters on human and economic outcomes: - Human cost and economic loss data and critique: Centre for Research on the Epidemiology of Disasters and UNDRR (2020); CRED Crunch (2021); Jones et al. (2022), “Human and economic impacts of natural disasters: can we trust the global data?” (Scientific Data, Volume 9, Issue 572). - Health and livelihoods impacts after floods: Sarkar (2022), “Pakistan floods pose serious health challenges”; OCHA (2022, 2023) early needs and floods response planning. - Agricultural vulnerability and desertification: - Desertification in Pakistan: Anjum et al. (2010), “Desertification in Pakistan: Causes, impacts, and management.” - Agricultural sector challenges and morphometric mapping: Qasim et al. (2016); Javid et al. (2019). - Fiscal and macro-fiscal policy responses to climate risks: - IMF and World Bank policy and analytical products: IMF Departmental Paper No. 21/07 (Dabla-Norris et al., 2021), IMF Staff Climate Note No. 2022/003, “Fiscal Policies for Climate Change Adaptation” (2022c), Feeling the Heat——Adapting to Climate Change in the Middle East and Central Asia (IMF Departmental Paper 2022/08), and World Bank “Pakistan—Country Climate and Development Report” (2022b). - Fiscal policy and resilience guidance: Forni et al. (2019), “Increasing Resilience: Fiscal Policy for Climate Adaptation”; Hallegatte et al. (2017), “Unbreakable: Building the Resilience of the Poor in the Face of Natural Disasters.” - Development finance and adaptation investments: - Multilateral development bank financing: Asian Development Bank (2021), “$200 Million ADB Loan to Develop Irrigation System in Pakistan.” - Aid flows for climate adaptation: Aid Atlas (2022), “All Donors to Pakistan for Climate Adaptation during 2002–2020.” ### Risk assessment and policy response themes from the Annex II Risk Assessment Matrix - Global risks (relative likelihood and time horizon preserved as in source): - Intensification of regional conflict(s). - Relative Likelihood: High - Time Horizon: Short Term - Expected Impact: High - Key expected impacts: - “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 responses: - “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.” - Social discontent. - Relative Likelihood: High - Time Horizon: Short to Medium Term - Expected Impact: High - Key expected impacts: - “Spending pressures and/or lower growth, weaken the underlying fiscal position.” - “Weaker confidence and supply disruptions drag on economic growth.” - Policy responses: - “Scale up targeted social assistance.” - “Resist pressures to weaken fiscal discipline and preserve fiscal and debt sustainability.” - “Build fiscal and external buffers.” - Commodity price volatility. - Relative Likelihood: Medium - Time Horizon: Short Term - Expected Impact: High - Key expected impacts: - “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.” - Policy responses: - “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.” - Abrupt global slowdown or recession. - Relative Likelihood: Medium - Time Horizon: Short Term - Expected Impact: Medium - Key expected impacts: - “Disruptions in trade channels leading to lower exports and supply disruptions.” - “Tighter financial conditions and capital outflows.” - “Weakening global demand decreases commodity prices.” - Policy responses: - “Maintain market-determined exchange rate to support competitiveness, while intervening only during disorderly market conditions.” - “Maintain financial stability.” - “Preserve fiscal and debt sustainability.” - Monetary policy miscalibration. - Relative Likelihood: Medium - Time Horizon: Short to Medium Term - Expected Impact: Medium - Key expected impacts: - “Lower demand for exports after tightening.” - “Tighter external financial conditions.” - “Stock market deteriorates.” - Policy responses: - “Maintain market-determined exchange rate to cushion shocks.” - “Build fiscal and external buffers.” - “Implement structural reforms to 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.” - Systemic financial instability. - Relative Likelihood: Medium - Time Horizon: Short to Medium Term - Expected Impact: Medium - Key expected impacts: - “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 responses: - “Maintain market-determined exchange rate to cushion shocks.” - “Build fiscal and external buffers.” - “Maintain an appropriate medium-term debt strategy.” - “Maintain financial stability to weather external shocks, tighten supervision to monitor banking risks.” - Climate and country-specific risks: - Extreme climate events. - Relative Likelihood: Medium - Time Horizon: Medium to Long Term - Expected Impact: Medium - Key expected impacts: - “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 responses: - “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.” - Slippages in policy implementation. - Relative Likelihood: High - Time Horizon: Short to Medium Term - Expected Impact: High - Key expected impacts: - “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 responses: - “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 - Key expected impacts: - “Eroded confidence and discouraged investment would disrupt economic activity and reduce growth prospects.” - “Increased military spending/ fiscal burden could strain fiscal sustainability.” - Policy responses: - “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.” - Clarifying note on risk probability definitions: “('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).” ### Debt sustainability and sovereign stress (Annex III highlights) - Overall staff assessment summaries: - “The overall risk of sovereign stress is high, reflecting a high level of vulnerability from elevated debt and gross financing needs and low reserve buffers.” - Conditional baseline: “If the proposed program is implemented consistently and macroeconomic prudence continues for the medium term, the debt path is expected to remain on a downward trajectory.” - Key vulnerabilities and risks: - “Elevated gross financing needs continue to pose high risks to debt sustainability, particularly as fiscal and reserve buffers have been depleted.” - “Higher interest rates, a larger-than-expected growth slowdown due to policy tightening, pressures on the exchange rate, renewed policy reversals, slower medium-term growth, and contingent liabilities related to SOEs pose significant risks to debt sustainability.” - Critical mitigation factors: - “Risks are mitigated by the fiscal adjustment safeguarded under the proposed SBA and continuing onto the medium term, financial commitments by bilateral partners, and the ability of the banking system to rollover existing domestic debt.” - “In this regard, timely disbursements of committed bilateral and multilateral support is critical in the period ahead.” - Staff commentary on baseline sustainability: - “Although the financing situation has worsened in recent months, public debt continues to be assessed as sustainable in the baseline scenario underpinned by steadfast implementation of the proposed SBA policies, with newly introduced tax measures assumed to persist beyond the program horizon, a macroframework which does not assume either additional primary consolidation or expansion beyond FY24, and the gradual resumption of growth in the coming years.” *Source: Excerpted references and annex text from 1pakea2023001 - References.* ### 1. De bt cov e rage in the DSA: 1/CGGGNFPSCPSOther ### 1. Debt coverage in the DSA: 1/CGGGNFPSCPSOther ### Coverage and perimeter - Chosen coverage: Budgetary central government (Yes); State governments (Yes); Local governments (Yes). - Excluded from chosen coverage: Extra budgetary funds (EBFs) (No); Social security funds (SSFs) (No); Public nonfinancial corporations (No); Central bank (No); Other public financial corporations (No). - 1a. If central government, are non-central government entities insignificant? n.a. ### Reporting and consolidation - Debt consolidation across sectors: reporting shows zeros for intra-government debt holdings across listed holders (Budget. central govt 0; Extra-budget. funds 0; Social security funds 0; State govt. 0; Local govt. 0; Nonfin pub. corp. 0; Central bank 0; Oth. pub. fin. corp 0). - Basis of recording: Not applicable / Not applicable / Partial (see commentary) across CG / CPS / NFPS headings. - Valuation of debt stock: Debt securities, Loans, IPSGSs 3/, Currency & deposits, Other account payable 2/; Non-consolidated and Consolidated entries shown as CPS / NFPS / GG: expected / CG. ### Staff commentary on contingent liabilities and exclusions - Includes bilateral FX swap liabilities of the central bank and deposits of official creditors at the central bank. - As of end-FY22, contingent liabilities not included in the perimeter consist of: - guarantees (PRs 2,984 billion) - non-guaranteed circular debt in the power and gas sector (PRs 1,453 billion and PRs 680 billion, estimated) - debt from commodity operations (PRs 1,134 billion) - non-guaranteed SOE debt (PRs 228 billion) - other contingent liabilities (PRs 500 billion, estimated) - The estimated total of those exposures amounts to 10.4 percent of GDP. *Source: 1pakea2023001 - 1. De bt cov e rage in the DSA: 1/CGGGNFPSCPSOther (IMF).* ### Public debt structure and risks - External debt composition (staff commentary): predominantly bilateral and multilateral creditors. - Domestic debt composition: mostly to domestic banks, increasing the sovereign-bank nexus. - Issuance behavior during monetary tightening: predominantly floating-rate domestic debt, increasing sovereign exposure to interest rate risk. - Residual maturity (projection): 6. years (label shown as "Residual maturity: 6. years"). - Debt by currency and holder: charts indicate foreign currency, local currency, local-linked splits and holders including external official and private creditors, domestic commercial banks, domestic central bank, domestic other creditors (percent of GDP series presented by year). *Source: Pakistan: Public Debt Structure Indicators (IMF).* ### Baseline scenario and projections (Figure 4) - Public debt (percent of GDP): - Actual 2022: 76.1 - 2023: 77.4 - 2024: 70.9 - 2025: 68.5 - 2026: 67.3 - 2027: 65.1 - 2028: 63.1 - 2029: 61.2 - 2030: 59.6 - 2031: 58.0 - 2032: 56.5 - Change in public debt: - 2022: 2.6 - 2023: 1.2 - 2024: -6.4 - 2025: -2.5 - 2026: -1.2 - 2027: -2.2 - 2028: -2.0 - 2029: -1.9 - 2030: -1.6 - 2031: -1.6 - 2032: -1.4 - Contribution of identified flows: - 2022: -2.6 - 2023: -2.2 - 2024: -3.8 - 2025: -0.4 - 2026: -0.9 - 2027: -1.7 - 2028: -2.1 - 2029: -2.0 - 2030: -1.7 - 2031: -1.6 - 2032: -1.5 - Primary deficit (percent of GDP): - 2022: 3.0 - 2023: 1.0 - 2024: -0.4 - 2025–2032: -0.5 each year (reported as -0.5 across 2025–2032) - Noninterest revenues (percent of GDP): - 2022: 12.1 - 2023: 11.4 - 2024–2032: 12.3, 12.2, 12.2, 12.2, 12.2, 12.2, 12.2, 12.2, 12.2 respectively (table shows 2024: 12.3 followed by 12.2 repeated) - Noninterest expenditures (percent of GDP): - 2022: 15.2 - 2023: 12.4 - 2024: 11.9 - 2025–2032: 11.7 repeated across projection years - Automatic debt dynamics (percent of GDP): - 2022: -5.7 - 2023: -3.2 - 2024: -3.4 - 2025: 0.1 - 2026: -0.4 - 2027: -1.3 - 2028: -1.6 - 2029: -1.5 - 2030: -1.2 - 2031: -1.2 - 2032: -1.1 - Real interest rate and relative inflation (contribution): - 2022: -2.4 - 2023: -3.5 - 2024: -1.5 - 2025: 2.5 - 2026: 2.5 - 2027: 2.0 - 2028: 1.5 - 2029: 1.5 - 2030: 1.7 - 2031: 1.7 - 2032: 1.7 - Real GDP growth (memo, percent): - Actual 2022: 6.1 - 2023: -0.5 - 2024: 2.5 - 2025: 3.6 - 2026: 4.5 - 2027–2031: 5.0 (2027–2031 shown as 5.0 each year) - 2032: n.a. - Inflation (GDP deflator; percent): - 2022: 14.1 - 2023: 26.0 - 2024: 25.9 - 2025: 11.4 - 2026: 7.4 - 2027–2031: 6.5 each year - Effective interest rate (percent): - 2022: 7.8 - 2023: 11.8 - 2024: 14.0 - 2025: 11.7 - 2026: 9.4 - 2027: 8.0 - 2028: 7.5 - 2029: 7.7 - 2030: 8.2 - 2031: 8.4 - 2032: 8.6 - Gross financing needs (percent of GDP): - 2022: 24.5 - 2023: 23.7 - 2024: 22.2 - 2025: 21.2 - 2026: 20.6 - 2027: 19.4 - 2028: 18.2 - 2029: 20.1 - 2030: 16.7 - 2031: 16.5 - 2032: 15.7 - Of which: debt service (percent of GDP): - 2022: 21.4 - 2023: 22.7 - 2024: 22.6 - 2025: 21.7 - 2026: 21.1 - 2027: 19.9 - 2028: 18.6 - 2029: 20.6 - 2030: 17.2 - 2031: 16.9 - 2032: 16.2 - Currency split of gross financing needs: - Local currency: 2022: 18.4; 2023: 18.1; 2024: 19.4; 2025: 16.6; 2026: 16.9; 2027: 14.7; 2028: 13.2; 2029: 15.9; 2030: 13.6; 2031: 12.8; 2032: 12.6 - Foreign currency: 2022: 3.0; 2023: 4.7; 2024: 3.2; 2025: 5.1; 2026: 4.2; 2027: 5.2; 2028: 5.2; 2029: 4.7; 2030: 3.6; 2031: 4.1; 2032: 3.5 Staff commentary: - Public debt is projected to decline very slowly over the projection horizon and will require the robust continuation of prudent policies beyond the program period. - The margin of error for policy slippages and delays in urgently needed structural reforms remains very small. *Source: Pakistan: Baseline Scenario (IMF).* ### Realism of baseline assumptions (Figure 5) - Staff commentary: The programmed fiscal adjustment path is ambitious but feasible. Renewed efforts for structural reforms are needed to lift growth potential and avoid Pakistan from getting trapped in negative debt dynamics. - Charts compare forecast track record for t+1, t+3, t+5 against comparator group percentiles for Public debt to GDP, Primary deficit, r - g, Exchange rate depreciation, SFA, and historical output gap revisions. Distributional metrics and 3-year adjustment magnitudes displayed (e.g., 3-year debt reduction above 75th percentile = 2 ppts of GDP). - 3-year debt reduction statistics: "3-year debt reduction above 75th percentile (5.9 ppts of GDP)" and percentile rank 80.1 shown. *Source: Pakistan: Realism of Baseline Assumptions (IMF).* ### Medium-term risk analysis (Figure 6) - Debt fanchart and GFN financeability indexes (percent of GDP unless otherwise indicated): - Fanchart width: 38.7 0.6 - Probability of debt not stabilizing (pct): 1.2 0.0 - Terminal debt level x institutions index: 47.0 1.0 - Debt fanchart index: ... 1.6 - Average GFN in baseline: 20.9 7.1 - Bank claims on government (pct bank assets): 50.0 16.2 - Change in claims on govt. in stress (pct bank assets): 9.0 3.0 - GFN financeability index: ... 26.4 - Staff commentary: - Debt Fanchart Module: moderate level of risk. - GFN Financeability Module: high level of risk. - High share of bank assets invested in government securities limits government's flexibility to respond to future crises. - The average GFN-to-GDP ratio is above the 75th percentile of the comparator group. - The aggregated index points to a high level of risk. - Probabilities (2023-2028): - Prob. of missed crisis (if stress not predicted): 54.5 pct. - Prob. of false alarm (if stress predicted): 8.0 pct. *Source: Pakistan: Medium-Term Risk Analysis (IMF).* ### External Debt Sustainability Framework (Table 1 highlights) - External debt (percent of GDP), baseline: - 2018: 27.0 - 2019: 33.2 - 2020: 37.6 - 2021: 35.1 - 2022: 32.1 - 2023: 36.4 - 2024: 38.3 - 2025: 37.0 - 2026: 35.5 - 2027: 33.8 - 2028: 31.9 - Debt-stabilizing non-interest current account: -1.8 - Change in external debt: - 2018: 2.2 - 2019: 6.2 - 2020: 4.4 - 2021: -2.5 - 2022: -3.0 - 2023: 4.2 - 2024: 1.9 - 2025: -1.3 - 2026: -1.6 - 2027: -1.6 - 2028: -1.9 - Identified external debt-creating flows (4+8+9): - 2018: 3.4 - 2019: 6.7 - 2020: 2.9 - 2021: -4.9 - 2022: 1.8 - 2023: 1.4 - 2024: 0.9 - 2025: 0.1 - 2026: -0.2 - 2027: -0.5 - 2028: -0.4 - Current account deficit, excluding interest payments (percent of GDP): - 2018: 4.5 - 2019: 3.0 - 2020: 0.3 - 2021: 0.1 - 2022: 3.7 - 2023: -0.2 - 2024: 0.5 - 2025: 0.4 - 2026: 0.4 - 2027: 0.4 - 2028: 0.5 - Exports (percent of GDP): - 2018: 8.6 - 2019: 9.4 - 2020: 9.3 - 2021: 9.1 - 2022: 10.5 - 2023: 10.4 - 2024–2028: 11.0, 11.0, 11.0, 10.9, 10.7 respectively - Imports (percent of GDP): - 2018: 19.1 - 2019: 19.6 - 2020: 17.4 - 2021: 18.0 - 2022: 22.5 - 2023: 18.2 - 2024: 21.1 - 2025: 21.1 - 2026: 20.8 - 2027: 20.6 - 2028: 20.4 - Automatic debt dynamics (percent of GDP): - 2018: -0.3 - 2019: 4.1 - 2020: 3.5 - 2021: -4.4 - 2022: -1.6 - 2023: 1.6 - 2024: 0.5 - 2025: 0.0 - 2026: -0.2 - 2027: -0.4 - 2028: -0.4 - Contribution from nominal interest rate (percent of GDP): 2018: 0.9; 2019: 1.1; 2020: 1.2; 2021: 0.7; 2022: 0.9; 2023: 1.4; 2024–2028: 1.3, 1.3, 1.3, 1.3, 1.2 - Contribution from real GDP growth (percent of GDP): 2018: -1.4; 2019: -0.9; 2020: 0.3; 2021: -1.9; 2022: -2.0; 2023: 0.2; 2024: -0.9; 2025: -1.3; 2026: -1.5; 2027: -1.6; 2028: -1.6 - Residual, incl. change in gross foreign assets (2-3): - 2018: -1.2 - 2019: -0.5 - 2020: 1.5 - 2021: 2.3 - 2022: -4.7 - 2023: 2.9 - 2024: 1.0 - 2025: -1.4 - 2026: -1.3 - 2027: -1.2 - 2028: -1.4 - External debt-to-exports ratio (in percent): - 2018: 314.3 - 2019: 353.1 - 2020: 404.0 - 2021: 387.2 - 2022: 305.4 - 2023: 348.2 - 2024: 347.1 - 2025: 335.3 - 2026: 322.9 - 2027: 308.9 - 2028: 297.4 - Gross external financing need (in billions of US dollars): - 2018: 28.5 - 2019: 26.6 - 2020: 19.8 - 2021: 15.7 - 2022: 33.4 - 2023: 25.6 - 2024: 28.4 - 2025: 30.4 - 2026: 32.3 - 2027: 29.3 - 2028: 33.2 - Gross external financing need (in percent of GDP): - 2018: 8.0 - 2019: 8.3 - 2020: 6.6 - 2021: 4.5 - 2022: 8.9 - 2023: 10-Year ... (table shows continuation with 10-Year labels and figures) Key macroeconomic assumptions underlying baseline (selected): - Real GDP growth (percent): historical 6.1; 2019: 3.1; 2020: -0.9; 2021: 5.8; 2022: 6.1; 2023: 4.1; 2024: 2.1; 2025: -0.5; 2026: 2.5; 2027: 3.6; 2028: 4.5; 2029: 5.0; 2030: 5.0; 2031: 5.0 - GDP deflator in US dollars (change in percent): 2018: -1.0; 2019: -12.6; 2020: -5.5; 2021: 9.7; 2022: 1.3; 2023: 0.1; 2024: 6.2; 2025: -8.9; 2026: 0.7; 2027: 4.1; 2028: 3.3; 2029: 2.7; 2030: 2.8 - Nominal external interest rate (percent): 2018: 3.6; 2019: 3.8; 2020: 3.3; 2021: 2.3; 2022: 2.8; 2023: 3.0; 2024: 0.5; 2025: 4.0; 2026: 3.8; 2027: 3.7; 2028: 3.9; 2029: 3.9; 2030: 3.9 - Growth of exports (US dollar terms, percent): 2018: 9.7; 2019: -1.3; 2020: -7.4; 2021: 12.9; 2022: 24.8; 2023: 3.3; 2024: 10.3; 2025: -10.0; 2026: 9.1; 2027: 7.9; 2028: 7.3; 2029: 7.4; 2030: 6.0 - Growth of imports (US dollar terms, percent): 2018: 16.0; 2019: -7.6; 2020: -16.6; 2021: 19.7; 2022: 34.1; 2023: 6.5; 2024: 14.9; 2025: -26.5; 2026: 19.9; 2027: 7.4; 2028: 6.6; 2029: 6.7; 2030: 7.1 - Current account balance, excluding interest payments (percent of GDP): 2018: -4.5; 2019: -3.0; 2020: -0.3; 2021: -0.1; 2022: -3.7; 2023: -1.7; 2024: 1.7; 2025: 0.2; 2026: -0.5; 2027: -0.4; 2028: -0.4; 2029: -0.4; 2030: -0.5 - Net non-debt creating capital inflows: 2018: 0.8; 2019: 0.4; 2020: 0.9; 2021: 0.5; 2022: 0.4; 2023: 0.6; 2024: 0.2; 2025: 0.0; 2026: 0.1; 2027: 0.4; 2028: 0.5; 2029: 0.5; 2030: 0.6 Notes on DSA mechanics (from table footnotes): - Automatic debt dynamics derived using formula with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms; g = real GDP growth rate; e = nominal appreciation; a = share of domestic-currency denominated debt in total external debt. - Contribution from price and exchange rate changes defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. - Gross external financing need defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period. *Source: Pakistan: External Debt Sustainability Framework, 2018-2028 (IMF).* ### Stress and bound tests (Figure 6: External Debt Sustainability: Bound Tests) - Shocks and scenario labels: - Interest rate shock, CA shock, Combined shock (permanent one-half standard deviation shocks; permanent 1/4 standard deviation shocks for some tests). - One-time real depreciation shock: 30 percent occurs in first projection year. - Selected box values (averages): - Baseline and scenario averages shown with ten-year historical averages indicated. - Examples in figure captions: Interest rate shock box values 32; CA shock box values 36; Combined shock box values 35; Real depreciation shock box value 58; Growth shock boxes 34. - Growth shock (in percent per year) statistics: Baseline: 3.8; Scenario: 4.1; Historical: 3.0 (as presented in figure notes). - Non-interest current account shock (in percent of GDP): Baseline: -0.4; Scenario: -1.3; Historical: -1.7 (as presented). *Source: Pakistan: External Debt Sustainability: Bound Tests (IMF).* ### Policy implications and recommendations (from staff commentary across figures/tables) - Continued robust and prudent fiscal policies are required beyond the program period to achieve the slow projected decline in public debt. - Urgently needed structural reforms are required to lift growth potential and to avoid negative debt dynamics; margin for policy slippages is very small. - Address high sovereign-bank nexus: large share of bank assets invested in government securities constrains crisis response flexibility. - Reduce vulnerability to interest rate risk by managing the share of floating-rate domestic debt and by lengthening maturities where possible. - Ensure timely disbursements from bilateral and multilateral creditors given the high short-term external debt share and financing needs. *Source: IMF staff commentary and projections in the DSA content unit.* ### Technical assistance and institutional capacity (Annex IV highlights) - Fiscal Affairs Department (FAD) ongoing engagements since FY20: - Medium-term tax policy (e.g., GST harmonization, CIT simplification, tax policy diagnostics) — FBR/MoF ongoing since FY20 - Public financial management, including cash management and treasury functions, fiscal risks, and PFM law — MoF ongoing since FY20 - Revenue administration (tax administration diagnostics, compliance risk management, reform of the inland revenue service) — FBR ongoing since FY20 - Climate Public Investment Management Assessment (Climate-PIMA) — MoF delivered in FY23 - Sustainable development goals (SDG) costing — MoF delivered FY20 - LEG delivered/ongoing items: - State-owned enterprise law — MoF delivered FY21 - AML/CFT (supervision and legislative drafting) — SBP/MoF/MoI ongoing since FY20 and closing in FY23 - Bank resolution framework (jointly with MCM) — SBP partly delivered FY22, more upcoming - Central bank law reform — SBP delivered FY20 - MCM delivered items: - Debt management — MoF delivered FY20 - Banking resolution framework (jointly with LEG) — SBP delivered FY22/23 - Cyber risks — SBP delivered FY20 *Source: Annex IV. Agenda for Technical Assistance (IMF).* *Source: 1pakea2023001 - 1. De bt cov e rage in the DSA: 1/CGGGNFPSCPSOther (IMF).* ### 2. We are firmly committed to resolving these macroeconomic and external imbalances, ### 2. We are firmly committed to resolving these macroeconomic and external imbalances, restoring macroeconomic stability, and laying the conditions for sustained and balanced growth. ### Program objectives and request to the IMF - Request a 9-month Stand-By Arrangement (SBA) with a cumulative amount of SDR 2,250 million (111 percent of quota). - Request approval to make available SDR 894 million upon approval of the arrangement. - SBA aims to: provide an anchor for macroeconomic policies and structural reforms, catalyze international support, and help entice the return of some private inflows. - Retention requests (temporary, non-discriminatory, to be removed before end of program): - (i) the exchange restriction on limitation of advance payments for imports against letters of credit (LCs) and advance payments up to the certain amount per invoice (without LCs) for import of eligible items (imposed in 2018); - (ii) the MCP arising from potential deviation of more than 2 percent between the previous day’s weighted average customer exchange rates used for FX transactions between the SBP and the government and the spot exchange rates prevailing on the FX market at the time. ### Early actions and program preconditions - FY24 budget: Parliamentary approval passed by the National Assembly on June 25, 2023 and signed into law on June 26, 2023 (Prior Action for program approval). FY24 budget advances fiscal consolidation through a primary surplus of PRs 401 billion (0.4 percent of GDP). - FX market functioning (PA for program approval): Withdrawal of the circular on prioritization in providing FX for certain types of imports introduced in December 2022 to ensure full market determination of the exchange rate. Commitment to refrain from formal and informal guidance on exchange rates of FX intermediaries; eliminate existing exchange restrictions and the multiple currency practice (MCP); maintain framework free of restrictions on payments and transfers for current international transactions and MCPs. The average premium between the interbank and open market rate will be no more than 1.25 percent during any consecutive 5 business day period (continuous SB). ### Recent economic developments and outlook - FY23 provisional outcomes and conditions: - Real GDP growth: 0.3 percent (PBS provisional estimate). - Headline inflation: 38 percent (yoy) in May 2023. - Core inflation: 20 and 26.9 percent (yoy) in urban and rural areas, respectively. - Gross reserves: declined to about US$4.2 billion in June 2023. - Flood-related fiscal impact: consideration to fiscalize part of FY23 circular debt (CD) flow of PRs 335 billion. - Baseline macroeconomic scenario: - Real GDP: expected to rebound to 2.5 percent in FY24; medium-term growth projected to rise gradually to 5 percent. - Headline CPI inflation: projected to remain above 20 percent (yoy) through FY24Q3; projected to decline significantly through FY25 and fall to the 5–7 percent target range by FY26H1. - Current account deficit: FY23 projected at 1.2 percent of GDP; expected to rebound to around 1¾ percent of GDP over the medium term. - Reserve cover: expected to rebound as fresh external financing inflows from official creditors pick up, including materialization of some funds pledged at the International Conference on Climate Resilient Pakistan. ### Risks to the baseline - Delays in implementing exchange rate, tax reform, and energy sector reforms would: - Compromise restoration of confidence and return of growth. - Impede rebuilding of reserves and jeopardize debt and external sustainability. - Fiscal slippages during the election season would endanger macroeconomic stability. - Delays in disbursements from multilateral and bilateral partners would put further pressure on reserves and the exchange rate and could cause an adverse shift in market sentiment. ### Fiscal policy stance and FY24 budget details - FY24 budget objective: resume fiscal consolidation to strengthen debt sustainability while creating fiscal space for social and infrastructure spending. Target: primary surplus of PRs 401 billion (0.4 percent of GDP). - FY23 primary deficit: expected to reach 1.0 percent of GDP for the year as a whole. - Measures to boost revenue (total stated boost PRs 254 billion): - Increase maximum petroleum development levy (PDL) to PRs 60 per liter with path to reach average rate over FY24 of PRs 55 per liter: adds PRs 79 billion. - Increase PIT yield by PRs 30 billion by increasing tax rates for business income and wage earners by 2.5 percentage points and merging the top two brackets. - Rationalize fertilizer tax exemptions: DAP subject to GST at 5 percent and federal excise at 5 percent; Urea subject to FED at 5 percent: increases tax revenues by PRs 34 billion. - Double FED on sugary drinks to 20 percent: expected yield PRs 8 billion. - Increase advance tax on purchase and sale of immovable property from 2 percent to 3 percent: expected sustainable revenue PRs 46 billion. - Annual tax on second homes and other high-wealth items from non-filers at 1 percent of the value: expected revenue PRs 19 billion. - Raise advance tax from builders and developers based on land size: revenue PRs 15 billion. - Increase additional GST on deliveries to businesses not registered for VAT from 3 percent to 4 percent (so unregistered businesses at 22 percent GST): expected PRs 23 billion. - Spending containment and protections: - Contain growth of public wage bill and pensions to below inflation. - Protect generosity level of Benazir Income Support Programme (BISP) Kafalat program in FY24. - Limit energy subsidies, reflected in cabinet-approved update of circular debt management plan (CDMP) for FY24 by end-July 2023, including notification of the annual rebasing (AR) of the power tariff for FY24 in full and with effect from July 1, 2023 as determined by NEPRA, continuation of regular tariff adjustments, and acceleration of structural cost-reducing reforms. - Contingency spending for emergencies: PRs 250 billion. - Fiscal ringfencing commitments: - No supplementary grants for additional unbudgeted spending over parliamentary approved level in FY24 until new government formation after elections (except severe natural disaster). - No new tax amnesties or new tax exemptions in FY24 without National Assembly approval. - Signature of MoUs with each province on achieving end-FY24 fiscal position consistent with FY24 general government primary balance goal of PRs 401 billion. - Commitment not to introduce any fuel subsidy, or cross-subsidy scheme, in FY23 and beyond. ### Structural fiscal reforms and public financial management - Revenue administration: - FBR prepared a draft Compliance Risk Management (CRM) strategy and will start building a Compliance Risk Register; plan to pilot Compliance Improvement Plans in Q1 of FY24 and design a CRM dashboard. - SOE monitoring: - Creation of a Central Monitoring Unit (CMU) within the Ministry of Finance in September 2022 to improve SOE monitoring and oversight; full operationalization with hiring of needed staff and publication of first periodic SOE performance report (section 31(3) of the new SOE law) using latest available data (end-November 2023 SB). - Cash management and Treasury Single Account: - Efforts to fully operationalize TSA-2 by end-October 2023. - Creation of Treasury and Cash Management Unit and Cash Forecasting Unit in Federal Treasury Office in Islamabad; developing monthly and quarterly cash forecasts since January 2022 with ADB TA. - Issued guidelines on annual and multiannual commitment control systems in March 2022. - Spending transparency and procurement: - PPRA launched and piloted e-Procurement System in early March 2023 with health and education ministry and Punjab province; full roll-out at federal and provincial levels by end-December 2023. - PPRA to leverage regulations on publication of beneficial ownership information for procurement contracts above PRs 50 million; access to relevant databases and publication of key procurement contract information. - Temporary procurement exemption: - Temporary exemption from relevant procurement regulations obtained from PPRA on February 22, 2023 will be revoked by cabinet by July 30, 2023. ### Debt management and financing strategy - Proactive debt management to cover large financing requirements and pressure on debt sustainability. - Given large share of floating-rate domestic debt and elevated global interest rates, debt servicing costs projected to rise near term; narrow path for fiscal and monetary discipline to ensure debt sustainability. - Maintain active domestic debt market via regular primary T-bill, PIB and Sukuk auctions as main mechanism for new domestic financing. - Commitment to refrain from new financing through direct credit lines, loans, or private placements with domestic financial institutions, including local branches of foreign banks. ### Program monitoring, safeguards, and transparency - MEFP and TMU define quantitative performance criteria (QPC), indicative targets (IT), and continuous performance criteria (PCs) with end-September 2023 and end-December 2023 test dates; structural benchmarks set out in MEFP Table 2. - Commitment to supply IMF with timely and accurate data needed for program monitoring. - Commitment to undergoing an updated safeguards assessment of the SBP; continue providing Fund staff with audit reports and authorize SBP’s external auditors to hold discussions with Fund staff. - Consent to IMF publication of the letter, the MEFP, the TMU, and accompanying Executive Board documents. *Source: Attachment I. Memorandum of Economic and Financial Policies (excerpt provided).* ### 9. Reducing poverty and strengthening social safety remains a key priority. A series of ### 9. Reducing poverty and strengthening social safety remains a key priority. A series of ### Social protection response and outcomes (FY23) - Compounded exogenous shocks: COVID-19 pandemic, inflation and a food price surge largely driven by the international commodity price hike in the wake of the Russian war in Ukraine, and the 2022 monsoon floods. - BISP FY23 spending increase: executed an increase in BISP spending in FY23 by over 70 percent of the FY22 execution, allowing spending of PRs 404 billion for BISP: - PRs 353 billion on regular programs. - PRs 50 billion on exceptional one-off cash transfers (of PRs 25,000 to 2.72 million flood-affected families). - UCT Kafalat program actions: - Implemented a 25-percent inflation adjustment of the UCT Kafalat stipend to PRs 35,000 per family and year from January 1, 2023. - Enrolled the targeted 1 million newly identified beneficiary families already by mid-February 2023 on the basis of the live NSER database, now covering a total of 9 million beneficiary families. - Reinstated the quarterly disbursement schedule. - CCT programs (education, health, nutrition): efforts to enroll more willing families. - Policy choice: decided against executing the originally budgeted fuel subsidy program (Sasta Fuel Sasta Diesel) to focus scarce budget resources on the most vulnerable. - Administrative note: administrative costs for keeping the NSER live and BISP enrollment open to facilitate people to redeclare their status at all times in case of need. ### Social protection plans and FY24 provisioning - BISP remains the prime program to provide public support to the most vulnerable, with focus on improving level and quality of health and education spending supported by development partners and fiscal space from revenue mobilization. - FY24 BISP budget envelope: PRs 471.7 billion (0.4 percent of GDP), enabling: - Absorbing an additional horizontal expansion of the UCT Kafalat base by 300,000 families to 9.3 million families from July 1, 2023 (eligibility confirmations pending for technical reasons in FY23). - Adequately provisioning for the regular inflation adjustment exercise to be undertaken in January 2024 (to cover calendar year 2024) (end-January 2024 SB). - General principles (building on World Bank advice): - Keep the NSER live, BISP enrollment open, and regular re-declaration of beneficiaries’ status on the intended 3-year cycle. - Speed up enrollment of interested UCT Kafalat families into the two CCT programs (supporting children’s education and health). - Implement a meaningful improvement of the still low UCT Kafalat generosity level. - Review the education and stunting CCT cash transfers to better align them with actual child schooling and food costs. - Rely on electronic payment systems for benefit disbursements. - Improve administrative capacity and create fiscal contingency reserves to disburse emergency cash transfers in case of adverse events hitting vulnerable families (including climate-related catastrophes, ¶22). - Footnotes: - Includes families with proxy-means test (PMT) scores below the threshold set for the UCT Kafalat scheme. - Out of the 8.6 million families enrolled in the UCT Kafalat program at end-December 2022, about 7.1 million families had at least one child in school- or college-going age (4–18 years) principally eligible for the two CCT programs; only 3.1 million families had at least one child enrolled in at least one of the CCT programs. - At end-FY22 the UCT Kafalat generosity level was about 9.3 percent of the average consumption of a bottom quintile family, relative to an international best practice of about 25 percent. ### Monetary, exchange, and financial sector commitments - Objectives: return to a market-determined exchange rate, lower inflation toward target, and rebuild foreign exchange reserves. - Reserves status: reserves now stand at around US$4.2 billion (about 3 weeks of imports). - Exchange rate policy commitments: - Reaffirm commitment to return to a market-determined exchange rate; banks and exchange companies free to determine exchange rates between Pakistani rupees and foreign currencies. - Refrain from providing guidance or expressing preference to market participants regarding the exchange rate or regulate demand for FX through (either formal or informal) administrative action (¶13). - Maintain the average premium between the interbank and open market rate at no more than 1.25 percent and no less than -1.25 percent during any consecutive 5 business day period (continuous SB). The premium is defined as the difference in the natural logarithms of the midpoint (average of buying and selling rate) of the interbank market rate and the midpoint of the open market rate; the average is evaluated over a five-business day period. - Publish daily the interbank and open market exchange rates and develop a framework to monitor and publish developments and pricing in the informal market. - Transition to a new trading platform for spot transactions connecting all banks, expected to go live by end-December 2023. - SBP interventions guided by market conditions and objectives to: - Bring reserves up to at least US$6.4 billion (1 month of import coverage) by end-December 2023. - Reduce the SBP’s net forward/swap position below US$4 billion. - Forex sales will not be used to prevent a trend depreciation of the rupee driven by fundamentals. - Abusive or anti-competitive behavior by market participants will be addressed through enforcement of regulations and applicable laws. ### Monetary policy stance - Policy rate actions: raised the policy rate to 22 percent on June 26, 2023; stand ready to consider further action in the next MPC in July and the coming months until inflation and inflation expectations are on a clear downward path. - Objective: aim to ensure the real policy rate returns to positive territory on a forward-looking basis to bring inflation within the target band within FY26. - Refinancing schemes rates: reduced the interest rate gap between the policy rate and the interest rate on the two major refinancing schemes (EFS and LTFF) to 3 percentage points; these rates will continue to be linked to the policy rate and adjust automatically. ### Phasing out SBP refinancing schemes and DFIs - Outstanding amount for all facilities as of end-May 2023: PRs 1,536 billion, or 16.7 percent of private sector credit. - Commitment: keep overall nominal outstanding credit of all facilities below the sanctioned limit as of end-April 2023. - Transition plan (consultation with IMF and stakeholders): - Establish an appropriate Development Finance Institution to support the eventual phasing out of refinance facilities. - Transition period foreseen of no more than 5 years. - Commercial banks to extend credit to export industries at preferential rates upon receipt of a subsidy, provided transparently from the federal budget and administered by Ex-Im Bank. - Commercial banks will no longer access dedicated liquidity facility at below-market rates from SBP; will obtain liquidity at market rates via SBP’s regular open market operations. - SBP’s operational involvement in refinancing schemes will cease by the end of the transition period. - Ex-Im Bank allowed to participate in subsidized lending schemes using its own balance sheet resources, as feasible. - Implementation to commence in July 2023 and required subsidy allocation (PRs 5.7 billion) incorporated in the FY24 budget. - SBP committed not to introduce further schemes during the transition period. ### Exchange restrictions, MCPs, and external imbalance measures - Withdrawal of prioritization circular: withdrawn on June 23, 2023 (the December 27, 2022 guidance to banks for prioritization of import transactions had discouraged banks from providing FX for non-priority imports). - Existing measures to be phased out as BOP conditions stabilize: - Exchange restriction from limitations on advance payments for imports against letters of credit (LCs) and advance payments beyond the certain amount per invoice (without LCs) for import of eligible items (imposed in 2018). - MCP arising from use of the previous day’s weighted average customer exchange rates (calculated and published by the SBP) for FX transactions between the SBP and the government (in place since 1999). Working on updating relevant procedures to eliminate the MCP. ### Financial sector resilience and supervisory actions - Monitoring domestic and external pressures; SBP ready to exercise regulatory and supervisory mandate. - Addressing undercapitalized institutions: - Two private banks and two public banks remain undercapitalized. - Progress with recapitalization of one private bank, but neither private bank fully recapitalized; resolution delayed due to on-going talks with potential investors. - Mid-sized public sector bank became undercapitalized during FY23 due to credit and mark-to-market losses; engagement with shareholders to make the bank capital-compliant by end-September 2023. - Small public sector bank privatization progress slow; Cabinet decided in late December 2022 to delist the bank from the privatization program and to wind down the bank on March 17, 2023; SBP has started implementation of the approved winding-down plan. - Strategy to address high NPLs: require bank-specific plans for reducing NPLs, and to write off/charge off fully provisioned NPLs. - Prompt supervisory action to address any additional banks becoming undercapitalized; owners to ensure adequate capital levels. - Microfinance bank sector: require time-bound recapitalization plans for owners to address capital shortfalls; ensure orderly market exit of non-viable institutions; postpone extension of deposit insurance system to this sector until issues addressed and preconditions met. - Mitigating external pressures: - Ensure foreign exchange exposures of banks remain within regulatory limits or face supervisory sanctions; adequate FX liquidity to be maintained. - All banks which breached net open position limits have returned to full compliance at end-March 2023. - Crisis management framework upgrades: - Advancing efforts to strengthen bank resolution and crisis management frameworks, including the deposit insurance scheme, aligning with international best practice. - Draft law submitted to the cabinet in November 2022; will submit amendments to parliament by end-December 2023 (end-December 2023 SB). - AML/CFT: - Pakistan exited the FATF list in October 2022. - SBP shared key findings of the thematic inspection on the tax amnesty program for the construction sector in September 2022. - SBP issued fines for AML/CFT shortcomings and encouraged banks to develop internal guidelines on mitigating potential risks associated with tax amnesty programs. ### Energy sector pressures and measures (FY23) - Power sector conditions acute in FY23: binding cash constraints, higher-than-expected arrears accumulation, increased load shedding. - Stock of power payment arrears (circular debt, CD) at end-March 2023: PRs 2,542 billion (3 percent of GDP), an increase of PRs 289 billion since end-FY22 (with PRs 417 billion from the CD flow and PRs 128 billion from gradual CD stock clearance from the budget). - Measures taken to contain overruns worth PRs 196 billion, resulting in: - Budget subsidies contained at PRs 335 billion. - CD flow contained at PRs 336 billion (reflected in updated FY23 CDMP approved by cabinet on February 13, 2023). - From March 2023 measures: - Recouped the deferred June and July 2022 FPAs (PRs 31 billion in FY23) by collecting installments over 8 months from originally sheltered households (but the flood-affected). - Reformed the debt service surcharge (DSS): about PRs 80 billion in FY23 and PRs 302 billion p.a. from FY24 by permanently expanding the base (from only ex-WAPDA DISCO consumers to additionally K-Electric (KE) consumers) and hiking the level, fully sparing protected consumers (from PRs 0.43/kwh to, on average for the FY and across consumer slabs, PRs 3.82/kwh until end-FY23 PRs 2.63/kwh from FY24). - Phased out new and unbudgeted subsidies (PRs 65 billion in FY23) by letting the zero-rated industry and agriculture subsidy packages permanently expire. - Amended the GST regime (PRs 14 billion in FY23 alone) by: - Levying GST on notified (rather than the determined) power tariffs in FY23 and reimbursing DISCOs a remaining PRs 5 billion in monthly tranches until end-June 2023 that FBR continued to collect during a transition period. - Making DISCOs pay GST on a collection basis (rather than on a billing/accrual basis). - Footnote: partial settlements included (i) due principal for the publicly-guaranteed Power Holding Private Limited (PHPL) debt (PRs 35 billion); and (ii) unguaranteed Central Power Purchasing Agency (CPPA) arrears (PRs 93 billion) to GENCOs (in return for previously revised PPA terms), WAPDA, nuclear power plants, and NPPMC. *Source: 1pakea2023001 - 9. Reducing poverty and strengthening social safety remains a key priority. A series of* ### 16. Going forward, we remain resolved to address the drivers of the CD flow. We project ### 16. Going forward, we remain resolved to address the drivers of the CD flow. We project ### FY24 financial gap, budget subsidy, and urgent liquidity needs - Projected sector’s financial gap (after revenue collection): PRs 976 billion (0.9 percent of GDP). - A budget subsidy of PRs 976 billion (0.9 percent of GDP) will address urgent liquidity needs in FY24 by covering: - Power tariff differential outlays (for DISCOs and KE): PRs 319 billion. - Other payments—largely one-off or installment—to provinces, tribal areas, and KE: PRs 265 billion. - CD stock payments: PRs 392 billion, composed of: - PHPL principal settlements: PRs 82 billion. - Payments to GPPs and CPEC IPPs: PRs 310 billion. - Cabinet expected to adopt updated FY24 CDMP by end-July 2023. ### Key priorities in updated FY24 CDMP - a. Ensuring cost-recovering tariffs - Notify the FY24 annual rebasing (AR) in full with effect from July 1, 2023, as determined by NEPRA (end-July 2023 SB). - NEPRA to continue automatic notifications of regular QTAs and FPAs in line with established formulas, with measures to spare protected slabs to help achieve cost recovery and increase progressivity of residential tariffs. - Strengthen cooperation between DISCOs, Ministry of Power, and NEPRA to facilitate swift petition and determination processes. - b. Better targeting subsidies - Next step in multi-year subsidy rationalization plan focuses on tube wells for large agricultural users; consultative stage reached after provincial field survey delays. - Aim to submit a concrete reform proposal to cabinet by end-2023, followed by a costed implementation plan by end-FY2023. - c. Accelerating medium-term cost-reducing reforms (with World Bank, ADB, and other donors) - Improve price signals for inputs: series of price-setting reforms for end-user gas prices (¶17) to ensure weighted average gas prices channel scarce gas to most efficient generators (merit order). - Renegotiate remaining PPAs 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 (10-year floating-rate PIBs and 5-year sukuks in equal parts, or more efficient instruments). - Convert expensive government-guaranteed PHPL debt into cheaper public debt: - Fiscal space created to settle PRs 35 billion of the PRs 164 billion falling due in FY23 from the budget and roll over the public guarantee for the remaining PRs 129 billion. - Improve distribution efficiencies: - Technical losses expected to reduce to 16.27 percent in FY23 from 16.85 percent in FY22; collections expected to remain at FY22 levels because of the floods. - Measures include technology, enforcement mechanisms, and private participation. - Pursue other reforms: - Accelerate green energy transition per 2021 National Electricity Policy (seek NEPRA approval of annually updated IGCEP and Transmission System Expansion Plan). - Seek NEPRA approval of updated Grid Code and Commercial Code to govern trading in new wholesale market (expected launch in April 2023), and work on eligibility criteria for key market entities. - Fiscal and arrears management principles - Strive to reduce capacity payments as arrears are paid via renegotiating PPAs or lengthening bank loan duration, depending on budget space and CDMP progress. - Same principle for assumption of PHPL amortization by federal budget. - Continue to refrain from netting out cross-arrears (unless independently audited); using “non-cash” settlements; and issuing government guarantees (e.g., for PHPL-issued sukuks to transfer CPPA-G payables to PHPL). ### Gas sector reforms and CD management (¶17) - CD stock in wider gas sector has increased considerably; liquidity constraints have increased gas shortages to levels comparable to the power sector. - Main drivers: non-implementation of regular end-user gas price adjustments since September 2020; accumulation of RLNG tariff differential since FY19; diversion costs; large unaccounted-for-gas (UFG) losses. - Recent measures (with World Bank support): updated end-user gas prices and changed structural end-user gas tariff. - OGRA notified adjusted end-user gas prices on average 75 percent on February 17, 2023 to generate an estimated revenue of PRs 310 billion from consumers in FY23H2, per its January 11, 2023 determination and along an updated tariff slab system adopted by cabinet on February 14, 2023 and notified by OGRA on February 15, 2023. - Ongoing and planned actions: - a. Unifying pricing across indigenous gas and imported RLNG - Ministry of Energy to issue guidelines for OGRA to implement structural pricing changes implied by the weighted average cost of gas (WACOG) bill enacted in March 2022; once implemented with the next OGRA determination, WACOG will allow full cost recovery of imported RLNG and provide price signals to guide consumption and reduce power generation costs. - b. Improving monitoring and management of gas CD - Devise precise definition of CD for gas sector (includes oil but excludes power sector elements). - Compile detailed and verified gas CD stock statistics. - Establish quarterly gas CD flow 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 (in line with OGRA Amendments Ordinance effective since March 2022) and tangible cost-reducing reforms to reduce UFG losses (infrastructure improvements, network rehabilitation, theft controls). ### Structural policies: SOEs, business environment, governance - SOE governance, transparency, efficiency, and fiscal risk limitation (¶19) - Operationalization of CMU within MOF to improve SOE monitoring (¶7). - New SOE law took effect December 2022 and: - Ensures SOE operations are commercial and defines commercial SOE. - Strengthens oversight and ownership arrangements. - With ADB support, finalize further regulatory reforms by end-November 2023 SB: - Operationalize SOE law into policy clarifying ownership and division of roles within federal government. - Amend Acts of four selected SOEs to make new SOE law fully applicable: National Highway Authority, Pakistan Post, Pakistan National Shipping Corporation, Pakistan Broadcasting Corporation. - Increase transparency: - SOEs continuously audited by external auditors; Auditor General conducts ‘compliance with authority’ audits. - Special audits requested for several SOEs (SSGCL, HESCO, PESCO); scope and terms of reference being defined; plan to secure approvals for commissioning by end-FY23. - Improving business environment (¶20) - Actions include: - Simplify procedures to start a business; introduce single portal for company registration and digital integration of federal and provincial entities. - Streamline FDI approval process. - Improve trading across borders by reducing customs-related processing time and hours to prepare import/export documentation. - Simplify and harmonize tax payment process via simple, fully automated regime for taxes, contributions, and fees. - Launch communication drive to disseminate information on reforms undertaken. - Addressing structural deficiencies in housing and construction (¶20.b) - Identified impediments: land title documentation; real estate regulatory authorities; availability of long-term financing; foreclosure laws; credit scoring. - Working group established June 2022 (including private sector and SBP); draft strategy paper submitted January 31, 2023 and is being examined. - Strengthening governance and anti-corruption (¶21) - Issued regulations to establish electronic asset declaration system in February 2023: - Comprehensive, centrally-held with FBR, covering federally employed civil servants BPS 17 to 22, covering assets beneficially owned or located abroad. - Accessible to entities authorized by law (including banks for customer due diligence); banks to provide bi-annual feedback to FBR (end-July and end-January); annual compliance audit by SBP. - Public access for annual declarations for all members of federal cabinet to be institutionalized. - UNCAC second Review Cycle in final stages; country visit conducted and draft Executive Summary shared for comments; full report expected and will publish findings, analysis, and recommendations. - Task force (Ministry of Law and Justice chair) to review institutional framework of anticorruption institutions (including National Accountability Bureau), propose legislative amendments and structural reforms to enhance independence and effectiveness, with consultations ongoing. ### Climate change: mitigation, transition, and adaptation (¶22) - Climate challenge prioritized after 2022 floods. - Current climate-related spending: about 1 percent of GDP per year, almost entirely on the spending side (split nearly equally between federal and provincial level). - Administrative steps to improve green budgeting starting with FY24 budget to better streamline planning, execution, and reporting of green budget components. - a. Mitigation and transition management - Active party to Paris Agreement and Global Methane Pledge. - Key projects: Ten Billion Tree Tsunami reforestation project; greening energy mix (¶16.c); policies to change relative prices toward carbon neutrality (including adequate taxation of fuel products (¶5.a) and developing tax/incentives framework). - b. Adaptation - Aim to finalize UNFCCC-supported National Adaptation Plan (NAP) by mid-2024. - Prioritize “no-regret” measures until then: - Strengthen PFM to enhance capital expenditure efficiency through Climate-PIMA supported by IMF TA; cabinet adoption of related Climate-PIMA and PIMA action plan in summer 2023 (end-December 2023 SB). - Prioritize resilience-boosting policies: social protection (¶10); build-back-more-resilient infrastructure via 4RF framework; execute updated 2015 National Flood Protection Plan (NPFF); transform agri-food system as in World Bank’s 2022 CCDR for Pakistan. *Source: Excerpt from the IMF staff report chapter on Pakistan (content unit 1pakea2023001).* ### 23. We recognize the importance of timely, reliable, and comprehensive provision of ### 23–Attachment II (Excerpt): Program commitments, financing, and TMU definitions ### Macroeconomic data and statistical commitment - Commitment to furnish Pakistan Bureau of Statistics (PBS) with requisite resources to commence compilation and dissemination of the Quarterly National Accounts (QNA) starting with FY24Q1 and the timely revision of annual provisional estimates (end-November 2023 SB). ### Financing and program monitoring — key financing figures and commitments - Gross external financing needs for FY24: approximately US$28.4 billion (including the current account). - Of the gross external financing needs, amortization to multilateral and bilateral official as well as commercial creditors: about US$14.5 billion. - Secured financing to close the gap: - US$10 billion as rollovers and refinancing of maturing debt. - US$5.6 billion in additional financing commitments from bilateral, multilateral, and commercial partners. - In line with program financing commitments, key bilateral creditors will at least maintain their exposure to Pakistan. - The program will be subject to quarterly reviews, prior actions (PAs), quarterly performance criteria (PCs), continuous performance criteria, and indicative targets as set out in this MEFP and defined in the Technical Memorandum of Understanding (TMU). - Completion of the two reviews scheduled for November 2023 and February 2024 will require observance of the quantitative performance criteria for end-September 2023 and end-December 2023, respectively. ### Quantitative performance criteria and indicative targets (MEFP Table 1; values shown for end-September 2023 and end-December 2023) - I. Quantitative Performance Criteria - Floor on net international reserves of the SBP (millions of U.S. dollars): -14,550 (end-September 2023); -13,800 (end-December 2023). - Ceiling on net domestic assets of the SBP (stock, billions of Pakistani rupees): 15,048; 14,888. - Ceiling on SBP's stock of net foreign currency swaps/forward position (negative, millions of U.S. dollars): 4,200; 4,000. - Ceiling on net government budgetary borrowing from the SBP (stock, billions of Pakistani rupees): 4,708; 4,708. - Ceiling on the general government primary budget deficit (cumulative, excl. grants, billions of Pakistani rupees): -87; -1232. ("-" means surplus; cumulative from the start of each fiscal year.) - Ceiling on the amount of government guarantees (stock, billions of Pakistani rupees): 4,000; 4,050. - Cumulative floor on targeted cash transfers spending (BISP) (billions of Pakistani rupees): 87.5; 185.5. - II. Continuous Performance Criteria - Zero new flow of SBP's credit to general government: 00. - Zero ceiling on accumulation of external public payment arrears by the general government: 0; 0. - III. Indicative Targets - Cumulative floor on general government budgetary health and education spending (billions of Pakistani rupees): 465; 1,031. - Floor on net tax revenues collected by the FBR (cumulative, billions of Pakistani rupees): 1,977; 4,425. - Ceiling on net accumulation of tax refund arrears (cumulative, billions of Pakistani rupees): 32; 43. - Ceiling on power sector payment arrears (cumulative flow, billions of Pakistani rupees): -155; 64. ### Structural conditionality and prior actions (selected items) - Prior Actions - Parliamentary approval of a FY24 budget in line with IMF staff agreement to meet program targets. - Withdrawal of the circular on prioritization in providing FX for certain types of imports introduced in December 2022, with the purpose of ensuring full market determination of the exchange rate. Status: Met. - Structural Benchmarks (selected) - Fiscal: Commit to not grant further tax amnesties. Status: Continuous. - Fiscal: Avoid the practice of issuing new preferential tax treatments or exemptions. Status: Continuous. - Fiscal: Issuance by the Central Monitoring Unit (CMU) of its first periodic report on the performance of SOEs, using latest available data, to the Federal Government. Date: end-Dec. 2023. - Social: Inflation adjustment of the unconditional cash transfer (Kafalat). Date: end-Jan. 2024. - Monetary and Financial: Average premium between the interbank and open market rate will be no more than 1.25 percent during any consecutive 5 business day period. Status: Continuous. - Monetary and Financial: Submission to parliament of amendments to align Pakistan’s early intervention, bank resolution, and crisis management arrangements with international good practices, in line with IMF staff recommendations. Date: end-Dec. 2023. - Energy Sector and SOEs: Notification of the annual rebasing (AR) for FY24 to take effect on July 1, 2023. Date: end-Jul. 2023. - Energy Sector and SOEs: Improve SOE governance by operationalizing the SOE law and amending Acts of four selected SOEs. Date: end-Nov. 2023. - Climate: Cabinet adoption of a Climate-PIMA and PIMA action plan. Date: end-Dec. 2023. - Economic Statistics: Compilation and dissemination of Quarterly National Accounts for FY24Q1 and revised annual estimates for FY23. Date: end-Nov. 2023. ### TMU definitions and key parameters - Program exchange rate of the Pakistani rupee to the U.S. dollar: 286.7091 rupee per one U.S. dollar. - Text Table 1: Program exchange rates (units of currency per U.S. dollar) (As of June 26, 2023) - EUR 0.918274 - JPY 143.118405 - CNY 7.231199 - GBP 0.785114 - AUD 1.498464 - CAD 1.316900 - THB 35.200194 - MYR 4.676498 - SGD 1.352850 - INR 82.008266 - SAR 3.750498 - SDR 0.749411 - Definition highlights - 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. - Usable gross international reserves: holdings of foreign currencies, holdings of SDRs, reserve position in the IMF, holdings of fixed and variable income instruments; excludes certain assets (claims on residents, assets in nonconvertible currencies, precious metals, illiquid assets, pledged/collateralized assets, assets lacking marketability, balances at foreign branches of non-investment rated domestic banks). - Reserve-related liabilities: foreign exchange liabilities to residents (except general government) or nonresidents including short-term foreign currency liabilities (remaining maturity of one year or less), derivatives positions on a net outstanding basis, outstanding IMF credits, foreign exchange deposits with the SBP by specified foreign and domestic institutions; excludes SDR allocations and accrued interest on reserve-related liabilities. - Aggregate net position in foreign exchange derivatives: aggregate net positions in forwards and futures in foreign currencies of the SBP and general government vis-à-vis the domestic currency (including forward leg of currency swaps). - NIR adjustment mechanism and calibrations - For end-September and end-December 2023 test dates, the floor on NIR will be adjusted upward (downward) by the cumulative excess (shortfall) in: - cash inflows usable for financing the government budget from multilateral and bilateral creditors, commercial borrowing, and bond issuance relative to projected inflows (Table 1); and - the cumulative excess (shortfall) of the actual stock of NIR at end-June 2023 relative to the projected amount. The stock of NIR of SBP at end-June 2023 is projected at negative US$16,721 million. - Downward adjustment of the floor on NIR will be limited to a maximum of US$2,000 million for both the September 2023 and December 2023 test dates. - Net domestic assets (NDA) - NDA defined as reserve money minus the NIR of the SBP (NIR valued at program exchange rate and expressed in Pakistani rupee). - Reserve money (RM) defined as sum of: (i) currency outside scheduled banks; (ii) scheduled banks’ domestic cash in vaults; (iii) scheduled 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. - Ceiling on NDA will be adjusted downward (upward) by the cumulative excess (shortfall) in the same cash inflows and NIR stock relative to projections; upward adjustment limited to same maximum adjustor limit as for NIR evaluated at the program exchange rate. - Other ceilings and monitoring definitions - SBP’s stock of net foreign currency swap/forward position: aggregate net positions in forwards and futures in foreign currencies of the SBP vis-à-vis the domestic currency (including forward leg of currency swaps), evaluated at the program exchange rate. - General government primary budget deficit (excluding grants) monitored as overall budget deficit (excluding grants) minus consolidated interest bill of federal and provincial budgets. - Net external budget financing (excluding valuation changes and external financing counted as reserve liabilities of the SBP) defined to include external budget loans (multilateral, bilateral, private sector), short-term maturity borrowing net of foreign portfolio investment (with specified inclusions/exclusions), and net external debt amortization flow (change in stock of external debt service arrears net of debt amortization due). *Source: Excerpt from MEFP and Attachment II (Technical Memorandum of Understanding).* ### 19. The ceiling on general government primary budget deficit (excluding grants) will be ### 19. The ceiling on general government primary budget deficit (excluding grants) will be ### Adjustors to the primary deficit ceiling (cumulative since start of fiscal year) - The ceiling will be adjusted on a cumulative basis since the beginning of the fiscal year: - 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; - downward by any underexecution in the targeted cash transfers (BISP) relative to their indicative program target; - 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 2); - downward by any excess in the flow of tax refund arrears (as defined below) relative to their respective indicative program targets. ### Definitions of related fiscal ceilings and floors - Ceiling on Net Government Budgetary Borrowing from the SBP - Defined as SBP claims on the general government minus general government deposits with the SBP. - Claims include government securities, treasury bills, treasury currency, and debtor balances; exclude accrued profits on government securities. - Government deposits with the SBP exclude the Zakat Fund (Table 2). - Ceiling on the Amount of Government Guarantees - Applies to the stock of publicly guaranteed debt for which guarantees have been issued by the central government (domestic and external). - 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. - Floor on Targeted Cash Transfers Spending (BISP) - Applies to the cumulative targeted cash transfers spending by the Benazir Income Support Program (BISP) for families with a poverty-means tested (PMT) score below that applying to the unconditional cash transfer program (Kafalat). ### Continuous performance criteria (continuous throughout program period) - No New Flow of SBP’s Credit to General Government - There should be no new flow of SBP’s direct credit to the general government, including in the form of purchases of public debt securities on the primary market. - Zero Ceiling on Accumulation of External Payment Arrears by General Government and SOEs - External payment arrears defined as all unpaid debt-service obligations (principal and interest) of the general government, SBP, and state-owned enterprises to nonresidents arising in respect of public sector loans, debt contracted or guaranteed, including unpaid penalties or interest charges beyond 30 days after the due date. - The ceiling on the accumulation of external payment arrears is set at zero. - Other Continuous Criteria (during program period Pakistan will not) - a. impose or intensify restrictions on the making of payments and transfers for current international transactions; - b. introduce or modify multiple currency practices (MCPs) excluding MCPs arising from the introduction and/or modifications of the multiple-price foreign exchange auction system operating in line with IMF staff advice; - c. conclude bilateral payment agreements inconsistent with Article VIII of IMF Articles of Agreement; - d. impose or intensify import restrictions for balance of payments purposes. ### Indicative targets and definitions - Floor on General Government Budgetary Health and Education Spending - Applies to cumulative budgetary spending on health and education by federal and provincial governments. - Floor on Net Tax Revenues Collected by the FBR - Net tax revenues defined as sum of: (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 measured as cumulative sum since beginning of fiscal year; floor measured quarterly based on cumulative end-of-quarter data. - Ceiling on Net Accumulation of Tax Refund Arrears - Stock of income tax refund arrears is PRs 215 billion as of end-May, and net accumulation will be counted from the starting point of PRs 215 billion or the stock remaining on July 1st, whichever is lower. - Stock of sales tax arrears at end-May is PRs 183.8 billion, and net accumulation will be counted from the starting point of PRs 183.8 billion or the stock remaining on July 1st, whichever is lower. - Ceiling on Power Sector Payment Arrears - Power sector payment arrears defined to include payables 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 not recognized by NEPRA; - (iv) GST non-refunds; - (iv) late payment surcharges; - (v) delays in subsidy payments; - (vi) delays in tariff determinations. ### Key power sector and arrears figures - Stock of payment arrears includes payables of PRs 2.5 trillion as of end-FY23Q3. - Of which PRs 765 billion held at PHPL. - Text Table 2: Flow of Power Sector Payment Arrears (Cumulative flows from start of fiscal year; billions of Pakistani Rupees) - Target end-Sep.: -155 - Target end-Dec.: 64 - Total flow Operational part: 163 (end-Sep.), 272 (end-Dec.) - DISCOs' losses and inefficiency: 79 (end-Sep.), 133 (end-Dec.) - DISCOs' under-recoveries: 84 (end-Sep.), 139 (end-Dec.) ### Projected external financing (Table 1 — Projected Disbursements, Millions of U.S. dollars) - Multilateral and bilateral disbursements: - Jan-March 2023: 3,049 - Apr-Jun 2023: 3,286 - Jul-Sep 2023: 5,545 - Oct-Dec 2023: 6,730 - Of which: in cash 1/ - Jan-March 2023: 2,820 - Apr-Jun 2023: 2,885 - Jul-Sep 2023: 5,346 - Oct-Dec 2023: 6,328 - Of which: Saudi oil facility and IDB commodity loans - Jan-March 2023: 376 - Apr-Jun 2023: 400 - Jul-Sep 2023: 928 - Oct-Dec 2023: 960 - Of which: project support - Jan-March 2023: 634 - Apr-Jun 2023: 1,111 - Jul-Sep 2023: 556 - Oct-Dec 2023: 1,062 - International bond issuance 2/ - Jan-March 2023: -81 - Apr-Jun 2023: 0 - Jul-Sep 2023: 0 - Oct-Dec 2023: 0 - Commercial borrowing - Jan-March 2023: 1,700 - Apr-Jun 2023: 1,600 - Jul-Sep 2023: 0 - Oct-Dec 2023: 0 - Gross inflows - Jan-March 2023: 4,668 - Apr-Jun 2023: 4,886 - Jul-Sep 2023: 5,545 - Oct-Dec 2023: 6,730 - Of which: in cash (memo) - Jan-March 2023: 4,439 - Apr-Jun 2023: 4,485 - Jul-Sep 2023: 5,346 - Oct-Dec 2023: 6,328 - Memo: New loans/deposits at SBP 3/ - Jan-March 2023: 0 - Apr-Jun 2023: 0 - Jul-Sep 2023: 1,000 - Oct-Dec 2023: 0 - Note: Cumulative excess/shortfall cumulates from July 1, 2023 onwards. - Footnote 1/: Assumes that 65 percent of project loans and 50 percent of project grants were received in FY 2023. - Footnote 2/: Includes Naya Pakistan Certificates (NPC). NPC flows are recorded on a net basis. - Footnote 3/: Not included in multilateral and bilateral disbursements for the purposes of the adjustor. ### Program reporting and monitoring requirements (selected highlights) - Authorities will provide data to IMF in line with Article VIII, Section 5 of the IMF Articles of Agreement. - Performance monitored using 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. - Key reporting items and frequencies (selected): - 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. - International reserves — Daily — The following working day. - Foreign exchange market data (market exchange rates; SBP FX operations; interbank transactions; forward positions) — Daily/Monthly — Within one day/monthly within five working day. - Net International Reserves at program exchange rates — Quarterly — Seventh working day after quarter end. - External financing: Foreign assistance received and projections for the coming four quarters — Quarterly — Within 15 days of the end of each quarter. - T-bill and coupon bond financing auction data — Fortnightly — Last working day of the fortnight. - Banking indicators and FSIs — Quarterly — Within 45 days of the following quarter. - FBR: Revenue collection and tax arrears by category and type — Monthly — Within seven days of the end of each month. - All tax refund claims in arrears itemized by tax category — Monthly — Within seven days of the end of each month. - Ministry of Water and Power: Key power sector statistics, cumulative monthly subsidy position, PEPCO month end payables and receivables — Monthly/Quarterly — Various specified timings. - BISP: Targeted cash transfers coverage and payments — Quarterly — Within 30 days from the end of the quarter. - Ministry of Finance: Financial statements and operational indicators for Pakistan Railways, Pakistan Steel Mills and Pakistan International Airline — Quarterly — Within 30 days from the end of the quarter. *Source: IMF staff report text provided.* ### 1. Recent economic developments. Headline inflation declined to 29.4 percent in June ### 1. Recent economic developments. Headline inflation declined to 29.4 percent in June ### Recent macroeconomic developments and outlook - Headline inflation declined to 29.4 percent in June (from 38 percent in May), driven primarily by base effects related to fuel and electricity price adjustments and easing food price pressures. - Core inflation declined to 21.2 percent in June (from 22.8 percent in May). - Price pressures are anticipated to remain elevated in the coming months, including due to the impact of measures in the agreed FY24 budget. - FY23 preliminary customs-based merchandise trade deficit: US$27.7 billion (8.1 percent of GDP), down from US$48.4 billion in FY22 (12.9 percent of GDP), but slightly above projections. - Merchandise imports declined by 31 percent in FY23. - Financial market reaction to staff-level agreement: - EMBIG spreads declined below 2,000 bps for the first time since September 2022 (from about 3,500 bps in mid-June 2023). - Exchange rate appreciated by 3.8 percent on July 4. - Interbank–open market spread has remained less than 1.25 percent. - International reserves at end-June: US$4.5 billion, reflecting increased SBP purchases. - FY2023 macro performance highlights: - Economy grew by 6.1 percent in FY2022. - Fiscal deficit reduced to 3.6 percent of GDP during first three quarters of FY2023 (July 2022–March 2023), compared to 3.9 percent of GDP in corresponding period last year. - Primary balance recorded a surplus of 0.6 percent of GDP (previous year: deficit of -0.7 percent of GDP). - External current account recorded a surplus of US$ 0.8 billion in March–April 2023. - Current account deficit likely to decline from US$ 17.5 billion in FY2022 to US$ 3.7 billion in FY2023. - Risks noted: uncertain global security situation, high inflation, lower capital inflows, and growing financing requirement. ### Political assurances and governance - IMF staff met with Pakistan Muslim League-Nawaz, Pakistan People’s Party, and Pakistan Tehreek Insaf; all expressed written support for SBA’s key objectives and policies ahead of national elections. - Parties recognized SBA’s role in preserving macroeconomic stability and supporting external financing. - Authorities thanked mission team and bilateral partners for support. ### Program performance under the 2019–23 EFF - Program implementation faced difficulties due to external shocks, domestic political situation, and some policy missteps. - Notable achievements under the EFF: - Independence of the central bank through legislation. - Introduction of market-determined exchange rate regime. - Ending flow of circular debt in the power sector. - Expansion of social protection programs. - New tariff structure in gas sector. - Removal of tax exemptions. - Exit from FATF grey list. - Completion status: - Prior actions for the 9th review completed in February and June 2023. - Ninth review (of eleven) could not be completed primarily due to alignment of FY24 budget with staff recommendations and external financing constraints. - Authorities renewed memoranda with provinces to meet provisional surplus targets and implemented revenue measures since FY23 budget. ### The new program — Stand-By Arrangement (SBA) - Program anchors and policy mix: - Prudent fiscal adjustment. - Continuation of market-determined exchange rate and proper FX market functioning. - Appropriately tight monetary policy to aid disinflation. - Implementation of FY24 budget to facilitate fiscal adjustment and ensure debt sustainability while protecting critical social spending. - Focus on structural reforms: energy sector viability, SOE governance, and strengthening climate resilience. - Expected outcomes: - Rebuild investor confidence and enable access to capital markets as fundamentals improve. - FY24 budget measures: - Primary surplus of 0.4 percent of GDP planned. - Revenue rise by targeting undertaxed sectors and rationalizing expenditure while expanding social protection. - Removal of untargeted subsidies and ensuring cost recovery in energy sector. - Removal of earlier import restrictions expected to restore customs revenues. ### Fiscal policy, debt management, and debt sustainability - New Debt Management Office (DMO) established via amendments to the Fiscal Responsibility and Debt Limitation Act with IMF and World Bank technical support; DMO rules approved by cabinet. - Pakistan’s debt assessed as sustainable in the baseline scenario underpinned by steadfast implementation of the SBA. - Authorities recognize exposure risks and view SBA engagement followed by an extended arrangement after installation of a new government as mitigating socio-political risks. ### Monetary, exchange rate, and financial sector policies - Monetary tightening: policy rate raised by 800 bps since August 2022; currently stands at 22 percent (compared with 7 percent 2 years ago). - Authorities aim to return to a 5-7 percent inflation target band by end June 2024 and agree to maintain tight monetary policy as long as necessary. - SBP removed all FX restrictions to ensure full market determination of the exchange rate and capped rates on refinancing scheme facilities. - Authorities requested temporary approval of exchange restrictions related to advance payments for imports against LCs; exchange restriction and MCP are non-discriminatory and maintained for BOP reasons, intended to be removed by end of program. - Banking sector: capital adequacy ratio (CAR) as of end-March 2023: 16.3 percent, above regulatory requirement. - Expectation of more diverse government borrowing sources domestically to reduce sovereign exposure of banks; authorities aware of interdependent risks if external financing shortfalls occur. ### Energy sector policies - Energy sector a major fiscal drain; Revised Circular Debt Management Plan (CDMP) adopted in February 2023 during 9th review. - CDMP entailed measures worth at 0.2 percent of GDP in FY23. - Measures included catching up with deferred tariff adjustments and expanding debt service surcharge by removing new unbudgeted subsidies. - Gas sector measures: - Authorities introduced an average increase of 75 percent in gas prices as determined by the regulator, along with an updated tariff slab system. ### Social protection and social sector spending - Crisis impacts: - 2022 floods affected one third of the country, took 1,700 lives, displaced nearly 8 million people, and affected 33 million people. - Preliminary estimate: national poverty rate may increase up to 4.0 percentage points, potentially pushing over 9 million more people into poverty. - Flood damages around ~US$ 31.2 billion; cost of recovery and rehabilitation estimated at US$ 16.3 billion. - Government response: - Flood relief assistance of PRs 70 billion to 2.8 million beneficiaries under BISP. - Authorities spent about 0.4 percent of GDP on all BISP schemes in FY23, which is 70 percent higher than previous year’s expenditure. - Social sectors’ spending on education and health consistent with program targets; higher allocations approved for FY24 in anticipation of SBA. ### AML/CFT, climate, and other structural reforms - AML/CFT: - Successful exit from FATF grey list credited to a ‘whole of a government approach’. - SBP conducted thematic AML/CFT inspection regarding tax amnesty for the construction sector and issued fines against financial institutions for AML/CFT shortcomings. - Climate agenda: - Efforts to strengthen climate resilience accelerated; collaboration with Fund initiated C-PIMA to identify gaps and improvements. - Authorities expect global support to reduce economy’s vulnerability to climate change. - Other structural reforms: - SOE reforms: new ownership policy and amendments to acts of many SOEs with ADB TA; Central Monitoring Unit within MoF operationalized. - Transparency: E-procurement system piloted in March 2023 in health and education ministries; central procurement regulatory authority ensured publication of beneficial ownership information for contracts above PRs 50 million (~US$182,000). - Accountability: FBR issued regulations granting banks access to assets details of high-level federal civil servants in February 2023. - Anti-corruption: new SOE law effective December 2022; task force set up to review anti-corruption institutional framework. - Tax harmonization: federal government brokered agreement between subnational tax jurisdictions to simplify tax regime and improve ease of doing business. ### Concluding assessment and policy implications - Program assessment contextualized by multiple shocks since 2020 (pandemic, commodity price surges, 2022 floods, political uncertainties); economy demonstrated resilience. - Proposed SBA expected to neutralize risks highlighted by staff and support macroeconomic stability. - Authorities reiterate ownership and commitment to macroeconomic stability and reforms and request SBA approval by Executive Board. *Source: 1pakea2023001 - 1. Recent economic developments. Headline inflation declined to 29.4 percent in June* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1pakea2023001.pdf_