## 1pakea2024001

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### Executive summary — recent developments and key indicators
- Economic activity stabilized; inflation has begun to gradually decline following 2022 floods and earlier financial pressures.
- GDP and sectoral activity:
  - GDP contracted by 0.2 percent in FY23.
  - GDP estimated to have increased 2.1 percent yoy in FY24Q1; sector contributions: agriculture +5.1 percent yoy, industry +2.5 percent, services +0.8 percent.
- Inflation and monetary policy:
  - Headline inflation: 38 percent in May; 26.8 percent in October; 29.2 percent in November.
  - Core inflation around 21 percent since June.
  - Policy rate held at 22 percent since late June 2023.
- External sector and reserves:
  - Current account: US$0.9 billion in FY24Q1 after US$2.2 billion in FY23.
  - Gross official reserves increased to US$7 billion (from US$4.5 billion in June).
  - Sovereign spreads fell from around 2,300 basis points in early July to below 1,500 basis points in late November.
- Banking and financial sector:
  - Banks’ sovereign exposure: 55.3 percent of assets at end-September 2023 (from 48 percent at end-FY21).
  - Private sector credit contracted -1 percent yoy.
  - CAR at 19.1 percent as of end-September 2023 (regulatory minimum 11.5 percent including capital conservation buffer).
  - NPLs 7.7 percent with provisioning at 95.5 percent.
- Energy sector circular debt (CD):
  - Combined CD ≈ 5¼ percent of GDP at end-FY23.
  - Power CD: PRs 2.5 trillion at end-September (2.4 percent of GDP); closed FY23 at PRs 2.3 trillion (2.7 percent of GDP).
  - Gas sector CD: PRs 2.1 trillion (2.5 percent of GDP) at end-FY23.

### Program performance and conditionality outcomes
- Arrangement status:
  - 9-month Stand-by Arrangement (SBA) approved July 12, 2023; program on track.
  - Staff supports completion of the first review; purchase in amount of SDR 528 million proposed.
- QPCs and continuous PCs (end-September 2023):
  - Six quantitative PCs met: floors on (i) net international reserves of the SBP; (ii) targeted cash transfers spending (BISP); ceilings on (iii) SBP's FX swap/forward book; (iv) net domestic assets of the SBP; (v) net government budgetary borrowing from the SBP; (vi) government guarantees.
  - Continuous PCs met: zero new flow of SBP credit to the government; zero external public payment arrears.
  - One QPC missed: ceiling on the general government primary budget deficit missed by a small margin due to exchange rate valuation technicalities.
- Indicative targets (end-September):
  - Met three ITs: floors on (i) net tax revenue collected by FBR; (ii) budgetary health and education spending; (iii) ceiling on net accumulation of tax refund arrears.
  - IT on power sector payment arrears missed by a large margin (under-recoveries in August; lower-than-anticipated tariff in annual rebasing).
- Structural benchmarks (SBs):
  - Met: notification of FY24 annual rebasing; compilation/dissemination of quarterly national accounts.
  - Missed continuous SB: average premium between interbank and open market exchange rate mid-August to early-September.
  - Strong progress on end-November SB to improve SOE governance: operationalization of SOE Act into policy and ordinance work on amending Acts of four selected SOEs (final amendments pending).

### Policies and reform priorities (summary)
- Fiscal policy:
  - Strict adherence to fiscal targets while protecting development needs and social safety net.
  - General government primary surplus of 0.4 percent of GDP in FY24Q1; revenue performance 0.1 percent of GDP above program projections.
  - Provincial spending pressures: Punjab PRs 115 billion payment to clear commodity operations debt; PSDP spending expected to remain close to Q1 level in Q2–Q3 given caretaker constraints.
- Monetary and exchange rate policy:
  - Maintain a market-determined exchange rate; rebuild reserves.
  - Monetary policy to remain tight and proactive; MPC should respond swiftly if inflationary pressures reemerge.
- Energy sector and SOE governance:
  - Recent electricity and gas tariff increases important; broader reforms needed to tackle structurally high energy sector costs.
  - Accelerate SOE reforms and governance framework; safeguards for the Sovereign Wealth Fund required.
- Social protection:
  - Protect low-income and vulnerable households from tariff adjustments; BISP UCT Kafaalat generosity to be preserved.

### SBA review, financing assurances, and risks
- Financing and access:
  - Completion of SBA review would make available SDR 528 million, bringing total access to SDR 1,422 million.
  - Program financing: over US$3 billion in commitments delivered at SBA request time; additional US$1 billion multilateral support expected by end-2023; bilateral assurances of US$0.7 billion reconfirmed.
  - Islamic Development Bank likely to deliver only a small fraction of US$1 billion pledged.
  - Debt rearrangement generated amortization savings of around US$1.2 billion in both FY24 and FY25.
- Risk assessment:
  - Downside risks remain exceptionally high; external financing risks exceptionally high.
  - Key risk drivers: delays in IFI/bilateral disbursements; reliance on expensive domestic bank financing; higher commodity prices; tighter global financial conditions; political tensions ahead of elections.

### Outlook (growth, inflation, external)
- Growth:
  - Real GDP growth revised down to 2.0 percent in FY24 (from 2.5 percent).
- Inflation:
  - Headline CPI projected to average 24 percent in FY24.
  - Staff projects year-end inflation of 18.5 percent in FY24 and 9 percent in FY25.
  - Table/annex projections: Consumer prices (period average) series includes 24.0 for 2024 and 11.7 for 2025.
- Balance of payments and reserves:
  - FY24 current account deficit projected at US$5.6 billion (1.6 percent of GDP), below US$6.5 billion in SBA Request.
  - CAD expected to remain around 1½ percent of GDP over medium term under market-determined exchange rate.
  - Projected gross official reserves: US$9.1 billion for 2023/24 (Table excerpt).

### Key quantitative indicators and projections (selected exact figures)
- Current account balance (percent of GDP): 2018/19 -4.2; 2019/20 -1.5; 2020/21 -0.8; 2021/22 -4.7; 2022/23 -1.2; 2023/24 -0.7; 2024/25 (Prog.) -1.8; 2025/26 (Est.) -1.6; 2026/27 (Prog.) -1.5; 2027/28 (Proj.) -1.5; 2028/29 (Proj.) -1.6.
- Balance of payments (US$ millions): Current account examples: -13,434 (2018/19), -4,449 (2019/20), -2,820 (2020/21), -17,481 (2021/22), -4,020 (2022/23), -2,235 (2023/24 Prog.), -6,424 (2024/25 Prog.).
- Exports, f.o.b. (US$ millions): 24,257 (2018/19), 22,536 (2019/20), 25,639 (2020/21), 32,493 (2021/22), 28,062 (2022/23), 27,879 (2023/24 Prog.).
- Imports, f.o.b. (US$ millions): 51,869 (2018/19), 43,645 (2019/20), 54,273 (2020/21), 71,543 (2021/22), 53,951 (2022/23), 51,834 (2023/24 Prog.).
- Workers' remittances (US$ millions): 21,740 (2018/19), 23,131 (2019/20), 29,450 (2020/21), 31,279 (2021/22), 27,051 (2022/23), 27,333 (2023/24 Prog.).
- Gross official reserves (end-period, US$ millions): 7,274 (2018/19), 12,175 (2019/20), 17,297 (2020/21), 9,821 (2021/22), 4,056 (2022/23), 4,455 (2023/24 Prog.), 8,982 (2024/25 Prog.), 9,101 (2025/26 Est.), 13,006 (2026/27 Proj.).
- Gross external financing requirements (US$ millions): 25,552 (2018/19), 23,430 (2019/20), 22,206 (2020/21), 33,736 (2021/22), 25,593 (2022/23), 22,819 (2023/24), 28,361 (2024/25 Prog.).

### Downside risks, external financing and capacity to repay
- External financing risks:
  - Exceptional: delays in disbursement of planned IFI/bilateral financing could pose major risks.
  - Shortfalls would increase reliance on expensive domestic bank financing and crowd out private credit.
- Fund exposure and reserves:
  - Fund exposure reaches SDR 5,972 million (294 percent of quota and about 103 percent of projected gross reserves at end-January 2024) with purchases linked to the review.
  - With completion of all purchases, exposure would peak at SDR 6,673 million in March 2024 (329 percent of quota and about 102 percent of projected gross reserves at end-March 2024).
- Enterprise risks and mitigants:
  - Pakistan represents a concentration risk as the fourth largest GRA credit exposure.
  - Mitigants: targeted macrocritical conditionality; phased access; burden sharing; financing assurances; political support.

### Fiscal policy — measures, targets, and contingent actions
- Authorities committed to general government primary surplus of PRs 401 billion (0.4 percent of GDP).
- FY24Q1 fiscal targets met, but further measures needed due to rapid provincial spending and SBP profits shortfall (0.1 percent of GDP).
- Strengthening revenue collection:
  - FBR bringing nine hundred thousand identified non-filers into tax net; initial notifications by mid-December; monitoring system established.
  - Anti-smuggling, track and trace system monitoring, contingent measures if revenue falls short (MEFP ¶6 and ¶8b).
- Containing primary expenditure:
  - Primary expenditure target PRs 12,915 billion (11.9 percent of GDP) while preserving priority social spending.
  - Salary and pension increases restricted to allocated budgets; BISP UCT Kafaalat generosity protected.
  - Energy subsidies limited to PRs 976 billion as per the budget.
- Improved fiscal coordination with provinces:
  - Updated MoUs; Punjab committed to curtail expenditure by PRs 115 billion for remainder of FY24.
  - Provinces to implement time-bound plans to retire accumulated commodity debts created outside fiscal perimeter.
- Broad-based fiscal framework reforms:
  - Documentation law mandating 145 organizations to share information with the FBR.
  - Compliance Risk Management team within FBR; e-invoicing pilot scheduled for December 2023.
  - Operationalization of TSA-2 encompassing 231 accounts.
  - Full implementation of e-PADS electronic procurement system; 912 planned contracts in e-PADS; 341 completed amounting to PRs 83 million; 1,148 Procuring Agency users and 1,082 suppliers registered; 646 suppliers provided beneficial ownership information.

### Poverty reduction and social protection
- BISP and UCT Kafaalat:
  - FY24 BISP envelope PRs 472 billion (0.4 percent of GDP), a 30 percent increase over FY23 (excluding one-off flood spending).
  - FY24 envelope allows absorption of additional 300,000 families into UCT Kafaalat, bringing enrollment to 9.3 million families.
  - Planned inflation adjustment of Kafaalat stipend in January 2024 (end-January 2024 SB).
  - Targets for FY24 conditional programs: additional 1.2 million new children and 0.8 million new families for education, health, nutrition programs.
  - UCT Kafaalat generosity metric: current generosity 11.7 percent of the bottom two income quintiles’ monthly consumption; expected to remain below global best practice standard of 25 percent after January adjustment.
- Administrative improvements:
  - National Socio-Economic Registry dynamic registry fully operational nationwide; payments via real time biometric mechanism.
  - Scope to improve BISP disbursement efficiency and transparency.

### Monetary policy, exchange rate, and financial sector reforms
- Monetary stance and transmission:
  - Tight stance critical to reduce inflation and re-anchor expectations.
  - Continue improving monetary transmission; phase-out of SBP involvement in refinancing schemes; strengthen internal controls per 2023 Safeguards Assessment.
- Exchange rate and FX market reforms:
  - Return to market-determined exchange rate, deepen FX market liquidity, discourage formal/informal restrictions.
  - Authorities agreed to eliminate existing exchange restriction and multiple currency practice in early 2024.
  - Reserve policy objectives: bring reserves to at least US$8.2 billion (1.4 months of import coverage) by end-December 2023, with net international reserves above US$13.4 billion; maintain SBP net forward/swap position below US$3.45 billion.
- Banking sector and financial stability:
  - Banks to adopt IFRS 9 on January 1, 2024.
  - Three undercapitalized banks: one public bank being wound down (liquidation by end-March 2024 planned); two private banks to comply within six months.
  - Microfinance sector recapitalization plans; extension of deposit insurance to sector postponed until issues addressed.
  - Amendments to bank resolution and deposit insurance legislation to strengthen crisis management (submission to parliament (Senate), end-December 2023 SB).

### Energy sector policies — FY24 CDMP and reforms
- FY24 CDMP objectives and financing:
  - CDMP projects zero net CD accumulation in FY24.
  - Sector financial gap after revenue collection projected PRs 976 billion (0.9 percent of GDP).
  - FY24 budget subsidy PRs 976 billion (0.9 percent of GDP) covers: PRs 319 billion (power tariff differential for DISCOs and KE); PRs 265 billion (other payments to provinces, tribal areas, KE); PRs 392 billion (CD stock payments: PHPL principal PRs 82 billion; payments to GPPs and IPPs PRs 310 billion).
  - CD stock ended FY23 at PRs 2,310 billion (2.7 percent of GDP), down from PRs 2,646 billion (3.1 percent of GDP) in May 2023.
- Power sector measures:
  - Cost-recovering tariffs: FY24 annual rebasing notified July 27, 2023: NEPRA determined PRs 5.75 per unit on average across consumer slabs.
  - QTAs: FY23Q3 QTA PRs 1.25 per unit; FY23Q4 QTA PRs 3.28 per unit.
  - Under-recoveries projected PRs 263 billion (0.2 percent of GDP) in FY24.
  - Further reforms: improve price signals (gas), move to private sector DISCO management via long-term concessions from 2024, renegotiate PPAs, convert publicly-guaranteed PHPL debt into cheaper public debt, expand renewable capacity, improve transmission efficiency.
  - Anti-theft: PRs 46 billion recovered from September 7 to October 31; require anti-theft law, dedicated DISCO police force, and independent monitoring for 2,500 high-loss feeders.
- Gas sector measures:
  - Gas sector CD stock PRs 2,084 billion (2.5 percent of GDP) at end-FY23.
  - OGRA adjustments: February 17, 2023 end-user gas price adjustments estimated to generate PRs 310 billion in FY23H2; November 2023 adjustment on average 65 percent estimated to generate additional PRs 470 billion.
  - Planned actions: regular semiannual gas tariff adjustments (OGRA December 2023 within 40-day window — new SB, February 15, 2024); phase out captive power; reduce cross-subsidies to fertilizer producers; formalize gas CD stock reduction plan.

### Structural policies — SOEs, SWF, competitiveness, anti-corruption, climate
- SOE governance:
  - SOE Act took effect January 2023; operationalization via policy and ordinance amendment of four SOE Acts (end-November 2023 SB); remaining alignment pending updated ordinance or parliamentary adoption.
  - CMU staffing progress; full staffing and publication of first periodic SOE performance report by end-December 2023 (SB).
- Sovereign Wealth Fund (SWF):
  - SWF created August 2023 comprising seven profitable SOEs (worth about US$8 billion); governance and PFM challenges noted; authorities agreed to introduce safeguards and align with SOE privatization and March 2021 SOE Triage Plan.
- Business environment and SIFC:
  - SIFC established August 2023; must be accompanied by safeguards and bring projects under Pakistan’s public investment management framework.
- Anti-corruption and institutional reform:
  - Commit to publish full UNCAC report and complete institutional review via taskforce with independent experts (MEFP ¶23); taskforce to publish report by end-March 2024.
  - Integrate asset declarations and AML/CFT compliance to detect laundering and tax evasion.
- Climate adaptation:
  - Implement National Adaptation Plan (NAP) across six priority sectors; costing exercise by September 2024.
  - Cabinet adoption of Climate-PIMA and PIMA action plan targeted end-December 2023 (SB: in progress / met in later reporting).
  - Green Pakistan Program: 2.07 billion trees planted; sequestering potential 148.8 million tons of carbon through 2030.

### Debt sustainability (Annex I) — assessments and projections
- Risk and sustainability:
  - Overall risk of sovereign stress: high.
  - Debt sustainability summary: Sustainable in baseline under steady implementation of SBA policies.
  - Near-term assessment: 1/n.a.n.a.; Medium-term assessment: High; Long-term assessment: Moderate.
- Public debt projections (percent of GDP):
  - Public debt levels: 2023 77.1; 2024 72.8; 2025 71.0; 2026 69.8; 2027 67.8; 2028 65.8; 2029 64.0; 2030 62.5; 2031 61.0; 2032 59.5; 2033 58.2.
  - Change in public debt (percent of GDP): 2023 0.9; 2024 -4.3; 2025 -1.9; 2026 -1.2; 2027 -2.0; 2028 -2.0; 2029 -1.8; 2030 -1.5; 2031 -1.5; 2032 -1.4; 2033 -1.3.
- Gross financing needs (GFN) (percent of GDP): 2023 23.4; 2024 23.1; 2025 22.8; 2026 19.4; 2027 18.7; 2028 16.8; 2029 20.3; 2030 16.7; 2031 16.2; 2032 15.6; 2033 14.1.
- Memo (real GDP growth; inflation; nominal GDP growth): Real GDP growth -0.2 (2023), 2.0 (2024), 3.5 (2025), 4.5 (2026), 5.0 (2027–2033); Inflation (GDP deflator) 26.1 (2023), 24.0 (2024), 11.7 (2025); Nominal GDP growth 26.2 (2023), 26.8 (2024), 16.0 (2025).
- Contingent liabilities not in perimeter (end-FY23 estimates):
  - Guarantees PRs 3,515 billion.
  - Non-guaranteed circular debt: power PRs 1,545 billion and gas PRs 2.1 trillion.
  - Debt from commodity operations PRs 1,486 billion.
  - Non-guaranteed SOE debt PRs 255 billion.
  - Other contingent liabilities PRs 500 billion.
  - Estimated total exposures: 11.2 percent of GDP.

### Updates to program conditionality, test dates, and monitoring
- Authorities requested updates (MEFP ¶16):
  - Tighten end-December PCs on: SBP's net foreign currency swaps/forward position; net domestic assets of SBP; floor on SBP's net international reserves.
  - Adjust end-December PC on general government primary budget deficit to balance quasi-fiscal effort while remaining consistent with 0.4 percent of GDP FY24 target.
  - Modify end-December ITs: nominal floor on general government budgetary health and education spending (to maintain cumulative Q2 spending ~1 percent of GDP); ceiling on power sector payment arrears aligned with August CDMP.
  - New SBs proposed: (i) notification of December 2023 semi-annual gas tariff adjustment determination (February 15, 2024); (ii) SBP plan to strengthen internal controls in lending operations (March 8, 2024).
  - Rephase access for second review to March 15, 2024.
- Quantitative PC outcomes and proposed test figures (selected from Table 1):
  - Floor on net international reserves (millions US$): Program -14,550; Adjusted -15,673; Actual -13,781 (Met); Program end-Dec -13,800; Proposed -13,400.
  - Ceiling on net domestic assets of SBP (stock, billions PRs): Program 15,048; Adjusted 15,370; Actual 14,410 (Met); Proposed 14,888; 14,450.
  - Ceiling on SBP net foreign currency swaps/forward position (negative, millions US$): Program 4,200; Actual 3,540 (Met); Proposed 4,000; 3,450.
  - Ceiling on general government primary budget deficit (cumulative, excl. grants, billions PRs): Program -87; Adjusted -389; Actual -376 (Not met); Proposed -1,232; -1,420.
  - Cumulative floor on BISP targeted cash transfers (billions PRs): Program 87.5; Actual 89.8 (Met); Proposed 185.5; 185.5.
  - Indicative: Floor on net tax revenues collected by FBR (billions PRs): Program 1,977; Actual 2,042 (Met); Proposed 4,425; 4,425.
  - Indicative: Ceiling on power sector payment arrears (cumulative flow, billions PRs): Program -155; Actual 227 (Not Met); Proposed 64; 385.

### Monitoring, reporting, and transparency commitments
- Monitoring framework:
  - Authorities to provide data to IMF in line with Article VIII, Section 5.
  - Reporting agencies: SBP, MOF, PBS, FBR, Ministry of Water and Power, Ministry of Petroleum, BISP, sectoral entities.
  - Selected reporting frequencies and deadlines (examples):
    - SBP balance sheet (weekly summary): First Thursday of the following week.
    - International reserves (daily): The following working day.
    - Monetary survey (monthly): Within first 30 days.
    - FBR revenue collection (monthly): Within seven days of end of month.
    - MOF external debt (monthly): Within 25 days of following month.
    - Consolidated general government (quarterly): Within 45 days of quarter end.
- Recent program test outcomes (end-December reporting):
  - Headline inflation in December: 29.7 percent (yoy).
  - Core inflation: 21 percent (down from 21.5 percent a month earlier).
  - Customs imports: US$26.1 billion in FY24H1 (down from US$31.2 billion in FY23H1).
  - Gross reserves: US$8.2 billion at end-December (from US$7 billion at end-November).
  - Exchange rate: rupee around 282 PRs/USD.
  - Program test outcomes: SBP net foreign currency swaps/forward position for end-December 2023 -US$3,423 million vs target -US$4,000 million (target met).
  - Three end-December 2023 SBs met: CMU SOE report issuance; submission to parliament of bank resolution and crisis management amendments; cabinet adoption of Climate-PIMA and PIMA action plan.

### Staff appraisal and near-term priorities
- Staff overall view:
  - Program on track with tentative stabilization signs; demand weak; inflation elevated but declining; SBP rebuilding FX buffers; fiscal performance improved (primary surplus FY24Q1).
  - Medium-term challenges remain acute; decisive policy implementation required.
- Near-term priorities:
  - Lock in FY24 primary surplus via continued spending restraint, revenue measures, and contingent actions if needed.
  - Continue timely tariff adjustments and structural energy reforms to contain CD flows.
  - Restore market-determined exchange rate and rebuild reserves.
  - Strengthen banking sector resilience and complete legal reforms for crisis management.
  - Advance SOE governance, SWF safeguards, anti-corruption institutional reforms, and climate adaptation financing and budgeting.

*Source: IMF staff report and executive summary (content unit 1pakea2024001).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Recent developments
- Economic activity has stabilized and inflation has begun to gradually decline on the back of strong policy adjustment following the 2022 floods and acute financial pressures earlier in the year.
- External pressures have eased somewhat since June, and the SBP has begun rebuilding foreign exchange (FX) reserves using renewed inflows.
- Fiscal performance has improved, with the general government achieving a primary surplus in FY24Q1.
- Downside risks remain exceptionally high despite welcome progress.

Key recent macro developments and indicators:
- GDP contracted by 0.2 percent in FY23.
- GDP estimated to have increased 2.1 percent yoy in FY24Q1; sector contributions: agriculture +5.1 percent yoy, industry +2.5 percent, services +0.8 percent.
- Headline inflation declined from 38 percent in May to 26.8 percent in October, then rose to 29.2 percent in November; core inflation has been around 21 percent since June.
- Monetary policy: policy rate held at 22 percent since late June 2023.
- Current account: reached US$0.9 billion in FY24Q1 after declining to US$2.2 billion in FY23.
- Gross official reserves increased to US$7 billion (up from US$4.5 billion in June).
- Sovereign spreads fell from around 2,300 basis points in early July to below 1,500 basis points in late November.
- Banking sector: banks’ sovereign exposure rose to 55.3 percent of assets at end-September 2023 (from 48 percent at end-FY21); private sector credit contracted -1 percent yoy; CAR at 19.1 percent as of end-September 2023 (regulatory minimum 11.5 percent including capital conservation buffer); NPLs increased to 7.7 percent with provisioning at 95.5 percent.
- Energy sector circular debt (CD) combined reached approximately 5¼ percent of GDP at end-FY23; power CD PRs 2.5 trillion at end-September (2.4 percent of GDP); power sector CD closed FY23 at PRs 2.3 trillion (2.7 percent of GDP); gas sector CD PRs 2.1 trillion (2.5 percent of GDP) at end-FY23.

### Program performance
- The 9-month Stand-by Arrangement (SBA) approved on July 12, 2023, is on track.
- QPCs and targets:
  - At end-September 2023, six quantitative Performance Criteria (PCs) were met: floors on (i) net international reserves of the SBP; and (ii) targeted cash transfers spending (BISP); ceilings on (iii) the SBP's FX swap/forward book; (iv) net domestic assets of the SBP; (v) net government budgetary borrowing from the SBP; and (vi) the amount of government guarantees.
  - Continuous PCs met: zero new flow of SBP credit to the government; and zero external public payment arrears.
  - The ceiling on the general government primary budget deficit was missed by a small margin due to technical factors related to exchange rate valuation of external financing flows (TMU ¶17; amendment noted).
- Indicative Targets (ITs):
  - Met three end-September ITs: floors on (i) net tax revenue collected by FBR; and (ii) budgetary health and education spending; and (iii) ceiling on net accumulation of tax refund arrears.
  - IT on power sector payment arrears was missed by a large margin, mostly due to under-recoveries in August and a lower-than-anticipated tariff in the annual rebasing.
- Structural Benchmarks (SBs):
  - Met SBs on notification of the FY24 annual rebasing and compilation/dissemination of quarterly national accounts.
  - Continuous SB on average premium between interbank and open market exchange rate was missed mid-August to early-September; reforms in the exchange company (EC) sector are expected to address governance/transparency risks.
  - Strong progress on end-November SB to improve SOE governance: operationalization of the SOE Act into a policy clarifying ownership arrangements and roles; significant progress via ordinance on amending Acts of four selected SOEs (final amendments pending via updated ordinance and/or parliamentary adoption).

### Policies and reform priorities
- Fiscal policy:
  - Strict adherence to fiscal targets is essential while protecting development needs and strengthening the social safety net to alleviate pressures and place debt on a downward path.
  - General government achieved a primary surplus of 0.4 percent of GDP in FY24Q1; overall revenue performance was strong, 0.1 percent of GDP above program projections.
  - Provincial spending exceeded projections in Q1 partly due to a PRs 115 billion payment by the Punjab government to clear commodity operations debt; provincial PSDP spending expected to remain close to Q1 level in Q2–Q3 given caretaker constraints.
- Exchange rate and monetary policy:
  - Maintain a market-determined exchange rate to buffer external shocks, rebuild reserves, and support recovery.
  - Monetary policy needs to stay tight and proactive; the Monetary Policy Committee (MPC) should respond swiftly and forcefully if inflationary pressures reemerge.
- Energy sector and SOE governance:
  - Recent increases in electricity and gas tariffs were important to shore up energy sector viability, but broader reforms are needed to tackle structurally high energy sector costs.
  - Accelerate reforms of state-owned enterprises and governance framework, including safeguards for the newly-created Sovereign Wealth Fund, to strengthen business environment, investment, and job creation.
- Social protection:
  - Protect low-income and vulnerable households from tariff adjustments (noted that protective measures were applied in recent power and gas tariff changes).

### SBA review and financing
- Staff supports completion of the SBA review, which would make available SDR 528 million, bringing total access to SDR 1,422 million, and help anchor essential financing from official partners.
- Support from multilateral and bilateral creditors has been strong and financing assurances are in place.

### Outlook and risks
- Growth and inflation outlook:
  - Real GDP growth revised down to 2.0 percent in FY24 (from 2.5 percent) reflecting subdued domestic demand.
  - Headline CPI projected to average 24 percent in FY24; year-end inflation revised to 18.5 percent in FY24 and 9 percent in FY25.
  - Staff projects year-end inflation of 18.5 and 9 percent in FY24 and FY25, respectively.
- Balance of payments and reserves:
  - FY24 current account deficit projected at US$5.6 billion (1.6 percent of GDP), below the US$6.5 billion projected in the SBA Request.
  - CAD expected to remain around 1½ percent of GDP over the medium term under a market-determined exchange rate consistent with a sustainable CAD and reserve rebuilding efforts.
  - Projected gross official reserves: US$9.1 billion for 2023/24 (Table excerpt shows Gross official reserves (billions of US$) 9.1 for 2023/24; other years listed in table).
- Public debt and financing risks:
  - Public debt sustainability remains vulnerable given large gross financing needs and scarce external financing.
  - Under decisive implementation of program policies and adequate multilateral and bilateral financing, public debt would remain sustainable (SRDSF, Annex I).
  - Risks that could undermine debt sustainability: policy slippages, insufficient financing, elevated gross financing needs, realization of contingent liabilities, and other downside shocks.
  - With low reserves and scarce market financing, FX payments will remain a persistent challenge; real interest rates absorb more than half of general government revenue.

### Mission and documentation
- Policy discussions were held in Islamabad during November 2–15, 2023.
- Staff team leadership and composition listed in the Executive Summary’s mission note (names and roles provided in source).

*Source: IMF staff executive summary (December 18, 2023).*

### 5.      Downside risks remain exceptionally high. External financing risks are exceptionally high

### 5.      Downside risks remain exceptionally high. External financing risks are exceptionally high

### Overall risk assessment
- External financing risks are exceptionally high; delays in the disbursement of planned financing from IFIs or bilateral partners could pose major risks to the government's program given limited buffers.
- Any external financing shortfalls would increase the government’s reliance on expensive financing from domestic banks and could further crowd out private credit.
- Higher commodity prices and tighter global financial conditions, including due to the intensification of geopolitical conflicts, could put pressure on the exchange rate and external stability.
- Political tensions ahead of the upcoming elections may weigh on policy decisions and reform implementation.

### A. Fiscal Policy — key findings and measures
- Authorities committed to achieving a general government primary surplus of PRs 401 billion (0.4 percent of GDP), but securing this requires additional effort.
- FY24Q1 fiscal targets were met, but rapid provincial spending and the shortfall in SBP profits (0.1 percent of GDP) imply the need for further measures.
- Strengthening revenue collection:
  - The FBR has commenced bringing nine hundred thousand identified non-filers into the tax net.
  - The FBR will issue initial notifications to these taxpayers by mid-December and has established a monitoring system to track the yield, with corrective measures planned should collections fall short.
  - Further reforms include anti-smuggling efforts, close monitoring of the track and trace system, and contingent measures if revenue falls short in FY24 (MEFP ¶6 and ¶8b).
- Containing primary expenditure:
  - Primary expenditure target of PRs 12,915 billion (11.9 percent of GDP) while preserving space for priority social spending (MEFP ¶6).
  - Salary and pension increases restricted to allocated budgets; BISP unconditional cash transfer (UCT) Kafaalat generosity protected.
  - Energy subsidies limited to PRs 976 billion as per the budget.
- Improved fiscal coordination with provinces:
  - Updated MoUs with provinces to guarantee FY24 budget targets.
  - Punjab government committed to curtail expenditure by PRs 115 billion for the remainder of FY24 to achieve the committed surplus.
  - Provinces agreed to implement time-bound plans to retire decade-long accumulated commodity debts created outside the government's fiscal perimeter.
- Broad-based fiscal framework reforms:
  - Strengthening revenue mobilization (MEFP ¶8a,c): tax policy agenda to raise additional revenue, IMF tax diagnostic support, adoption of a documentation law mandating 145 organizations to share information with the FBR, establishment of a Compliance Risk Management team within the FBR, implementation of the e-invoicing system scheduled for December 2023, and a door-to-door campaign in four provincial capitals and Islamabad to register non-filing retailers.
  - Enhancing Public Financial Management (PFM) (MEFP ¶8d, ¶24b): IMF TA requested to strengthen budget preparation and execution, improve coordination and fiscal reporting with provinces, Climate-PIMA assessment completed with an action plan, operationalization of TSA-2 encompassing 231 accounts, and ADB TA requested for forecasting and cash management.
  - Increasing spending transparency (MEFP ¶8d): Full implementation of electronic procurement system (e-PADS) with World Bank support.
  - Improving debt management: progress in resolving staffing issues in the Debt Management Office (DMO) but challenges remain; agreement that the government's borrowing requirement must continue to fall; ceiling on government guarantees remains key; SOE debts related to commodity operations should be included in the guarantee perimeter to strengthen debt reporting transparency.

### B. Poverty Reduction and Social Protection
- Social protection spending pace:
  - FY24 BISP envelope of PRs 472 billion (0.4 percent of GDP), a 30 percent increase over BISP spending in FY23 (excluding one-off flood-related spending).
  - The FY24 envelope allows absorption of an additional 300,000 families into BISP’s UCT (Kafaalat) program, bringing enrollment to 9.3 million families.
  - Planned inflation adjustment of the Kafaalat stipend in January 2024 (end-January 2024 SB) will protect the scheme’s current real generosity level.
  - Targets for FY24 conditional programs: an additional 1.2 million new children and 0.8 million new families for education, health, and nutrition programs.
- Program design and administration:
  - The National Socio-Economic Registry's dynamic registry is fully operational nationwide; payments now made through a real time, biometric-based mechanism enabling quick response to shocks.
  - Scope remains to improve the efficiency and transparency of BISP disbursement mechanisms.
- Other social spending execution risks:
  - End-September health and education spending target met, but authorities expect to fall short of the original end-December target due in part to limits on the caretaker government's ability to execute new projects.
  - Execution should continue later in the fiscal year when a new government forms.
  - Lifeline and protected power and gas tariff slabs (¶14) must continue until they can be effectively replaced by a targeted BISP scheme.
- Note on generosity metric:
  - The UCT Kafaalat’s current generosity level – 11.7 percent of the bottom two income quintiles’ monthly consumption – is expected to remain below the global best practice standard of 25 percent even after the January inflation adjustment.

### C. Monetary, Exchange Rate and Financial Sector Policies
- Monetary policy stance:
  - A tight monetary stance is critical to reduce inflation, re-anchor expectations, and support external sector rebalancing through the exchange rate.
  - The stance is broadly appropriate given weak domestic demand, but the MPC should be ready to respond if near-term price pressures reemerge and ensure the real policy rate remains in clear positive territory.
  - Continue improving monetary transmission, including gradual phase-out of SBP's involvement in refinancing schemes (MEFP ¶14) and strengthening internal control systems around monetary policy lending operations as recommended by the 2023 Safeguards Assessment Report (March 8, 2024 SB, ¶20, MEFP ¶13).
- Exchange rate and FX market reform:
  - Support return to a market-determined exchange rate via gradual deepening of the FX market and avoiding actions to manage the current account.
  - Deepening FX market liquidity should rebound trading volumes if banks are encouraged to manage FX flows via the interbank market.
  - Authorities must refrain from formal or informal restrictions; SBP interventions should build FX buffers and not be used to prevent trend depreciation driven by fundamentals.
  - Authorities agreed to redouble efforts to eliminate the existing exchange restriction and multiple currency practice in early 2024.
  - SBP's planned EC sector reforms could improve oversight, governance, and transparency; monitoring pricing in informal exchange rate markets would help identify market dysfunction.
- Banking sector and financial stability:
  - Close monitoring of the banking sector is essential; actions to address undercapitalized institutions should move to conclusion.
  - SBP implemented risk-based bank supervision; banks must adopt IFRS 9 on January 1, 2024.
  - Amendments to bank resolution and deposit insurance legislation will further strengthen crisis management (submission to parliament (Senate), end-December 2023 SB, MEFP ¶16c).
  - Three undercapitalized banks: the public bank is being wound down with SBP intending to put the legal entity into liquidation by end-March 2024; two private banks remain undercapitalized with commitment to achieve compliance with capital requirements within six months (MEFP ¶16a).
  - Microfinance sector vulnerabilities being addressed; owners asked to provide time-bound recapitalization plans; extension of deposit insurance to the sector postponed until issues addressed.

### D. Energy Sector Policy — power and gas measures
- Power sector fiscal containment:
  - August 2023 FY24 circular debt management plan (CDMP) aims to contain the CD stock to end-FY23 level of PRs 2,310 billion (2.2 percent of GDP).
  - Plan includes budgeted FY24 subsidy to the power sector of PRs 976 billion (0.9 percent of GDP), including direct support of PRs 584 billion (0.6 percent of GDP) and CD stock payments of PRs 392 billion (0.4 percent of GDP).
- Power sector measures:
  - Timely alignment of tariffs with cost recovery to prevent further annual CD accumulation; a temporary intra-year CD stock increase is expected due to subsidy disbursement and tariff patterns; progressive lifeline and protected slab tariff structure must be maintained to shield vulnerable households (MEFP ¶18a).
  - Collections enhancement: under-recoveries projected at PRs 263 billion (0.2 percent of GDP) in FY24; sustain enhanced collections efforts initiated in early September (MEFP ¶18c).
  - Further reforms (MEFP ¶18) to reduce high costs, improve DISCO performance, and increase competition and green energy, including: improving price signals for inputs (notably gas); moving to private sector management of DISCOs through long-term concessions from 2024; renegotiating remaining power purchase agreements; converting publicly-guaranteed PHPL debt into cheaper public debt; expanding renewable energy capacity; and improving transmission efficiency.
- Gas sector measures:
  - Following the November tariff increase, further efforts include:
    - Regular (automatic) implementation of semiannual gas tariff adjustments, including OGRA's December 2023 determination within the required 40-day window (SB February 15, 2024, MEFP ¶19a).
    - Full phasing out of captive power usage to reduce demand distortions and power sector liquidity pressures (MEFP ¶19b).
    - Establishing a more level playing field among non-household consumers by eliminating cross-subsidies to fertilizer producers and favorable rates for well-connected industries (MEFP ¶19c).
    - Formalization of a CD stock reduction plan (MEFP ¶19e).

### E. Structural Policies
- SOE governance and oversight:
  - Strong progress made, with ABD support, implementing the SOE Act that took effect in early 2023, including a policy to operationalize the law and amendment via ordinance of four SOE-dedicated laws (end-November 2023 SB).
  - Remaining alignment of individual SOE laws with the SOE Act requires either an updated ordinance or parliamentary adoption (MEFP ¶21a).
  - Progress toward fully staffing a Central Monitoring Unit within the Ministry of Finance (end-December 2023 SB) to play a key role in SOE monitoring, reporting, and governance.
- Sovereign Wealth Fund (SWF) risks:
  - Creation of a SWF in August 2023 comprising seven profitable SOEs (worth about US$8 billion) presents governance and PFM challenges; these SOEs are exempted from the SOE Act’s best practice structure.
  - Authorities agreed to swiftly introduce safeguards to address these challenges and align efforts with SOE privatization and restructuring and the March 2021 SOE Triage Plan (MEFP ¶8d and ¶21b).
- Business environment and investment:
  - Legal establishment in August 2023 of the Special Investment Facilitation Council (SIFC) should be accompanied by committed safeguards (MEFP ¶22) and bring SIFC-identified projects under Pakistan's public investment management framework to ensure accountability and transparency.
- Anti-corruption and institutional reforms:
  - Authorities committed to publishing the full UNCAC report and completing a review of Pakistan's anti-corruption institutions by a taskforce with independent experts (MEFP ¶23).
  - The review should identify corruption vulnerabilities and reform actions to strengthen independence and effectiveness of institutions, including the National Accountability Bureau.
  - Integration of asset declarations held by the FBR and AML/CFT compliance functions of banks consistent with best practices would help detect, prevent, and deter laundering of proceeds of corruption, tax evasion and smuggling through the financial sector.
- Climate adaptation and resilience:
  - Implement the National Adaptation Plan (NAP) focused on six priority sectors; realign the PSDP portfolio with NAP objectives; carry out a costing exercise for new projects; and explore channels for mobilizing climate finance.
  - Advance recommendations of the IMF's Climate-PIMA (cabinet adoption end-December 2023 SB, MEFP ¶24b).

*Source: IMF staff report — Section 5 of the Pakistan program documentation.*

### 16.      The authorities have requested the following updates to program conditionality (MEFP

### 16.      The authorities have requested the following updates to program conditionality (MEFP

### Updates to program conditionality and structural benchmarks
- End-December performance criteria (PCs) proposed to be tightened for:
  - (i) SBP's stock of net foreign currency swaps/forward position;
  - (ii) net domestic assets of the SBP;
  - Floor on:
  - (iii) SBP's net international reserves;
  - Rationale: to lock in progress in rebuilding SBP's reserves.
- End-December PC on the general government primary budget deficit proposed to be adjusted to balance quasi-fiscal effort through the year while remaining consistent with the 0.4 percent of GDP target for FY24.
- End-December indicative targets (ITs) proposed to be modified:
  - (i) the nominal floor on general government budgetary health and education spending, to maintain cumulative Q2 spending at about 1 percent of GDP;
  - (ii) the ceiling on power sector payment arrears, for consistency with the August CDMP.
- New structural benchmarks proposed:
  - (i) notification of the December 2023 semi-annual gas tariff adjustment determination (February 15, 2024);
  - (ii) SBP to develop a plan to strengthen internal controls systems in lending operations, in line with the recommendations from the 2023 Safeguards Assessment (March 8, 2024).
- Rephasing of access for the second review to March 15, 2024, to provide sufficient time to complete the program’s structural agenda (Table 9b).

### Financing
- Program financing and reserve position:
  - The program is fully financed and the reserve position at end-FY24 is consistent with program objectives (Table 3a), although risks remain exceptionally high.
  - Over US$3 billion in commitments made at the time of the SBA request have already been delivered, with an additional US$1 billion in multilateral support expected by end-2023.
  - Further assurances for bilateral support of US$0.7 billion were reconfirmed ahead of this review.
  - The Islamic Development Bank is now likely to deliver only a small fraction of the US$1 billion pledged ahead of the SBA during the program period.
  - A debt rearrangement with a major bilateral creditor has generated amortization savings of around US$1.2 billion in both FY24 and FY25.
- Financing risks (remain exceptionally high) stem from:
  - large public sector external rollover needs;
  - a persistent current account deficit;
  - a difficult external environment for Eurobond and Sukuk issuance;
  - limited reserve buffers in case of delays to anticipated inflows.

### Capacity to repay
- Fund exposure and reserves:
  - The Fund's exposure reaches SDR 5,972 million (or 294 percent of quota and about 103 percent of projected gross reserves at end-January 2024) with purchases linked to the review (Table 9b).
  - With completion of all purchases under the arrangement, exposure would peak at SDR 6,673 million in March 2024 (329 percent of quota and about 102 percent of projected gross reserves at end-March 2024).
- Risks to capacity to repay:
  - Exceptionally high risks from delayed adoption of reforms, high public debt and gross financing needs, low gross reserves and SBP's sizeable net FX derivative position, the recent decline in inflows, and sociopolitical factors could jeopardize policy implementation and erode repayment capacity and debt sustainability.
  - Restoring external viability hinges on strong policy implementation, including beyond the SBA.
  - Adequate and timely execution of the firm and credible financing assurances from official creditors remains essential to mitigate these risks.

### Enterprise risks
- SBA enterprise risks remain broadly unchanged from program approval.
- Concentration and exposure:
  - As the fourth largest GRA credit exposure, Pakistan represents a significant concentration risk, with GRA credit outstanding representing 30 percent of FY23 precautionary balances assuming full disbursement of the SBA.
- Mitigating factors:
  - targeted macrocritical conditionality;
  - phased access;
  - burden sharing;
  - adequate financing assurances for the program, including from key multilateral and official bilateral creditors;
  - assurances of broad political support for the program’s objectives and policies.
- Other risks and mitigants:
  - Reputational and engagement risks from program disruptions; mitigated by the caretaker government’s commitment to strong policy implementation and timely completion of reviews.
  - Sociopolitical tensions; mitigated by calibrated communication and outreach strategies, including direct outreach to CSOs and measures to protect the vulnerable.
  - Non-financial risks mitigated by the review-based nature of Fund lending that allows adjustment of policies and conditions as macroeconomic circumstances change.
  - Challenging security situation; all in-country Fund activities are closely coordinated in line with Fund policies and supported by UNDSS.

### Safeguards assessment of SBP
- An updated safeguards assessment of the SBP is completed.
- Key findings:
  - Broadly sound safeguards framework, with all recommendations from the 2019 assessment implemented.
  - Legal amendments to the SBP Act in 2022 significantly improved the institutional framework for autonomy and governance, with SBP ceasing monetary financing and beginning the phase out of quasi-fiscal development schemes.
  - Monetary policy reverse repo operations have increased substantially in recent years.
- Recommended risk mitigation measures:
  - enhance SBP's collateral policy;
  - establish a counterparty eligibility policy (¶11, MEFP ¶13).

### Staff appraisal: macroeconomic assessment and policy advice
- Overall assessment:
  - The authorities’ program is on track, with tentative signs that the economy is stabilizing and external pressures are easing.
  - Demand remains weak; economic activity is picking up gradually; inflation has started to decline but remains elevated.
  - SBP has taken advantage of inflows to begin rebuilding FX buffers.
  - Fiscal performance improved, with the general government registering a primary surplus in FY24Q1.
  - Medium-term challenges remain acute; current policy efforts need to continue.
- Fiscal policy:
  - Authorities’ measures to safeguard the FY24 primary surplus target are welcome.
  - Further fiscal reforms essential to reduce debt to more sustainable levels.
  - Recommendations:
    - strict adherence to the budget;
    - future revenue mobilization focused on improving revenue administration, ensuring proper tax policy implementation, and expanding the base through measures targeting under-taxed sectors;
    - curtail non-priority spending while safeguarding social assistance and prioritizing projects;
    - enhance public financial management to optimize efficiency.
- Social spending:
  - Reducing poverty and protecting the most vulnerable require strengthening social spending and institutions.
  - Staff welcomed higher nominal BISP budget envelope for FY24, expansion of the UCT beneficiary base, and new enrollments into CCT schemes.
  - Called for greater efforts to maintain planned health and education spending.
- Monetary policy:
  - Given elevated near-term inflationary risks, monetary policy needs to remain tight and proactive.
  - Forward-looking real policy rate has returned to positive territory, but caution is warranted.
  - MPC should respond forcefully and without delay if inflationary pressures reemerge.
- Exchange rate and FX policy:
  - Ensuring a market-determined exchange rate is critical to buffer external shocks, rebuild SBP's FX reserves, and support growth.
  - Restore public confidence by allowing price signals to function without impediment and decisively abandoning tight management of the FX market.
  - Signaling that repatriation of profits and dividends will not be restricted is indispensable to attract high-quality FDI.
  - The existing exchange restriction and the MCP should be eliminated as soon as possible.
- Financial stability:
  - Continued vigilance required.
  - Ensure all banks and microfinance banks are compliant with minimum capital requirements or exit the market.
  - Passing legal reform of the crisis management framework is crucial to equip authorities to deal with weak institutions.
- Energy sector:
  - Recent electricity and natural gas tariff increases demonstrate willingness to shore-up energy sector viability.
  - Authorities should continue to implement tariff adjustments on time while maintaining a progressive structure to protect the most vulnerable households.
  - Swift movement needed on broader reforms to reduce operational inefficiencies, improve performance, and reduce distortions that add pressure on CD flows.
- Structural reforms:
  - Progress needed to create a basis for sustainable and inclusive growth.
  - Continued progress on SOE governance and anti-corruption institutional reform is essential, including introducing sufficient governance measures for the newly-created SWF and SIFC, alongside business environment improvements and critical climate change adaptation efforts.
- Risk outlook:
  - Risks remain exceptionally high and tilted to the downside.
  - External headwinds include tight global financial conditions, volatile food and fuel prices, and geopolitical tensions, including due to the conflict in Gaza and Israel.
  - Wavering reform efforts could undermine adjustment, put pressure on the exchange rate, and affect availability of external financing.

*Source: 1pakea2024001 - 16.      The authorities have requested the following updates to program conditionality (MEFP*

### 30.      While recognizing these risks, staff supports the authorities' request for completion of

### While recognizing these risks, staff supports the authorities' request for completion of the first review under the SBA

### Program requests and staff assessment
- Staff supports the authorities' request for:
  - Completion of the first review under the SBA.
  - Modification of performance criteria and rephasing of access (¶16).
  - A waiver of nonobservance for the end-September QPC on the general government primary budget deficit, because the deviation was minor and will not affect program goals.
- Acknowledgement of risks to program implementation (phrase: "While recognizing these risks").

### Recent macroeconomic developments
- Real GDP growth and sectoral contribution (FY12–FY23): charts indicate Real GDP Growth series across FY12–FY23 with sectoral contributions from Industry (incl. mining), Agriculture, and Services.
- Notable drivers and outcomes:
  - Growth contracted in FY23 in the context of the floods, tight external financing, and adverse domestic policies.
  - Import compression drove a narrowing of the current account deficit.
  - Foreign reserves declined sharply in FYs22-23, pressuring the rupee, before recovering since approval of the SBA.
  - After an increase in FY23, the SBP substantially narrowed its derivative position in recent months.
  - External competitiveness remains weak, despite some recent modest improvement.
  - Private sector credit growth has fallen into negative territory.

### External sector and balance of payments (selected figures and projections)
- Current account balance (in percent of GDP), selected years:
  - 2018/19: -4.2
  - 2019/20: -1.5
  - 2020/21: -0.8
  - 2021/22: -4.7
  - 2022/23: -1.2
  - 2023/24: -0.7
  - 2024/25 (Prog.): -1.8
  - 2025/26 (Est.): -1.6
  - 2026/27 (Prog.): -1.5
  - 2027/28 (Proj.): -1.5
  - 2028/29 (Proj.): -1.6
- Balance of payments (Table 3a, current account and components, in US$ millions):
  - Current account (2018/19–2027/28): examples include -13,434 (2018/19), -4,449 (2019/20), -2,820 (2020/21), -17,481 (2021/22), -4,020 (2022/23), -2,235 (2023/24 Prog.), -6,424 (2024/25 Prog.), -5,649 (2025/26 Est.), -5,617 (2026/27 Proj.), -5,952 (2027/28 Proj.), -6,499 (2028/29 Proj.), -7,323 (2029/30 Proj.).
  - Exports, f.o.b.: 24,257 (2018/19), 22,536 (2019/20), 25,639 (2020/21), 32,493 (2021/22), 28,062 (2022/23), 27,879 (2023/24 Prog.), 30,843 (2024/25 Prog.), 30,327 (2025/26 Est.), 32,356 (2026/27 Proj.), 34,689 (2027/28 Proj.), 37,254 (2028/29 Proj.), 39,461 (2029/30 Proj.).
  - Imports, f.o.b.: 51,869 (2018/19), 43,645 (2019/20), 54,273 (2020/21), 71,543 (2021/22), 53,951 (2022/23), 51,834 (2023/24 Prog.), 64,700 (2024/25 Prog.), 58,262 (2025/26 Est.), 63,025 (2026/27 Proj.), 66,553 (2027/28 Proj.), 70,492 (2028/29 Proj.), 74,470 (2029/30 Proj.).
- Workers' remittances (US$ millions): 21,740 (2018/19), 23,131 (2019/20), 29,450 (2020/21), 31,279 (2021/22), 27,051 (2022/23), 27,333 (2023/24 Prog.), 32,889 (2024/25 Prog.), 29,470 (2025/26 Est.), 31,172 (2026/27 Proj.), 33,039 (2027/28 Proj.), 34,643 (2028/29 Proj.), 36,233 (2029/30 Proj.).

### Reserves and gross financing requirements
- Gross official reserves (end-period, US$ millions) shown in Table 3a and Table 3b:
  - 2018/19: 7,274
  - 2019/20: 12,175
  - 2020/21: 17,297
  - 2021/22: 9,821
  - 2022/23: 4,056
  - 2023/24 (Prog.): 4,455
  - 2024/25 (Prog.): 8,982
  - 2025/26 (Est.): 9,101
  - 2026/27 (Proj.): 13,006
  - 2027/28 (Proj.): 16,901
  - 2028/29 (Proj.): 19,731
  - 2029/30 (Proj.): 21,182
- Gross external financing requirements (Table 3b, US$ millions): examples include 25,552 (2018/19), 23,430 (2019/20), 22,206 (2020/21), 33,736 (2021/22), 25,593 (2022/23), 22,819 (2023/24), 28,361 (2024/25 Prog.), 24,965 (2025/26 Est.), 22,245 (2026/27 Proj.), 24,678 (2027/28 Proj.), 24,924 (2028/29 Proj.), 31,189 (2029/30 Proj.).

### Monetary policy, exchange rate, and financial markets
- SBP has gradually tightened monetary policy since September 2021; policy rate and corridor movements are shown in figures for 2015M7–2023M11 and 2010M12–2023M10.
- Interest rate indicators (selected): Six-month treasury bill rate (period average) examples: 10.2 (2018/19), 11.9 (2019/20), 7.3 (2020/21), 11.0 (2021/22), and 18.3 (2023/24 in selected entries).
- Exchange rate and reserves (figure): Interbank exchange rate (PRs/US$) and gross official reserves series from 2014M1–2023M11 illustrate rupee depreciation pressures and reserve fluctuations.
- External bond spreads and equity markets:
  - EMBI and Pakistan spreads remain elevated despite significant drop following SBA approval.
  - Karachi Stock Exchange (KSE) index rallied strongly; trading volumes rebounded; KSE up by more than regional peers in charts spanning 2011–2023.
- Open Market Operations (OMOs) injections remain very high (outstanding net OMOs in Pakistani rupees, 2012M9–2023M11).

### Banking system and financial stability
- Nonperforming loans (NPLs) rose in FY23 but remained relatively contained in the context of the large economic deceleration.
- Banking system orientation:
  - System remains oriented toward providing credit to the government, leaving Pakistan behind peers in terms of private credit relative to the size of its economy.
- Capitalization, profitability, liquidity (selected indicators, Table 6 and Figure 3):
  - Regulatory capital to risk-weighted assets: e.g., 14.9 (2013), 19.1 (2022), series in Table 6.
  - NPLs to gross loans: 13.3 (2013), 7.7 (2022), series across years.
  - Return on assets (after tax): ranges from 1.1 to 1.5 across years; Return on equity (after tax): e.g., 12.4 (2013) to 26.9 (2022 Sep).
  - Liquid assets to total assets and loans/deposits ratios indicate banks remain highly liquid.
- Credit to private sector: sharp deceleration into negative territory in recent periods; Table 1 shows private credit (percent change) examples: 11.9, 3.0, 11.5, 17.4, 1.0, 2.3, 8.0, 5.0, 20.0 (selected years).

### Fiscal position and public debt (selected tables)
- General government fiscal balances (percent of GDP, Table 4b):
  - Revenue and grants: 11.3 (2018/19), 13.3 (2019/20), 12.4 (2020/21), 12.1 (2021/22), 11.4 (2022/23), 11.4 (2023/24), 12.3 (2024/25 Prog.), 12.5 (2025/26 Est.), 12.4 (2026/27 Proj.), 12.4 (2027/28 Proj.).
  - Expenditure (including statistical discrepancy): 19.1 (2018/19), 20.3 (2019/20), 18.5 (2020/21), 20.0 (2021/22), 18.9 (2022/23), 19.2 (2023/24), 19.8 (2024/25 Prog.), 20.2 (2025/26 Est.), 19.7 (2026/27 Proj.), 17.5 (2027/28 Proj.).
  - Overall balance (including grants): -7.8 (2018/19), -7.0 (2019/20), -6.0 (2020/21), -7.8 (2021/22), -7.6 (2022/23), -7.7 (2023/24), -7.5 (2024/25 Prog.), -7.6 (2025/26 Est.), -7.3 (2026/27 Proj.), -5.8 (2027/28 Proj.), -5.1 (2028/29 Proj.), -4.7 (2029/30 Proj.).
- Debt levels and dynamics (selected lines, Table 1 / Table 4a / Table 10):
  - General government debt incl. IMF obligations (percent of GDP): 77.5 (2018/19), 79.6 (2019/20), 73.5 (2020/21), 76.2 (2021/22), 77.4 (2022/23), 77.1 (2023/24), 70.9 (2024/25 Prog.), 72.8 (2025/26 Est.), 71.0 (2026/27 Proj.), 68.8 (2027/28 Proj.).
  - Total public debt stock (Table 10, US$ million, end-period): Total 239,275 (Sep-23); External 101,311 (42.3 percent of total); Domestic 137,964 (57.7 percent of total).
  - Gross public debt service (Table 3b and Table 10): examples include amortization totals and debt service lines in respective tables (e.g., Debt service in Table 1: 40.8, 51.5, 34.1, 37.5, 57.6, 57.8, 41.0, 40.0, 39.6 for selected years).

### Medium-term outlook (selected framework and risks)
- Medium-Term Macroeconomic Framework (Table 2) projections:
  - Real GDP at factor cost: series includes -0.9, 5.8, 6.2, -0.5, -0.2, 2.5, 2.0, 3.5, 4.5, 5.0, 5.0 (selected years through 2027/28).
  - Consumer prices (period average): 10.7, 8.9, 12.1, 29.2, 25.9, 24.0, 11.7, 7.7, 7.6, 6.6, 6.6.
  - Current account balance (in percent of GDP) through the medium term: values around -1.5 to -1.6 in projections.
  - Gross reserves in billions of US$ in Table 2: 12.2, 17.3, 9.8, 4.1, 4.5, 9.0, 9.1, 13.0, 16.9, 19.7, 21.2 (selected years).
- Vulnerabilities and indicators (Table 8):
  - Real GDP growth (2023/24 Est.): 3.1; 2024/25 Prog.: -0.9; 2025/26 Est.: 5.8; 2026/27 Prog.: 6.2; 2027/28 Proj.: -0.2 (selected entries show series).
  - EM bond spreads and exchange rate pressures noted; EMBI spread values noted in charts and tables.
  - Gross international reserves and GIR as percent of short-term debt at remaining maturity show wide fluctuations across years.

### Policy implications and near-term priorities (as reflected in staff stance)
- Staff endorsement of program process steps:
  - Completion of first review under the SBA.
  - Modification and rephasing of access and performance criteria where requested by authorities.
  - Granting of a waiver for the minor deviation on the end-September QPC for the general government primary budget deficit, given limited impact on program goals.
- Underlying emphasis across the data and figures:
  - Restoration of external buffers (gross official reserves recovery post-SBA approval).
  - Continued fiscal consolidation to improve primary and overall balances as projected.
  - Tight monetary policy stance alignment with market rates to contain inflation and stabilize the exchange rate.
  - Addressing structural constraints to revive private sector credit growth and improve external competitiveness.

*Source: IMF staff report (Pakistan), tables and figures as provided in the content unit.*

### Annex I. Sovereign Risk and Debt Sustainability Analysis

### Annex I. Sovereign Risk and Debt Sustainability Analysis

### Overall risk assessment and sustainability
- Final assessment: Overall risk of sovereign stress is high.
- Near-term assessment: 1/n.a.n.a.
- Medium-term assessment: High (in line with the mechanical signal).
- Long-term assessment: Moderate.
- Debt sustainability summary: Sustainable (public debt continues to be assessed as sustainable in the baseline under steady implementation of the proposed SBA policies).
- Key staff commentary findings:
  - If the SBA is implemented consistently and macroeconomic prudence continues for the medium term, the debt path is expected to remain on a downward trajectory.
  - GFNs, although high, would be covered by official bilateral and domestic financing.
  - Underlying vulnerabilities and risks are very high because of significant sovereign exposure of domestic banks and extremely limited scope for policy flexibility.
  - Elevated gross financing needs continue to pose high risks to debt sustainability, particularly as fiscal and reserve buffers have been depleted.
  - Timely disbursements of committed bilateral and multilateral support are critical.
  - Significant risks include: 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.
- Additional risk factors:
  - Insufficient progress with policies and structural reforms could hamper potential growth.
  - Pakistan is very exposed to adverse consequences of climate change (more frequent floods and droughts); adaptation costs would slow debt reduction and increase financing requirements.

### Debt coverage and disclosures
- Debt coverage in the DSA: 1/CGGGNF PSCPSOther
- Question: If central government, are non-central government entities insignificant? n.a.
- Subsectors included in chosen coverage (Inclusion):
  - Budgetary central government: Yes
  - Extra budgetary funds (EBFs): No
  - Social security funds (SSFs): No
  - State governments: Yes
  - Local governments: Yes
  - Public nonfinancial corporations: No
  - Central bank: No
  - Other public financial corporations: No
- Staff commentary on contingent liabilities not included in perimeter (as of end-FY23):
  - Guarantees: PRs 3,515 billion
  - Non-guaranteed circular debt in the power and gas sector: PRs 1,545 billion and PRs 2.1 trillion
  - Debt from commodity operations: PRs 1,486 billion
  - Non-guaranteed SOE debt: PRs 255 billion
  - Other contingent liabilities (estimated): PRs 500 billion
  - Estimated total of those exposures: 11.2 percent of GDP
- Reporting on intra-government debt holdings: Partial (see commentary)
- Basis of recording / Valuation of debt stock: Not applicable / Not applicable (with partial aspects noted)
- Instrument coverage categories noted: Debt securities, Loans, IPSGSs, Currency & deposits, Other accounts payable
- Recording basis: Non-cash basis 4/ and Cash basis noted as applicable across sectors in commentary
- Valuation conventions referenced: Nominal value 5/, Face value 6/, Market value 7/

### Public debt structure indicators
- Perimeter shown: General government.
- Staff commentary:
  - Pakistan's external debt is predominantly to bilateral and multilateral creditors.
  - Although the maturity structure is set to lengthen over the projection horizon, the high share of short-term debt poses risks and will require timely disbursements from creditors.
  - Pakistan’s domestic debt is mostly to domestic banks, increasing the sovereign-bank nexus.
  - During the current monetary tightening cycle, Pakistan has issued predominantly floating-rate domestic debt, increasing sovereign exposure to interest rate risk.
- Residual maturity: 6. years (as listed under charts)
- Trends (noting chart axes but preserving text statements):
  - Debt by currency: foreign currency, local currency, local-linked composition shown across years.
  - Public debt by holder: external private creditors, external official creditors, domestic other creditors, domestic commercial banks, domestic central bank.
  - Debt by instruments: marketable debt, nonmarketable debt.
  - Public debt by governing law, 2023: domestic law, foreign law ex. multilateral, multilateral.

### Baseline scenario projections (Percent of GDP, unless otherwise indicated)
- Public debt levels (Actual and projections):
  - 2023: 77.1
  - 2024: 72.8
  - 2025: 71.0
  - 2026: 69.8
  - 2027: 67.8
  - 2028: 65.8
  - 2029: 64.0
  - 2030: 62.5
  - 2031: 61.0
  - 2032: 59.5
  - 2033: 58.2
- Change in public debt (percent of GDP):
  - 2023: 0.9
  - 2024: -4.3
  - 2025: -1.9
  - 2026: -1.2
  - 2027: -2.0
  - 2028: -2.0
  - 2029: -1.8
  - 2030: -1.5
  - 2031: -1.5
  - 2032: -1.4
  - 2033: -1.3
- Contribution of identified flows:
  - 2023: 1.4
  - 2024: -3.2
  - 2025: 0.0
  - 2026: -0.8
  - 2027: -1.4
  - 2028: -1.8
  - 2029: -1.7
  - 2030: -1.6
  - 2031: -1.5
  - 2032: -1.4
  - 2033: -1.4
- Primary deficit (percent of GDP):
  - 2023: 0.8
  - 2024: -0.4
  - 2025: -0.5
  - 2026: -0.4
  - 2027: -0.4
  - 2028: -0.4
  - 2029: -0.4
  - 2030: -0.4
  - 2031: -0.4
  - 2032: -0.4
  - 2033: -0.4
- Noninterest revenues (percent of GDP): 11.4 (2023), 12.5 (2024), 12.4 (2025–2033)
- Noninterest expenditures (percent of GDP): 12.2 (2023), 12.1 (2024), 12.0 (2025–2033)
- Automatic debt dynamics (percent of GDP):
  - 2023: 0.6
  - 2024: -2.8
  - 2025: 0.4
  - 2026: -0.3
  - 2027: -1.0
  - 2028: -1.4
  - 2029: -1.3
  - 2030: -1.2
  - 2031: -1.1
  - 2032: -1.0
  - 2033: -0.9
- Real interest rate and relative inflation (percent):
  - 2023: -3.8
  - 2024: -1.3
  - 2025: 2.9
  - 2026: 2.7
  - 2027: 2.4
  - 2028: 1.8
  - 2029: 1.9
  - 2030: 1.9
  - 2031: 1.9
  - 2032: 1.9
  - 2033: 1.9
- Real interest rate (percent):
  - 2023: -8.9
  - 2024: -6.5
  - 2025: 0.5
  - 2026: 1.4
  - 2027: 1.2
  - 2028: 0.8
  - 2029: 0.8
  - 2030: 1.0
  - 2031: 1.1
  - 2032: 1.1
  - 2033: 1.2
- Relative inflation (percent):
  - 2023: 5.1
  - 2024: 5.3
  - 2025: 2.4
  - 2026: 1.4
  - 2027: 1.1
  - 2028: 1.0
  - 2029: 1.0
  - 2030: 0.9
  - 2031: 0.8
  - 2032: 0.7
  - 2033: 0.7
- Real growth rate (percent):
  - 2023: 0.1
  - 2024: -1.5
  - 2025: -2.5
  - 2026: -3.1
  - 2027: -3.3
  - 2028: -3.2
  - 2029: -3.1
  - 2030: -3.0
  - 2031: -3.0
  - 2032: -2.9
  - 2033: -2.8
- Contribution of residual:
  - 2023: -0.5
  - 2024: -1.1
  - 2025: -1.8
  - 2026: -0.4
  - 2027: -0.6
  - 2028: -0.1
  - 2029: -0.1
  - 2030: 0.0
  - 2031: 0.0
  - 2032: 0.0
  - 2033: 0.0
- Gross financing needs (GFN) (percent of GDP):
  - 2023: 23.4
  - 2024: 23.1
  - 2025: 22.8
  - 2026: 19.4
  - 2027: 18.7
  - 2028: 16.8
  - 2029: 20.3
  - 2030: 16.7
  - 2031: 16.2
  - 2032: 15.6
  - 2033: 14.1
- Of which: debt service (percent of GDP):
  - 2023: 22.6
  - 2024: 23.5
  - 2025: 23.2
  - 2026: 19.9
  - 2027: 19.1
  - 2028: 17.2
  - 2029: 20.7
  - 2030: 17.1
  - 2031: 16.6
  - 2032: 16.0
  - 2033: 14.5
- Local currency GFN (percent of GDP): 18.0 (2023), 19.8 (2024), 19.5 (2025), 15.8 (2026), 15.3 (2027), 12.8 (2028), 16.2 (2029), 13.2 (2030), 12.0 (2031), 12.3 (2032), 11.0 (2033)
- Foreign currency GFN (percent of GDP): 4.6 (2023), 3.8 (2024), 3.7 (2025), 4.0 (2026), 3.9 (2027), 4.4 (2028), 4.6 (2029), 3.9 (2030), 4.6 (2031), 3.7 (2032), 3.5 (2033)
- Memo:
  - Real GDP growth (percent): -0.2 (2023), 2.0 (2024), 3.5 (2025), 4.5 (2026), 5.0 (2027–2033)
  - Inflation (GDP deflator; percent): 26.1 (2023), 24.0 (2024), 11.7 (2025), 7.7 (2026), 6.6 (2027–2033)
  - Nominal GDP growth (percent): 26.2 (2023), 26.8 (2024), 16.0 (2025), 12.7 (2026), 11.8 (2027), 11.9 (2028–2033)
  - Effective interest rate (percent): 11.3 (2023), 13.4 (2024), 12.4 (2025), 9.8 (2026), 8.6 (2027), 7.9 (2028), 8.0 (2029), 8.4 (2030), 8.5 (2031), 8.7 (2032), 8.9 (2033)
- Staff commentary: Public debt is projected to decline very slowly and will require robust continuation of prudent policies beyond the program period. The margin of error for policy slippages and delays in structural reforms remains very small.

### Realism of baseline assumptions
- Staff commentary:
  - The programmed fiscal adjustment path is ambitious but feasible given broad political support for the SBA, support from partners, favorable demographic dynamics, and significant scope for revenues by widening the tax base.
  - Renewed efforts for structural reforms are needed to lift growth potential and avoid negative debt dynamics.
  - T-bill issuance as a share of total domestic issuance is projected to decline gradually, with some progress made in FY24H1.
- Comparator and percentile references used in realism charts:
  - Exchange rate depreciation color codes and comparator percentiles (e.g., > 75th percentile, 50-75th percentile, 25-50th percentile, < 25th percentile) are used to assess historical realism.
  - Distribution and percentile ranks referenced for 3-year debt reduction and 3-year adjustment in cyclically-adjusted primary balance (examples: 3-year reduction above 75th percentile (5.9 ppts of GDP) percentile rank 80.1; 3-year adjustment above 75th percentile (2 ppts of GDP) percentile rank 71).

### Medium-term risk analysis
- Key indicators and values:
  - Fanchart width: 37.00.5
  - Probability of debt not stabilizing (pct): 6.40.1
  - Terminal debt level x institutions index: 47.71.0
  - Debt fanchart index: ...1.6
  - Average GFN in baseline: 20.26.9
  - Bank claims on government (pct bank assets): 55.317.9
  - Change in claims on govt. in stress (pct bank assets): 10.03.3
  - GFN financeability index: ...28.2
- Probabilities (2024-2029):
  - Prob. of missed crisis, 2024-2029 (if stress not predicted): 54.5 pct.
  - Prob. of false alarm, 2024-2029 (if stress predicted): 5.7 pct.
- Staff commentary:
  - Debt Fanchart Module points to a moderate level of risk because the fiscal effort underlying the program sets Pakistan on a declining debt-to-GDP trajectory.
  - GFN Financeability Module suggests a high level of risk due to:
    - High share of bank assets invested in government securities (limits scope for government response to future crises).
    - Average GFN-to-GDP ratio above the 75th percentile of the comparator group.
  - Aggregated index points to a high level of medium-term risk.

### Long-term risk analysis
- Large Amortization Trigger: Not triggered.
- Commentary:
  - Elevated GFN are a key risk, but the risk of large amortizations is not triggered because projected GFN-to-GDP and Amortization-to-GDP ratios for years t+6 through t+30 do not exceed the historical average (plus one standard deviation) threshold, given elevated historical time series over the past 10 years.
  - Explosive dynamics for GFN and debt ratios under historical assumptions illustrate that macroeconomic adjustment as envisaged under the SBA-supported program is critical.
  - Historical 10-year average for the primary balance: -1.4 percent of GDP.
  - Projected primary balance for year t+5 under the baseline: 0.5 percent of GDP.
  - Debt-stabilizing primary balance: -1.1 percent of GDP (noted as relatively close to historical 10-year average).
- Climate change scenarios (adaptation costs and long-term projections):
  - Standardized scenario: adaptation costs deteriorate the primary fiscal balance by 0.6 percent of GDP annually initially, declining towards 0.3 percent of GDP by the mid-2030s.
  - Customized scenario: reduced initial adaptation investment, potentially arising from financing constraints, and relatedly lower long-term growth (4 percent instead of 5 percent).
  - Staff commentary: Given Pakistan's exceptionally high vulnerability to climate change, freeing up fiscal space for adaptation investment within the confines of debt sustainability will be critical.

*Source: Fund staff.*

### 3. In the period ahead, we will seek to build on the strong program performance to gradually

### 1pakea2024001 - 3. In the period ahead, we will seek to build on the strong program performance to gradually

### Program priorities and near-term objectives
- Priorities of the economic program:
  - (i) advancing gradual fiscal consolidation—underpinned by continued spending restraint, effective execution of revenue measures, and, if necessary, contingent measures to help lock in a solid primary surplus for FY24—to bring down debt, while creating fiscal space for much-needed social and development spending;
  - (ii) reducing quasi-fiscal deficits in the electricity and gas sectors;
  - (iii) completing the return to a market-determined exchange rate;
  - (iv) further building the resilience of the banking sector;
  - (v) pursuing state-owned enterprise (SOE) reform including improved governance; and
  - (vi) boosting efforts to build resilience from climate change.

### Financing, SBA effects, and reform momentum
- The approval of the SBA catalyzed significant financing from bilateral partners, including new disbursements of budget and balance of payment support as well as rescheduling of existing bilateral loans.
- Ongoing efforts:
  - realize remaining committed financing during the period of the SBA;
  - mobilize financial support pledged during the Conference on Climate Resilient Pakistan (January 2023) for humanitarian assistance and rehabilitation projects from the 2022 floods;
  - attract foreign investment, including through forthcoming privatization of SOEs, to improve economic performance and help replenish gross reserves.

### Requests to the IMF Executive Board
- Requests based on strong program performance and commitments:
  - (i) a waiver of nonobservance for the missed end-September QPC ceiling on the general government primary budget deficit;
  - (ii) modifications to the end-December 2023 targets for net international reserves, the net foreign currency swap/forward position, and net domestic assets, and for the general government primary budget deficit to continue progress towards the FY24 primary balance goal of 0.4 percent of GDP;
  - (iii) rephasing of the access date for the second review to March 15, 2024;
  - (iv) completion of the first review under the SBA and the related purchase in the amount of SDR 528 million (26 percent of quota).
- Completion of the final review scheduled for March 2024 requires observance of QPCs, ITs, and PCs with end-December 2023 test dates (set out in MEFP Table 1) and structural benchmarks (SBs, set out in MEFP Table 2).

### Commitment to consultation, data, and safeguards
- The authorities will consult with the IMF on adoption of additional measures and supply timely and accurate data needed for program monitoring.
- Commitment to implement recommendations of the 2023 Safeguards Assessment, including revisiting risk mitigating measures for monetary policy operations.
- Consent to IMF publication of this letter, the MEFP, the TMU, and accompanying Executive Board documents.

*Attachment I. Memorandum of Economic and Financial Policies*

### Recent economic developments and outlook (findings and projections)
- FY23: sharp slowdown amid intensifying external pressures; damage from floods and deep import compression.
- Signs of stabilization and incipient recovery in recent months.
  - Large-scale manufacturing: 0.7 percent (yoy) in FY24Q1.
  - Headline inflation: 29.2 percent (yoy) in November.
  - Core inflation: 18.6 and 25.9 percent (yoy) in urban and rural areas, respectively.
  - Gross reserves: increased from US$4.5 billion at end-FY23 to US$7 billion at end-November 2023.
- Baseline macro scenario:
  - Real GDP projected at 2 percent in FY24; medium-term growth rising gradually to 5 percent.
  - Headline CPI inflation projected to remain above 20 percent (yoy) through FY24Q3; decline through FY25-26 to within the 5–7 percent target range within FY26.
  - Current account deficit (CAD) projected at 1.6 percent of GDP in FY24; medium-term CAD expected to remain around 1½ percent of GDP.

### Risks to the baseline
- Failures or delays in implementing exchange rate, tax, and energy sector reforms could:
  - compromise restoration of confidence and return of growth;
  - impede rebuilding of reserves and jeopardize debt and external sustainability.
- Fiscal slippages could increase pressures on domestic banks and endanger macroeconomic stability.
- Delays in multilateral and bilateral disbursements, intensification of geopolitical conflicts, resurgent commodity prices, and tightening global financial conditions are material downside risks.

### Fiscal policy stance, recent performance, and targets
- Commitment to achieve a primary surplus of at least 0.4 percent of GDP.
  - FY23 slippages led to overruns in the primary balance by 0.3 percent of GDP.
  - General government primary surplus in FY24Q1 was 0.4 percent of GDP.
  - Part of the Q1 surplus reflected technical delays in releasing power subsidies of PRs 72 billion and underspending of PSDP (PRs 137 billion released, PRs 41 billion spent in FY24Q1).
  - Interest expenses in FY24Q1 reached 1.3 percent of GDP.
- Revenue performance in FY24Q1:
  - Non-tax revenues increased 124 percent (yoy); petroleum levy collection exceeded projections by PRs 22 billion.
  - FBR revenue increased 25 percent (yoy); domestic-oriented tax revenue jumped 36 percent (yoy).
  - Provincial tax revenue in line with projections, but provincial current and capital expenditure exceeded projections.

### Measures to secure the FY24 primary surplus target
- Expenditure-side commitments:
  - refrain from granting any further increases in salaries and pensions beyond those in FY24Q1; these items will remain within FY24 appropriated limits;
  - create fiscal room to protect the generosity level of the BISP unconditional cash transfer (UCT) Kafaalat program in FY24;
  - expedite PSDP prioritization and rationalization to achieve savings of at least PRs 61 billion;
  - limit energy subsidies via timely notification of quarterly and monthly power tariff adjustments by NEPRA, timely notification of the December 2023 semiannual gas tariff adjustment by OGRA, and acceleration of structural cost-reducing reforms.
- Revenue-side actions:
  - Recognize realized shortfall in SBP dividend transfers: budget projected PRs 1,113 billion; realized amount fell short by PRs 141 billion.
  - Commit to effective execution of all FY24 budget measures and measures to expand the tax base, including issuing tax notification to more than 900 thousand non-filers identified by the FBR.
  - Monitor FED, income tax (including advance payments and withholding taxes), and taxpayer base expansion; provide IMF team with timely monthly data on agreed performance indicators early in the following month.
  - Contingency triggers: if monthly cumulative FBR revenue falls short of projected target by 1.5 percent in Q2, 0.5 percent in Q3 or 0.1 percent in Q4, evaluate adoption of one or more contingency measures (¶8.b).

### Ringfencing fiscal discipline (commitments)
- Commitments:
  - (i) not to allow supplementary grants for any additional unbudgeted spending over the parliamentary approved level in FY24 (except severe natural disaster response);
  - (ii) not to grant further tax amnesties or issue new preferential tax treatments or exemptions (continuous SBs) in FY24 without prior National Assembly approval;
  - (iii) continuing focus on critically urgent energy sector policies;
  - (iv) commitment not to introduce any fuel subsidy, or cross-subsidy scheme, in FY24 and beyond.

### Structural fiscal reforms and implementation milestones
- Revenue administration improvements:
  - Amended Income Tax Rules, 2022 to mandate 145 organizations to share information regularly with the FBR; follow legal procedure for adoption.
  - Build FBR Compliance Risk Management (CRM) analytical capability with advanced data science staff; initial Risk Register by December 2023; Compliance Improvement Plans by March 2024.
  - Initiate pilot testing of the e-invoicing system by December 2023.
- Contingent revenue measures (selected options and expected monthly collections):
  - raise GST rate for textiles and leathers tier-1 from 15 percent to 18 percent, expected PRs 1 billion per month;
  - implement a FED of PRs 5 per kilogram on sugar, expected PRs 8 billion per month;
  - increase advance income tax on import of machinery by 1 percentage point, expected PRs 2 billion per month;
  - increase advance income tax on import of raw materials by industrial undertakings by 0.5 percentage points, expected PRs 2 billion per month;
  - increase advance income tax on import of raw materials by commercial importers by 1 percentage point, expected PRs 1 billion per month;
  - increase withholding tax on supplies by 1 percentage point, expected PRs 1 billion per month;
  - increase withholding tax on services by 1 percentage point, expected PRs 1.5 billion per month;
  - increase withholding tax on contracts by 1 percentage point, expected PRs 1.5 billion per month.
- Taxpayer base expansion:
  - January 2024: door-to-door campaign in four provincial capitals and Islamabad to register non-filing retailers; cross-reference tax filings with electricity meter data; safeguards via random audits; monthly advance tax payments under the scheme will offset final income tax liabilities at year-end with no refunds of such advance payments.
- Public financial management (PFM) reforms:
  - SOE monitoring: Central Monitoring Unit (CMU) created in September 2022; full operationalization with hiring and publication of first periodic SOE performance report by end-December 2023 (end-December 2023 SB).
  - Sovereign Wealth Fund (SWF) governance safeguards for SWF created in August 2023 (assets currently comprise seven SOEs): ensure public investment plan approval via standard public investment process; investment strategy approval by Supervisory Council; annual accounts audited by the Auditor General; prohibition on using assets to provide borrowing to public entities or as collateral; SWF will not engage as private partner in a PPP.
  - Cash management: operationalized treasury single account (TSA-2) encompassing 231 accounts including FBR and NHA; drafting TSA rule amendments focused on sweep-in, sweep-out; requested ADB technical assistance; established cash management working group.
  - Spending transparency and procurement: roll-out of electronic procurement system e-PADS with TA from the World Bank; since launch in early 2023:
    - 912 planned procurement contracts in e-PADS; 341 contracts completed (amounting to PRs 83 million);
    - 1,148 Procuring Agency users and 1,082 suppliers registered;
    - e-PADS incorporates beneficial ownership information and is interlinked with Securities and Exchange Commission of Pakistan data; for contracts PRs 50 million and above, beneficial ownership information is mandatory;
    - 646 suppliers registered in e-PADS have provided beneficial ownership information; PPRA conducting training for federal and provincial procuring agencies and suppliers.

### 9.      We will continue our proactive debt management efforts to cover the large financing

### 9.      We will continue our proactive debt management efforts to cover the large financing

### Debt management and domestic debt market deepening
- Finding: Large financing requirements are putting pressure on our debt sustainability.
- Finding: Large share of floating-rate domestic debt and elevated global interest rates imply debt servicing costs are projected to remain high over the near term.
- Policy objective: Maintain fiscal and monetary discipline to ensure debt sustainability.
- Funding strategy:
  - Continue to rely on regular primary T-bill, PIB and Sukuk auctions as the main mechanism for raising new domestic financing.
  - Issue and list government securities, including short-term Shariah-compliant instruments, on the Pakistan Stock Exchange to diversify and expand the investor base for government debt.
- Financial market development:
  - Move away from a bank-centric financial system to deepen domestic financial markets to build the foundation for strong private sector growth over the medium-term.
  - Reform National Savings Scheme to make it more cost-effective and reduce crowding-out of market-based saving opportunities, aligned with public sector pension reform and the creation of an enabling environment for retirement savings.

### Poverty reduction and social protection (FY24 focus)
- Objective: Reduce poverty, strengthen social safety net, mitigate disparities, foster inclusion, and shore up resilience to shocks.
- FY24 budget allocation and execution:
  - FY24 budget includes a PRs 472 billion (0.4 percent of GDP) BISP allocation, about a third higher than in FY23 (excluding one-off spending for flood emergencies).
  - Spending execution through end-September was in line with the program target, as was spending execution for health and education.
- Program operations and adjustments:
  - Fully operationalized, across the country, the dynamic registry for regular NSER updates to capture more households, remain more up to date, and respond to shocks more timely.
  - Revised the education and stunting CCT programs to align them with actual child schooling and food costs.
- FY24 specific targets and measures:
  - a. Use larger BISP budget envelope to:
    - (i) absorb an additional horizontal expansion of the UCT Kafaalat base by 300,000 families to 9.3 million families by end-FY24 (enrollment was already up to 9.2 million by end-September 2023);
    - (ii) adequately provision for the regular inflation adjustment exercise to be undertaken in January 2024 (to cover calendar year 2024) (end-January 2024 SB).
  - b. Continue collaboration with the World Bank to:
    - (i) keep the NSER live and covering all of Pakistan’s poor, keep BISP enrollment open, and ensure regular re-declaration of BISP beneficiaries’ status on the intended 3-year cycle;
    - (ii) fully roll out a new electronic payment model with more banking options and transparency for users;
    - (iii) speed up enrollment of interested UCT Kafaalat families into the two CCT programs supporting children’s education and health, with targets of 1.2 million new children and 0.8 million new families, respectively, for FY24;
    - (iv) implement a meaningful improvement of the still low UCT Kafaalat generosity level;
    - (v) maintain administrative capacity and create fiscal contingency reserves to disburse emergency cash transfers in case of adverse events hitting vulnerable families (including climate-related catastrophes, ¶24).
- Contextual statistics (from footnotes):
  - Out of the 9.1 million families enrolled in the UCT Kafaalat program at end-September 2023, about 7.3 million families had at least one child in school- or college-going age (4–18 years) who was principally eligible for the two CCT programs; only 4.8 million families had at least one child enrolled in at least one of the CCT programs.
  - At end-September 2023, the UCT Kafaalat generosity level was about 11.5 percent of the average consumption of a bottom quintile family, relative to an international best practice of about 25 percent.

### Monetary, exchange rate, and financial sector policies
- Strategic objectives:
  - Complete the return to a market-determined exchange rate.
  - Lower inflation toward target.
  - Rebuild foreign exchange reserves.
- Exchange rate policy and market conduct:
  - Noted disorderly FX market conditions with the average premium between the interbank and open market rate (continuous SB) exceeding 1.25 percent from mid-August to early-September against program commitments.
  - Reaffirm commitment to a market-determined exchange rate; banks and exchange companies (ECs) are at liberty to determine exchange rates free from formal or informal influence.
  - Refrain from providing guidance or expressing preference to market participants regarding the exchange rate or regulate demand for FX through formal or informal administrative action.
  - Structural reforms in the EC sector to create stronger and better-managed ECs, including banks establishing wholly-owned ECs.
  - Transparency and market infrastructure measures:
    - Publish daily exchange rates in the interbank and open market as of December 2023.
    - Finalize preparations for transitioning to a new trading platform for spot transactions connecting all banks, scheduled to go live by end-January 2024.
    - Undertake a feasibility study to conduct FX purchases and sales via auctions, including publication of auction results, by end-March 2024.
    - Develop a framework to monitor pricing and broader developments in informal markets and publish a report with findings by end-March 2024.
  - Enforcement: Address abusive or anti-competitive behavior through enforcement of relevant regulations and applicable laws.
- Rebuilding foreign exchange reserves:
  - Reserve policy objectives:
    - Bring reserves up to a more prudent level of at least US$8.2 billion (1.4 months of import coverage) by end-December 2023, with net international reserves above US$13.4 billion.
    - Maintain SBP’s net forward/swap position below US$3.45 billion.
  - SBP interventions guided by building FX buffers; FX sales limited to episodes of disorderly market conditions and not used to prevent trend depreciation driven by fundamentals.
- Monetary policy stance:
  - Maintained the policy rate at 22 percent at the Monetary Policy Committee meeting on October 30.
  - Expect inflation to notably decline over coming months given weaker demand, favorable supply developments, and receding exchange rate pressures.
  - Stand ready to respond if near-term price pressures reemerge or if exchange rate pressures reemerge amid normalization of the current account.
  - Aim to ensure the real policy rate remains in clear positive territory on a forward-looking basis to bring inflation within the target band within FY26.
  - Strengthen monetary policy transmission by linking interest rate on EFS and LTFF to the policy rate with a spread of no more than 3 percentage points.
- Strengthening internal controls and safeguards:
  - Implemented all recommendations from the 2019 Safeguards Assessment, including amendments to the SBP Act in early 2022.
  - Reverse repo lending operations expanded to 43 percent of total SBP assets as of end-June 2023; plan to develop a plan to strengthen internal control systems, including updates to collateral policy and counterparty eligibility policy, in line with recommendations from the 2023 Safeguards Assessment (new SB, March 8, 2024), with implementation starting by end-December 2024.
  - Reaffirm commitment to engage with appointing authority to fill senior official vacancies in a timely manner.
- Phasing out SBP refinancing schemes:
  - Transition plan to phase out SBP’s involvement in refinancing schemes by mid-2028, transferring responsibility to the EXIM Bank of Pakistan.
  - FY24 actions: phase out 10 percent of existing refinancing exposures under EFS and LTFF; by end-October 2023, outstanding balances on these facilities had been reduced by 5.3 and 13 percent, respectively.
  - EXIM license issued to commence operations on November 3, 2023; EXIM drafted term sheets and expects to launch first export refinancing operations by end-December 2023.
  - SBP committed not to introduce further refinancing schemes during the transition period or thereafter.
- Elimination of multiple currency practice (MCP) and exchange restrictions:
  - Update procedures to eliminate MCP on government FX transactions and phase out the existing exchange restriction.
  - Intend to eliminate MCP arising from the use of the weighted-average customer exchange rate for SBP-government transactions by end-January 2024.
  - Continue to assess removal of the exchange restriction on advance payments for imports and will consult with the IMF to ensure consistency with Pakistan’s Article VIII commitments and aim to complete the phase out by end-January 2024.
- Financial sector resilience and supervision:
  - Monitoring impact of domestic and external pressures and ready to act decisively to safeguard resilience.
  - SBP supervisory and regulatory actions:
    - a. Addressing undercapitalized financial institutions:
      - One previously undercapitalized mid-sized public sector bank returned to capital compliance in the last quarter of FY23 after a capital injection.
      - Two private banks and one public bank remain undercapitalized; committed to ensure compliance with minimum capital requirements within the next 6 months.
      - Partial recapitalization of one private bank has occurred; neither private bank is fully recapitalized.
      - Implementation of cabinet-approved wind-down plan for the remaining undercapitalized public bank anticipates repayment of deposits, sale of assets, retrenchment of staff, and legal entity liquidation during the first quarter of 2024 at the latest.
      - Continue efforts to address vulnerabilities in the microfinance bank sector affected by floods, including time-bound recapitalization plans and orderly market exit of non-viable institutions; postpone extension of deposit insurance to this sector until issues are addressed and preconditions met.
      - Adopted comprehensive strategy to address high levels of NPLs, including requiring bank-specific plans and charging-off fully provisioned NPLs; public consultation process with industry is being finalized.
    - b. Mitigating external pressures:
      - Ensure foreign exchange exposures of banks remain within regulatory limits or face supervisory sanctions; ensure adequate FX liquidity by all deposit-taking institutions.
      - Assess options to strengthen monitoring of FX exposures in the non-financial corporate sector, including unhedged off-balance sheet exposures through forwards.
    - c. Upgrading crisis management framework:
      - Advancing bank resolution and crisis management frameworks, including deposit insurance scheme, to align with international best practice.
      - Technical work finalized in the legislative committee and cabinet-approved draft legal framework on October 30, 2023; preparing for submission to parliament (Senate) to meet the SB (end-December 2023 SB). Will engage IMF staff before submission to confirm alignment with IMF TA advice.
    - d. Effective implementation of AML/CFT:
      - SBP and FBR implementing February 2023 Regulations giving banks access to asset declarations of public officials BPS17-22 held by the FBR.
      - FBR created a Customer Due Diligence Office to respond to banks’ requests; FBR will issue a feedback report by end-January 2024.
      - SBP will conduct a focused inspection to assess banks’ utilization of asset declarations and internal controls to safeguard confidentiality.
      - FBR, SBP and the Financial Monitoring Unit will plan joint trainings with designated bank officers to increase system uptake and improve AML/CFT compliance.

### Energy sector policies and power sector stability
- Finding: Power sector remains under pressure.
- Key statistics:
  - Stock of power payment arrears (circular debt, CD) stood at PRs 2,537 billion (3.0 percent of GDP) at end-September 2023, an increase of PRs 227 billion (0.2 percent of GDP) since end-FY23.
  - Increase exceeded target due to a lower-than-anticipated annual tariff rebasing and large DISCO under-recoveries (PRs 222 billion, centered in August when the annual rebasing was implemented).
  - Collections dipped to 77 percent during August due to the large price shock and high average monthly consumption per household.
  - Cumulative collection improved to 84 percent at end-September and to 90 percent at end-October, supported by enhanced enforcement actions.

*IMF staff summary of chapter content as provided in the source document.*

### 18.      Going forward, we remain resolved to address the drivers of CD flow. Our updated FY24

### 18.      Going forward, we remain resolved to address the drivers of CD flow. Our updated FY24

### FY24 Circular Debt Management Plan (CDMP) — overview and financing
- The CDMP projects zero net CD accumulation for this fiscal year.
- The sector’s financial gap (after revenue collection) is projected to amount to PRs 976 billion (0.9 percent of GDP).
- The FY24 budget subsidy of PRs 976 billion (0.9 percent of GDP) will cover:
  - Outlays for the projected power tariff differential (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 totaling PRs 392 billion, comprising:
    - PHPL principal settlements: PRs 82 billion.
    - Payments to GPPs and IPPs: PRs 310 billion.
- CD stock ended FY23 at PRs 2,310 billion (2.7 percent of GDP), down from PRs 2,646 billion (3.1 percent of GDP) in May 2023, following unpaid subsidy releases, K-Electric payments, delayed price adjustments, and annual settlement of: (i) PHPL due principal PRs 35 billion; and (ii) CPPA unguaranteed arrears PRs 127 billion.

### Key priorities of the FY24 CDMP — power sector measures
- Ensuring cost-recovering tariffs:
  - FY24 annual rebasing (AR) notified in full on July 27, 2023, effective July 1: NEPRA determined PRs 5.75 per unit on average across consumer slabs (end-July 2023 SB).
  - NEPRA’s FY23Q3 QTA automatically notified in July 2023: PRs 1.25 per unit on average across consumer slabs.
  - FY23Q4 QTA notified in October: PRs 3.28 per unit on average across consumer slabs.
  - NEPRA to continue automatic notifications of regular QTAs and FCAs per established formulas; efforts to spare protected slabs to achieve cost recovery and increase tariff progressivity.
  - Strengthen cooperation between DISCOs, Ministry of Power, and NEPRA to facilitate swift petition and determination processes.
- Better targeting subsidies:
  - Follow-up to 2022 residential subsidy reform; focus on tube well subsidies benefiting large agricultural users, supported by the World Bank.
  - First phase in Punjab, Sindh, and Khyber-Pakhtunkhwa: remove the government subsidy only; seek cabinet and NEPRA approval on a concrete proposal by end-FY24; implementation to begin in FY25Q1.
  - Second phase: eliminate one-third of the cross-subsidy for tube wells, implementation to begin in FY26.
  - Exploring replacement options for agriculture tube well subsidies in Baluchistan.
- Accelerating medium-term cost-reducing reforms (with World Bank, ADB, and other partners):
  - Improve price signals for inputs:
    - Series of price-setting reforms for end-user gas prices through price rationalization to channel scarce gas resources to the most efficient gas-based power generator (merit order principle).
    - Next round to be implemented with OGRA’s next semiannual gas tariff determination in December 2023.
  - Renegotiate remaining PPAs in return for clearing unguaranteed CPPA-G arrears:
    - Settle up to PRs 310 billion earmarked for IPPs and GPPs with revised PPA terms using established contract structure (10-year floating-rate PIBs and 5-year sukuks in equal parts, or a more efficient financial instrument).
  - Convert expensive government-guaranteed PHPL debt into cheaper public debt:
    - Fiscal space created to settle PRs 82 billion falling due in FY24 from the budget; roll over the public guarantee for the remaining PRs 683 billion.
  - Improve distribution efficiencies:
    - Bring private sector participation via long-term concession arrangements supported by the new SOE Act and policies (¶21.a) as a step toward divestment/privatization.
    - Initiate work including engagement of a transaction advisor by end-April 2024 and development of transaction structure, DISCO selection, and way forward thereafter.
  - Institutionalize anti-theft procedures:
    - Anti-theft efforts yielded PRs 46 billion from September 7 to October 31.
    - Require formal approval of an anti-theft law by the legislature, creation of a dedicated police force for all DISCOs, and recognition of electricity theft as a cognizable offense.
    - Implement an independent monitoring system through officers outside the DISCOs for 2,500 high-loss feeders via the Power Planning and Monitoring Company (PPMC).
  - Pursue other reforms:
    - Accelerate green energy transition per the 2021 National Electricity Policy; update of the IGCEP in 2022.
    - Work on Integrated System Planning including a 2024 IGCEP and the first ever Transmission System Expansion Plan (TSEP); both to be submitted to NEPRA for approval in April 2024.
    - Seek NEPRA approval of the Commercial Code to govern trading in the new wholesale market expected to be launched in April 2024; rules and eligibility criteria notified as of September 4, 2023.

- Principles for arrears and liabilities management:
  - Strive to reduce capacity payments as arrears are paid via renegotiated PPAs or lengthening bank loans depending on budget space and CDMP progress.
  - Same principle applies to assumption of PHPL amortization by the federal budget.
  - Continue to refrain from:
    - Netting out cross-arrears (unless independently audited).
    - Using “non-cash” settlements (e.g., payables against reimbursement of on-lent loans to DISCOs).
    - Issuing government guarantees (e.g., for PHPL-issued sukuks to transfer CPPA-G payables to PHPL).

### Gas sector: CD dynamics, reforms, and measures
- Current dynamics and drivers:
  - Gas sector CD stock estimated at Rs 2,084 billion (2.5 percent of GDP) at end-FY23, up from PRs 1,623 billion (2.4 percent of GDP) at end-FY22.
  - Main drivers: non-implementation of regular end-user gas price adjustments since September 2020; accumulation of RLNG tariff differential since FY19; diversion costs for RLNG during winter.
  - Liquidity constraints have increased gas shortages.
- Recent actions:
  - Updated end-user gas prices and structural end-user gas tariff in February 2023; updated end-user gas prices again in November, effective November 1, 2023.
  - OGRA notified adjusted end-user gas prices on average 75 percent on February 17, 2023, estimated to generate PRs 310 billion in FY23H2.
  - End-user gas prices adjusted again in November 2023 by on average 65 percent, estimated to generate an additional PRs 470 billion.
- Planned measures to contain CD accumulation and reform the gas sector:
  a. Continue regular end-user gas price updates in line with revenue and legal requirements:
    - Implement OGRA’s scheduled semiannual gas price adjustment anticipated for December 2023 within the mandated 40-day window (new SB, February 15, 2024).
    - Maintain current progressive slab structure for domestic consumers and protection for most vulnerable households; reduce large preferential cross-subsidies across industrial and commercial users; further disincentivize captive gas use.
    - Advise OGRA within 40 days to enable automatic notification of semiannual determinations per the 2022 Amendment to the 2002 OGRA Ordinance.
  b. Reduce incentives for captive power:
    - Refine pricing structure for non-domestic consumers via semiannual notifications (including December 2023) to direct scarce resources to more efficient assets, phase out captive power, and transition captive users to the electricity grid per the January 2021 Cabinet Committee on Energy decision.
    - Increase prices for captive power users where network distribution and reliability are present; other captive users to transition to the grid within twelve months, after which prices increase to the RLNG-equivalent.
    - Announce a plan to make captive generation uneconomic by end-March 2024 to bring captive power use to an end by January 2025.
  c. Reduce price disparities between regions and industries:
    - Gradually move prices for parts of the fertilizer sector closer to cost-recovery; cross-subsidy ending March 2024 upon expiry of current fixed concession fee tariff agreement.
    - End subsidization of fertilizer products through gas price cross-subsidies; any subsidies to be explicit on-budget subsidies from July 1, 2024.
  d. Unify pricing across indigenous gas and imported RLNG and improve cross-subsidies across industries:
    - Ministry of Energy to issue guidelines to OGRA to implement structural gas pricing changes implied by the weighted average cost of gas (WACOG) bill enacted in March 2022.
    - WACOG implementation will allow full cost recovery of imported RLNG and provide price signals to guide gas consumption and help reduce power generation costs.
  e. Improve monitoring and management of gas CD:
    - Devise a precise definition of CD for the gas sector (includes oil but excludes power sector elements).
    - Compile detailed and verified gas CD stock statistics.
    - Establish a quarterly gas CD flow reporting system with improved data management and projection capacity.
    - Devise a gas CDMP whose salient elements will include regular end-user gas price adjustments per established formulas and tangible cost-reducing reforms (including measures to reduce UFG losses via infrastructure improvements, network rehabilitation, and theft controls).

### Structural policies: SOE reform, competitiveness, and governance
- SOE governance, transparency, and efficiency (limit fiscal risks):
  - Operationalization of the CMU within the MOF to improve SOE monitoring (¶8.d).
  - Enhancing the SOE legal and regulatory framework:
    - New SOE Act took effect January 2023; defines commercial SOE and strengthens oversight and ownership arrangements.
    - With ADB support, significant regulatory reforms advanced (end-November 2023 SB): (i) operationalization of the SOE Act into policy clarifying ownership arrangements and division of federal roles; (ii) revision of Laws of four selected SOEs (National Highway Authority, Pakistan Post, Pakistan National Shipping Corporation, Pakistan Broadcasting Corporation) to make the SOE Act fully applicable.
    - Commitment to introduce further amendments to these four dedicated SOE laws during parliamentary adoption process, in consultation with the IMF, to align with SOE Act corporate governance principles; continue amending other SOE-dedicated laws similarly.
    - Commit to moving forward with the SOE triage plan, including privatization of select SOEs.
  - Ensuring SOE governance under the new SWF:
    - Implement safeguards to: regulate SWF ownership functions (including appointment of SOE Board members, performance monitoring and evaluation, financial oversight); ensure transparency and reporting requirements including auditing by Pakistan’s Auditor General; prohibit lending by the SWF to any other public bodies; implement transparency and accountability mechanisms including asset declaration requirements for top SOE executives and Board members; ensure SWF-owned SOEs’ public investment plans integrated into standard public investment process.
  - Increasing transparency:
    - SOEs undergo external audits and Auditor General ‘compliance with authority’ audits.
    - Special audits requested of several SOEs (SSGCL, HESCO, PESCO); scope and terms finalized; audit planned to be initiated in FY24Q3.
- Improving competitiveness and the business environment:
  - Policy focus areas going forward:
    - Simplify procedures to start a business and eliminate unnecessary regulations; introduce a single portal for company registration and digital integration of federal and provincial entities involved in starting a business.
    - Streamline approval process for foreign direct investment.
    - Improve trading across borders by reducing customs-related processing time and reducing hours to prepare import/export documentation.
    - Simplify and harmonize tax payment process via a simple and fully automated regime for paying taxes, contributions, and fees.
    - Launch a communication drive to disseminate information regarding undertaken reforms.
  - Ensure the Special Investment Facilitation Council (SIFC) does not create an uneven playing field, promise incentives or guaranteed returns, distort investment landscape, or increase state role that could disincentivize high-quality, long-term investments.
  - Establish best transparency and accountability practices for SIFC; ensure SIFC investments follow standard Public Investment Management framework and affordability test operated by Ministries of Planning and Finance.
- Strengthening governance and combatting corruption:
  - Priorities: strengthen effectiveness of anticorruption institutions to prevent, deter and detect rent-seeking, bribery and fraud.
  - Institutionalize public access for annual declarations for all members (elected and unelected) of the federal cabinet via permanent regulations.
  - The second Review Cycle under the UNCAC implementation mechanism was completed; Executive Summary made available; intend to publish the full UNCAC report subject to cabinet approval.
  - Ministry of Law and Justice re-notified a task force on October 5, 2023 to complete and publish a comprehensive review of the institutional framework of anticorruption institutions (including the National Accountability Bureau) to enhance independence and effectiveness, with proposals for legislative amendments as appropriate.
    - Task force to include reputable independent experts with international experience and civil society inputs.
    - Taking into account the UNCAC report, the task force will recommend an action plan with structural reform measures to strengthen independence (including appointing process of the Chairperson of the National Accountability Bureau, scope of investigative jurisdictions), prevent political influence and persecution, and provide transparency and accountability controls against abuse (including mechanisms for discipline and accountability).
    - Focused consultations with other key stakeholders and the public to be undertaken before finalizing the task force report.
    - The task force is expected to publish and complete the report by end-March 2024.

*Source: Excerpt from the CDMP and structural policy section of the provided IMF chapter.*

### 24.      Responding to climate change is an urgent and existential challenge for Pakistan, as

### 24.      Responding to climate change is an urgent and existential challenge for Pakistan, as

### Mitigation and transition management
- Pakistan is an active party to the Paris Agreement of the United Nations Framework Convention on Climate Change (UNFCCC) and Global Methane Pledge.
- Key mitigation projects and measures:
  - Up-scaling Green Pakistan Program: 2.07 billion trees have already been planted, with a sequestering potential of 148.8 million tons of carbon through 2030.
  - Greening the energy mix (see ¶18.c in source).
  - Policies to change relative prices to guide households and firms toward a more carbon-neutral economy, including:
    - Adequately taxing fuel products (see ¶7 in source).
    - Developing Policy Guidelines for Trading in Carbon Markets, planned to be sent to cabinet for approval by end-December 2023.

### Adaptation and resilience-building
- National Adaptation Plan (NAP) finalized and published with UNFCCC support; it identifies adaptation needs and policies to boost resilience.
- Next steps:
  - Translate the NAP into specific, costed investment plans to be implemented at provincial and local levels; costing exercise aimed to be completed by September 2024.
  - Instruct national entities to gain accreditation for the Green Climate Fund to better access global climate finance.
- Public financial management and project appraisal improvements:
  - Strengthening PFM to enhance capital expenditure efficiency through a Climate-PIMA supported by IMF TA; the Climate-PIMA and PIMA action plan from this TA is on track to be adopted by cabinet (end-December 2023 SB) and implementation is underway.
  - Development of a handbook for climate screening in the project appraisal process.
  - Development of a green building code for Pakistan, to be taken to cabinet by the end of 2023.
  - Inclusion of climate risks in the fiscal risk statement (published on the finance ministry website).
  - Establishment of a sustainable finance bureau to work with line ministries and provinces to build capacity in preparing climate-responsive projects.
- Priority resilience areas guided by NAP and Resilient Recovery, Rehabilitation, and Reconstruction Framework (4RF):
  - Strengthening the agriculture-water nexus.
  - Urban resilience.
  - National and human capital (including social protection).
  - Disaster risk management.

### Macroeconomic data and monitoring
- Pakistan met the structural benchmark on compilation and dissemination of Quarterly National Accounts (QNA) for FY24Q1 and the revision of annual provisional estimates for FY23 (end-November 2023 SB).
- Pakistan Bureau of Statistics published the first QNA covering FY24Q1 in November 2023.

### Financing and program monitoring
- Current projections: gross external financing needs for FY24 will amount to approximately US$25.0 billion (including the current account), of which about US$13.8 billion is amortizations of the public sector.
- Financing secured ahead of SBA approval:
  - US$5.6 billion in additional financing commitments from bilateral, multilateral, and commercial partners, of which over US$3 billion has already been disbursed.
  - Commitments regarding US$7 billion in rollovers.
  - US$1 billion in refinancing of maturing debt.
  - US$1.2 billion in amortization savings from a debt rearrangement covering some existing external loans.
- Program monitoring:
  - Implementation will be monitored through quarterly reviews, with quarterly performance criteria (PCs) and continuous performance criteria, as set out in MEFP dated June 30, 2023 and this MEFP.
  - Technical Memorandum of Understanding (TMU) defines quantitative PCs, continuous PCs, indicative targets, and structural benchmarks.
  - Completion of final review scheduled for March 2024 requires observance of quantitative performance criteria for end-December 2023 as set out in Table 1, along with continuous PCs and indicative targets; structural benchmarks are set out in Table 2.

### Quantitative performance criteria and indicative targets (selected exact figures from Table 1)
- Floor on net international reserves of the SBP (millions of U.S. dollars):
  - Program: -14,550
  - Adjusted: -15,673
  - Actual: -13,781 (Status: Met)
  - Program (end-December 2023 proposed): -13,800; -13,400
- Ceiling on net domestic assets of the SBP (stock, billions of Pakistani rupees):
  - Program: 15,048
  - Adjusted: 15,370
  - Actual: 14,410 (Status: Met)
  - Proposed: 14,888; 14,450
- Ceiling on SBP's stock of net foreign currency swaps/forward position (negative, millions of U.S. dollars):
  - Program: 4,200
  - Actual: 3,540 (Status: Met)
  - Proposed: 4,000; 3,450
- Ceiling on net government budgetary borrowing from the SBP (stock, billions of Pakistani rupees):
  - Program: 4,708
  - Actual: 4,380 (Status: Met)
  - Proposed: 4,708; 4,708
- Ceiling on the general government primary budget deficit (cumulative, excl. grants, billions of Pakistani rupees):
  - Program: -87
  - Adjusted: -389
  - Actual: -376 (Status: Not met)
  - Proposed: -1,232; -1,420
- Ceiling on the amount of government guarantees (stock, billions of Pakistani rupees):
  - Program: 4,000
  - Actual: 3,806 (Status: Met)
  - Proposed: 4,050; 4,050
- Cumulative floor on targeted cash transfers spending (BISP) (billions of Pakistani rupees):
  - Program: 87.5
  - Actual: 89.8 (Status: Met)
  - Proposed: 185.5; 185.5

- Indicative targets (selected):
  - Cumulative floor on general government budgetary health and education spending (billions of Pakistani rupees):
    - Program: 465
    - Actual: 482 (Status: Met)
    - Proposed: 1,031; 905
  - Floor on net tax revenues collected by the FBR (cumulative, billions of Pakistani rupees):
    - Program: 1,977
    - Actual: 2,042 (Status: Met)
    - Proposed: 4,425; 4,425
  - Ceiling on net accumulation of tax refund arrears (cumulative, billions of Pakistani rupees):
    - Program: 32
    - Actual: -15 (Status: Met)
    - Proposed: 43; 43
  - Ceiling on power sector payment arrears (cumulative flow, billions of Pakistani rupees):
    - Program: -155
    - Actual: 227 (Status: Not Met)
    - Proposed: 64; 385
- Test dates referenced in Table 1 include end-September 2023 and end-December 2023.

### Structural benchmarks (selected items and statuses from Table 2)
- Fiscal:
  - Commit to not grant further tax amnesties. (Continuous) — Met.
  - Avoid the practice of issuing new preferential tax treatments or exemptions. (Continuous) — Met.
  - 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. (end-Dec. 2023) — In progress.
- Social:
  - Inflation adjustment of the unconditional cash transfer (Kafaalat). (end-Jan. 2024) — In progress.
- 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. (Continuous) — Not met.
  - 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. (end-Dec. 2023) — In progress.
- Energy Sector and SOEs:
  - Notification of the annual rebasing (AR) for FY24 to take effect on July 1, 2023. (end-Jul. 2023) — Met.
  - Improve SOE governance by: (i) operationalizing the recently approved SOE law into a policy that clarifies ownership arrangements and the division of roles within the federal governments; and (ii) amending the Acts of four selected SOEs to make the new SOE law fully applicable to those SOEs. (end-Nov. 2023) — Not met.
- Climate:
  - Cabinet adoption of a Climate-PIMA and PIMA action plan. (end-Dec. 2023) — In progress.
- Economic Statistics:
  - Compilation and dissemination of Quarterly National Accounts for FY24Q1 and revised annual estimates for FY23. (end-Nov. 2023) — Met.
- New Structural Benchmarks:
  - Notification of the December 2023 semiannual gas tariff adjustment determination. (February 15, 2024)
  - Develop a plan to strengthen internal control systems in lending operations, including updates to collateral policy and counterparty eligibility policy, in line with recommendations from the 2023 Safeguards Assessment. (March 8, 2024)

### Technical Memorandum of Understanding (TMU) — definitions and program mechanics (selected)
- Program exchange rate: Pakistani rupee per one U.S. dollar is set at 286.7091.
- For monitoring, assets and liabilities denominated in SDRs or other currencies are converted into U.S. dollars at program exchange rates.
- Performance criteria defined in TMU include:
  - Floor on the net international reserves (NIR) of the SBP (millions of U.S. dollars).
  - Ceiling on the net domestic assets (NDA) of the SBP (stock, billions of Pakistani rupees).
  - Ceiling on SBP’s stock of net foreign currency swap/forward position (millions of U.S. dollars).
  - Ceiling on the general government primary budget deficit excluding grants (cumulative flows, billions of Pakistani rupees).
  - Ceiling on net government budgetary borrowing from the SBP (stock, billions of Pakistani rupees).
  - Ceiling on the amount of government guarantees (stock, billions of Pakistani rupees).
  - Floor on targeted cash transfers spending (BISP) (cumulative, billions of Pakistani rupees).
- Definitions and adjustments:
  - NIR defined as 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 include holdings of foreign currencies; holdings of SDRs; reserve position in the IMF; and holdings of fixed and variable income instruments. Exclusions listed in ¶6.
  - Reserve-related liabilities include foreign currency liabilities (remaining maturity of one year or less), foreign exchange liabilities from derivatives, outstanding IMF credits, and certain foreign exchange deposits; excludes SDR allocations and accrued interest on reserve-related liabilities.
  - Adjustment mechanism for end-December 2023 NIR floor: adjusted upward (downward) by 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; downward adjustment limited to a maximum of US$2,000 million for the December 2023 test date.
  - NDA defined as reserve money minus NIR (valued at program exchange rate); reserve money defined in ¶13.
  - Ceiling on NDA is adjusted downward (upward) consistent with NIR adjustment mechanism and subject to the same maximum adjustor limit evaluated at program exchange rate.
- Stock of net foreign currency swap/forward positions defined as aggregate net positions in forwards and futures in foreign currencies of the SBP vis-à-vis the domestic currency (including forward leg of currency swaps), evaluated at program exchange rate.

*Source: Excerpted content from the IMF country document.*

### 16.      The general government primary budget deficit (excluding grants) is monitored

### 16.      The general government primary budget deficit (excluding grants) is monitored

### Definition of the monitored variable
- The general government primary budget deficit (excluding grants) is monitored quarterly as:
  - the general government’s overall budget deficit (excluding grants) minus the consolidated interest bill of the federal and provincial budgets.

### Measurement of the general government overall budget deficit (excluding grants)
- Measured as the cash deficit from below the line, defined as the sum of:
  - a. net external budget financing, excluding valuation changes, with foreign currency disbursements/payments converted into PRs at the actual exchange rates applied to each transaction;
  - b. change in net domestic credit from the banking system (cash basis), excluding valuation changes from deposits denominated in foreign currency and government securities bought by non-residents (notably T-bills, Pakistan Investment bonds (PIBs), Naya Pakistan Certificates, and Banao Certificates);
  - c. change in the net domestic nonbank financing, excluding valuation changes. These comprise:
    - (i) privatization receipts (either received directly or transferred from the privatization accounts to the general government budget, including from abroad and in foreign currency);
    - (ii) change in the stock of issued government securities held outside the general government and the banking system, net of valuation changes;
    - (iii) change in net deposits and reserves received by the general government (public accounts deposits);
    - (iv) any other government borrowing from domestic nonbank sources net of repayments;
    - minus (v) change in general government deposits with nonbank financial institutions;
  - d. total external grants to the federal and provincial governments, defined as the sum of project grants, cash external grants for budgetary support, capital grants reflecting the principal amounts of external debt cancellation or swaps, and other grants. External grants in foreign currencies are converted into PRs at the actual exchange rates applied to each transaction.

### Definition of net external budget financing
- Net external budget financing (excluding valuation changes and all external financing counted as reserve liabilities of the SBP) is the sum of:
  - a. external budget loans to the general government, including those on-lent to financial institutions and companies (public or private) and external emergency relief lending. It comprises:
    - (i) medium- and long-term maturity from official multilateral sources (including IMF budget support), official bilateral sources, and private sector sources (e.g., bonds and non-residents’ purchases of PIBs, Naya Pakistan Certificates, and Banao Certificates);
    - (ii) short-term maturity, net of foreign portfolio investment excluding non-residents’ purchases of Naya Pakistan Certificates and Banao Certificates but including non-residents’ purchases of domestic T-bills;
  - b. net external debt amortization flow of the general government, defined as the change in its stock of external debt service arrears net of the debt amortization due on its external budget loans (with the latter accounting for the impact of any rescheduled, relieved, or accelerated amortization, including that related to debt swaps or debt cancellation recorded as capital grants).

### Adjustment mechanism for the end-December 2023 ceiling on the general government primary deficit (excluding grants)
- The ceiling will be adjusted on a cumulative basis since the beginning of the fiscal year:
  - a. downward (upward) by any shortfall (excess) in external project financing during the period October-December 2023 relative to the program projections (US$664 million for October-December 2023) evaluated in Pakistani rupee terms at actual average quarterly exchange rates. For avoidance of doubt, no adjustment will be made for the period July-September 2023 (actual external project financing US$333 million). External project financing is defined as disbursements from bilateral and multilateral creditors to the general government for specific project expenditure;
  - b. downward by any underexecution in the targeted cash transfers (BISP) relative to their indicative program targets (PRs 185.5 billion for July-December 2023);
  - c. downward by any excess in the flow of power sector payment arrears above the respective indicative program targets (PRs 385 billion for July-December 2023), excluding non-recoveries (relative to the projection of PRs 255 billion for July-December 2023) and excess line losses (relative to the projection of PRs 76 billion for July-December 2023);
  - d. downward by any excess in the flow of tax refund arrears (as defined below) relative to their respective indicative program targets (PRs 43 billion for June-December 2023).

### Other fiscal ceilings and floors (definitions)
- 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; claims exclude accrued profits on government securities. Government deposits with the SBP exclude the Zakat Fund.
- 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, including both domestic and external guarantees. External government guarantees will be converted into Pakistani rupees at the program exchange rate. Excludes guarantees issued by the Ministry of Finance for the SBP borrowing from the IMF.
- Floor on Targeted Cash Transfers Spending (BISP):
  - Applies to the cumulative targeted cash transfers spending by the Benazir Income Support Program (BISP), i.e., all spending on BISP programs.
- Floor on General Government Budgetary Health and Education Spending:
  - Applies to the cumulative budgetary spending on health and education by the federal and provincial governments.
- Floor on Net Tax Revenues Collected by the Federal Board of Revenue (FBR):
  - Net tax revenues collected by the FBR are defined as the sum of revenues collected from: (i) general sales tax (GST) on goods (including GST on services collected in Islamabad Capital Territory); (ii) customs duties, customs registration fees and levies; (iii) excise duties on imported products; (iv) excise duties on domestic products; (v) levies (toll) on oil derivatives; (vi) other proceeds and fees; (vii) sales tax; and (viii) unclassified revenues (including income tax) minus the tax refunds. Net revenue collection is defined, for each test date, as the cumulative sum of net revenues collected since the beginning of the respective fiscal year. The floor on the collection of net revenues by the FBR is measured quarterly based on cumulative end-of-quarter data.
- Ceiling on Net Accumulation of Tax Refund Arrears:
  - Applies to the cumulative flow of tax refund arrears. The stock of tax refund arrears is the amount of tax refund claims not settled (through a cash refund, netting out against obligations of taxpayers, payment with a government bond/promissory note or an official decision to reject the claim) within a specified time period after submission to the FBR.
  - The stock of income tax refund arrears is PRs 215.2 billion as of end-May 2023, and the net accumulation of income tax refund arrears will be counted from the starting point of PRs 215.2 billion.
  - The stock of sales tax arrears at end-May 2023 is PRs 183.8 billion, and the net accumulation of sales tax refund arrears will be counted from the starting point of PRs 183.8 billion.
- Ceiling on Power Sector Payment Arrears:
  - Power sector payment arrears are defined as power sector payables in arrears that arise from:
    - (i) non-recoveries from supply to Azad Jammu and Kashmir (AJ&K), industrial support package, other federal and provincial governments including FATA, private consumers, and Baluchistan Tube Wells;
    - (ii) accrued markup from the servicing of PHPL;
    - (iii) line losses and non-collections that are not recognized by NEPRA;
    - (iv) GST non-refunds;
    - (v) late payment surcharges;
    - (vi) delays in subsidy payments; and
    - (vi) delays in tariff determinations.

### Continuous performance criteria
- 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 purchases of public debt securities on the primary market. The performance criterion applies on a continuous basis throughout the program period.
- Zero Ceiling on the Accumulation of External Payment Arrears by the General Government and SOEs:
  - External payment arrears are all unpaid debt-service obligations (payments of principal and interest) of the general government (federal and provincial government, and SBP), and state-owned enterprises to nonresidents arising in respect of public sector loans, debt contracted or guaranteed (including unpaid penalties or interest charges associated with these obligations that are beyond 30 days after the due date).
  - The definition of debt, for the purposes of the SBA, is set out in ¶8 of 2020 Guidelines on Public Debt Conditionality in Fund Arrangements.
  - The ceiling on the accumulation of external payment arrears is set at zero. The performance criterion applies on a continuous basis throughout the program period.
- Other Continuous Performance Criteria:
  - During the program period, Pakistan will not:
    - a. impose or intensify restrictions on the making of payments and transfers for current international transactions;
    - b. introduce or modify multiple currency practices (MCPs) excluding those MCPs arising from the introduction and/or modifications of the multiple-price foreign exchange auction system operating in line with IMF staff advice with the objective of supporting flexible market-determined exchange rate;
    - c. conclude bilateral payment agreements that are inconsistent with Article VIII of IMF Articles of Agreement;
    - d. impose or intensify import restrictions for balance of payments purposes.

*Source: 1pakea2024001 - 16.      The general government primary budget deficit (excluding grants) is monitored*

### 30.      To effectively monitor the program performance, the authorities will provide all the

### 1pakea2024001 - 30.      To effectively monitor the program performance, the authorities will provide all the

### Monitoring and reporting framework
- The authorities will provide all needed data to the IMF in line with Article VIII, Section 5 of the IMF Articles of Agreement.
- Performance under the program is monitored from data supplied to the IMF by the SBP, Ministry of Finance, FBR, Pakistan Bureau of Statistics, Ministry of Energy (Power and Petroleum Division), and other agencies as outlined in Table 2.
- The authorities will report on an ongoing/continuous basis any non-observance of continuous PCs and will transmit promptly to IMF staff any data revisions and other information necessary to monitor the arrangement.

### Projected disbursements (Table 1)
- Reporting period columns: Jul-Sep 2023 (Est.) and Oct-Dec 2023 (Proj.)
- Multilateral and bilateral disbursements: 3,832 and 5,893
  - of which: in cash 1/3,693 and 5,647
  - of which: Saudi oil facility and IDB commodity loans 400 and 350
  - of which: project support 333 and 664
  - of which: sales of state-owned assets 0 and 0
- International bond issuance 2/2 and 80
- Commercial borrowing 0 and 600
- Other 0 and 0
- Gross inflows: 3,860 and 6,493
  - of which: in cash 3,721 and 6,247
- memo: New loans/deposits at SBP 3/1,000 and 0
- Note: "2/ Includes Naya Pakistan Certificates (NPC). NPC flows are recorded on a net basis."
- Note: "3/ Not included in multilateral and bilateral disbursments for the purposes of the adjustor."
- Note: "Cumulative excess/shortfall cumulates from October 1, 2023 onwards"
- FY24: "1/ Assumes that 65 percent of project loans and 50 percent of" (text continues in source)

### Key monitoring and reporting requirements (selected items from Table 2)
- Reporting agencies: State Bank of Pakistan (SBP), Ministry of Finance (MOF), Pakistan Bureau of Statistics (PBS), Federal Board of Revenue (FBR), Ministry of Water and Power, Ministry of Petroleum and Natural Resources, BISP, and sectoral entities (e.g., DISCOs, CPPA/PEPCO).
- Selected SBP reports and timing:
  - SBP balance sheet (Summary): Weekly — First Thursday of the following week.
  - SBP balance sheet (Summary at program exchange rates; and by official exchange rates): Monthly — Within 15 days of the end of each month.
  - Monetary survey (Summary banking system balance sheet ... at both program exchange rates and by chart of accounts): Monthly — Within the first 30 days of each month.
  - International reserves (By (i) program exchange rates; and (ii) at actual official exchange rates): Daily — The following working day.
  - International reserves (Inflows/outflows into/out of Naya Pakistan Certificates): Daily — The following working day.
  - Foreign exchange market (Market exchange rates (buying and selling); weighted average customer exchange rate; monthly trade volume, and high and low exchange rate of the interbank, the KERB market): Daily/Monthly — Within one day/monthly within five working day.
  - Foreign exchange market (SBP foreign exchange operations, and intervention (volume), distinguishing within spot transactions the outright purchase/sale and purchase/sale related to forward contract): Daily — Within one day.
  - Interbank market transactions in the spot market for US dollars: detailed statistics including total value transacted in US$, total number of transactions, number of banks involved, average value transacted in US$ (simple mean, untrimmed), weighted average price transacted (untrimmed), simple average price transacted (simple mean, untrimmed), standard deviation of values transacted (untrimmed), and standard deviation of prices transacted (untrimmed): Daily — Within one day.
  - Net International reserves at program exchange rates as defined in TMU, including a breakdown by currency and specification of nostro balances with foreign branches of National Bank of Pakistan: Quarterly — Seventh working day after quarter end.
  - External financing (Foreign assistance received and projections for the coming four quarters; categorize all grants and loans by program/project, amounts received/expected in cash): Quarterly — Within 15 days of the end of each quarter.
- Selected MOF reports and timing:
  - External debt (Disbursements and stock of outstanding short-term and medium-and long-term external debt of the government, the SBP, and state-owned companies; any stock of arrears on external debt service and outstanding stock of government guarantees and external arrears): Monthly — Within 25 days of the following month.
  - External financing (Foreign assistance received and projections for the coming four quarters; categorize all grants and loans by program/project, and amounts received/expected in cash and in kind): Quarterly — Within 15 days of the end of each quarter.
  - Federal government State budget: Monthly — Within 30 days of the end of each month.
  - Consolidated general government (Federal and provincial governments (including fiscal outcomes broken down by province)): Quarterly — Within 45 days of the end of each quarter; Annual — Within 180 days of the end of each year.
  - Federal government Fiscal financing sources: Detailed quarterly financing plan for the coming 12 months: Monthly — One month in advance.
- Selected FBR reports and timing:
  - Revenue collection: Total revenue collected separately by the tax administration and customs administration, including revenue by individual tax, and social contributions: Monthly — Within seven days of the end of each month.
  - Tax arrears: By category — Monthly — Within seven days of each month.
  - All tax refund claims in arrears: Itemized by tax category (GST, income, customs duties, etc.): Monthly — Within seven days of the end of each month.
  - Automated GST refunds: Detailed data, by type of tax, of outstanding tax credits for all types of tax revenues: Quarterly — Within seven days of the end of each month.
- Selected sectoral/other reports:
  - PBS: SPI, CPI, WPI — Detailed monthly price indices: Monthly — Within five days of the following month. CPI Index of core inflation: Monthly — Within 21 days of the end of each month.
  - Ministry of Water and Power: Key Power Sector Statistics and Cumulative Monthly Subsidy Position (Rs. Billion), PEPCO Month End Payables and Receivables Positions And Aging Schedule, PR. Billion, CPPA/PEPCO Month-wise Consolidated Cash Flow, AT&C Statistics, DISCOs Consolidated Income Statement, Net Electrical Output & Power Purchase Price by Source, GWh, etc.: Monthly/Quarterly depending on item (see Table 2).
  - Ministry of Petroleum and Natural Resources: Gas supply and sales by consumer category: Quarterly on monthly frequency — Within 60 days from the end of the quarter. Gas prices by consumer category: Biannually — Within 30 days of price notification. UFG losses: Quarterly — Within 60 days from the end of the quarter.
  - BISP Targeted cash transfers (Coverage (number of beneficiaries paid) and payment by all BISP programs): Quarterly — Within 30 days from the end of the quarter.
  - Financial statements for Pakistan Railways, Pakistan Steel Mills and Pakistan International Airline (cash flow, income statement, and balance sheet) and operational indicators: Quarterly — Within 30 days from the end of the quarter.

### Recent economic developments and program performance (supplement)
- Headline inflation in December: 29.7 percent (yoy).
- Core inflation: 21 percent (down from 21.5 percent a month earlier).
- Customs data: total imports of US$26.1 billion in FY24H1 (down from US$31.2 billion in FY23H1).
- Gross reserves: US$8.2 billion at end-December (from US$7 billion at end-November).
- Exchange rate: rupee has remained stable at around 282 PRs/USD.
- Premium between interbank and open market rate: continued to be negligible.
- Program test outcomes:
  - One performance criterion (PC) for end-December 2023: SBP’s stock of net foreign currency swaps/forward position for end-December 2023 was -US$3,423 million against a target of -US$4,000 million (target met).
  - Three structural benchmarks (SBs) for end-December 2023 were met:
    - issuance by the Central Monitoring Unit (CMU) of its first periodic report on SOE performance;
    - submission to parliament of amendments to the bank resolution and crisis management framework;
    - cabinet adoption of a Climate-PIMA and PIMA action plan.

### Political assurances and program request
- IMF staff met with Pakistan’s major political parties: Pakistan Muslim League-Nawaz, Pakistan People’s Party, and Pakistan Tehreek Insaf.
  - Pakistan Muslim League-Nawaz and Pakistan People’s Party expressed written support for the SBA’s key objectives and policies.
  - Pakistan Tehreek Insaf issued a statement noting the importance of free and fair elections to the successful implementation of the Fund-supported program.
- Authorities requested waivers of applicability for all performance criteria aside from the one on the SBP’s net foreign currency swaps/forward position.
- Staff supports the authorities’ request for waivers (other than on the SBP swaps/forward position) and continues to recommend completion of the review as set forth in the main staff report, the authorities’ December 2023 Letter of Intent (LOI), and the attached MEFP and TMU.

*Source: Extracted from the PDF content unit 1pakea2024001 - 30.*

### 2. We also take the opportunity to report on structural conditionality commitments. On

### 1pakea2024001 - 2. We also take the opportunity to report on structural conditionality commitments. On

### Structural conditionality and recent actions
- Cabinet adoption of the Climate-PIMA and PIMA action plan: end-Dec. 2023 — Met.
- Submission to the Senate of proposed amendments to bank resolution and deposit insurance legislation: end-Dec. 2023 — Met (substantively aligns with IMF TA advice).
- Central Monitoring Unit (CMU) published its first periodic report on SOE performance: end-Dec. 2023 — Met.
- Revised table of structural conditionality included in Table 2 (structural benchmarks and statuses reproduced in source).

### Quantitative performance criteria and indicative targets (selected figures)
- Floor on net international reserves of the SBP (millions of U.S. dollars): Program -14,550; Adjusted Program -15,673; Actual -13,781; Status Met; Program (end-Dec) -13,800; Proposed -13,400.
- Ceiling on net domestic assets of the SBP (stock, billions of Pakistani rupees): Program 15,048; Adjusted Program 15,370; Actual 14,410; Status Met; Program (end-Dec) 14,888; Proposed 14,450.
- Ceiling on SBP's stock of net foreign currency swaps/forward position (negative, millions of U.S. dollars): Program 4,200; Actual 3,540; Status Met; Program (end-Dec) 4,000; Actual 3,423; Status Met.
- Ceiling on general government primary budget deficit (cumulative, excl. grants, billions of Pakistani rupees): Program -87; Adjusted Program -389; Actual -376; Status Not met; Program (end-Dec) -1,232; Proposed -1,420.
- Cumulative floor on targeted cash transfers spending (BISP) (billions of Pakistani rupees): Program 87.5; Actual 89.8; Status Met; Program (end-Dec) 185.5; Actual 185.5.
- Indicative target — Floor on net tax revenues collected by the FBR (cumulative, billions of Pakistani rupees): Program 1,977; Actual 2,042; Status Met; Program (end-Dec) 4,425; Proposed 4,425.
- Indicative target — Ceiling on power sector payment arrears (cumulative flow, billions of Pakistani rupees): Program -155; Actual 227; Status Not Met; Program (end-Dec) 64; Proposed 385.

### Structural benchmarks (revised) — statuses (selected)
- Fiscal: Commit to not grant further tax amnesties — Continuous — Met.
- Fiscal: Avoid issuing new preferential tax treatments or exemptions — Continuous — Met.
- Fiscal/SOEs: Issuance by CMU of first periodic SOE performance report — end-Dec. 2023 — Met.
- Social: Inflation adjustment of the unconditional cash transfer (Kafaalat) — end-Jan. 2024 — In progress.
- Monetary/Financial: Average premium between the interbank and open market rate no more than 1.25 percent during any consecutive 5 business day period — Continuous — Not met.
- Monetary/Financial: Submission to parliament of amendments to align early intervention, bank resolution, and crisis management arrangements with IMF recommendations — end-Dec. 2023 — Met.
- Energy/SOEs: Notification of the annual rebasing (AR) for FY24 to take effect on July 1, 2023 — end-Jul. 2023 — Met.
- Energy/SOEs: Improve SOE governance by operationalizing SOE law and amending Acts of four selected SOEs — end-Nov. 2023 — Not met.
- Climate: Cabinet adoption of a Climate-PIMA and PIMA action plan — end-Dec. 2023 — Met.
- Economic statistics: Compilation and dissemination of Quarterly National Accounts for FY24Q1 and revised annual estimates for FY23 — end-Nov. 2023 — Met.
- New SBs: Notification of the December 2023 semiannual gas tariff adjustment determination — February 15, 2024.
- New SBs: Develop plan to strengthen internal control systems in lending operations, including updates to collateral policy and counterparty eligibility policy — March 8, 2024.

### Recent economic developments and outlook (selected projections and outcomes)
- Real GDP growth: FY2024 projected to be broad-based and in the range of 2.5-3.0 percent.
- Headline inflation: peaked at 38 percent in May 2023; expected to fall within the SBP’s 5-7 percent target range during FY26 (barring major supply shocks).
- Current account deficit: during July-November 2023 narrowed to US$1.2 billion against US$3.3 billion in the corresponding period in FY23.
- SBP FX reserves: stabilized around US$7.5 billion as of October 20, 2023.

### Fiscal policy, revenue performance, and debt financing (selected figures)
- Fiscal deficit (Jul-Oct FY24): 0.8 percent of GDP (PRs 861.7 billion) versus 1.5 percent of GDP (PRs1265.8 billion) last year.
- Non-tax revenues (Jul-Oct FY24): PRs 1586.5 billion versus PRs 346.4 billion last year (more than 300 percent growth).
- FBR tax collections (Jul-Oct FY24): PRs 2748.4 billion versus PRs 2138.7 billion last year (29 percent growth).
- Net provisional FBR tax collection (Jul-Nov FY24): PRs 3484.7 billion versus PRs 2688.4 billion last year (29.6 percent growth).
- Domestic tax revenues growth: 32 percent; FED up 62.8 percent; direct taxes up 42.2 percent.
- Total expenditures (Jul-Oct FY24): PRs 3706.7 billion versus PRs 2737.2 billion last year (35 percent growth).
- Markup payments increase: 63 percent during the first four months of the current fiscal year.
- Primary balance (Jul-Nov): surplus of PRs 1542 billion versus PRs 511 billion last year.
- Target primary surplus for FY24: 0.4 percent of GDP.
- External inflows expected by end-Dec. 2023: US$ 5.1 billion (excludes US$ 4.0 billion bilateral rollover).
- Bilateral debt rearrangement in July: US$ 2.4 billion for FY24 and FY25.
- Planned mobilization from foreign commercial banks: US$ 0.5-1.0 billion (budgeted US$ 3.5 billion and US$ 1.5 billion from international capital markets seem unlikely to be realized).

### Financing and multilateral disbursements (selected figures)
- Disbursements during July-December 2023:
  - World Bank under RISE II: US$ 350 million.
  - Asian Development Bank under Domestic Resource Mobilization: US$ 300 million.
  - Asian Development Bank under Women Inclusive programs: US$ 100 million.
  - Asian Infrastructure Investment Bank: US$ 250 million.
- Government commitment: design and implement by April 2025 a framework for the management of guarantees and carry out assessment of three SOEs under this framework.

### Monetary, exchange rate, and financial sector developments
- Monetary stance: tight monetary policy stance and supportive fiscal policy.
- Inflation determinants cited: significantly positive real interest rates on a forward looking basis; decelerating growth in monetary aggregates; declining inflation expectations; moderating wage growth; declining global commodity prices.
- Output gap: estimated to remain negative for the second consecutive year in FY24.
- FX market: wedge between interbank and open market exchange rates narrowed; interbank FX flows improved from September; reforms of exchange companies introduced in early September.
- Banking sector: well-capitalized and profitable; capital adequacy strengthened; NPLs increased slightly but well provisioned; SBP engaged with undercapitalized private sector banks; one public sector bank is being wound down in an orderly manner.
- Legislative reforms: draft amendments to The Banking Companies Ordinance of 1962 and The Deposit Protection Corporation Act of 2016 submitted to the cabinet.

### Energy sector policies
- Revised Circular Debt Management Plan (CDMP) adopted in August 2023; measures amounting to 0.2 percent of the GDP in FY24.
- For FY24, no increase in CD stock projected in the approved CDMP.
- Gas sector: average price increases of 50 percent as determined by the regulator; tariff slab system updated.

### Social protection and social sector expenditure
- Cumulative floor on targeted cash transfers spending (BISP): PRs 185.5 billion.
- Q1 floor on targeted cash transfers met; process on track for upcoming quarterly targets.
- Indexation Committee formed by MoF to ensure stipends are inflation adjusted.
- Dynamic registry for regular/periodical NSER is fully updated and operational.
- Enrollment targets for FY24:
  - Education CCT (Benazir Taleemi Wazaif): 1.2 million new children.
  - Health and nutrition CCT (Benazir Nashonuma): 0.8 million new families.
- Emergency reserve earmarked by MoF: PRs 250 billion.

### Climate change and budgeting for resilience
- Federal cabinet approved the National Action Plan (NAP) for climate in August 2023.
- Resilient Recovery, Rehabilitation and Reconstruction Framework Pakistan (4RF) developed; prioritizes “no-regret” measures and resilience-boosting policies including social protection and build-back-more resilient infrastructure.
- Climate-sensitive cost centers: 85 percent of federal government demands identified and tagged for the green component of the budget in the FMIS system.
- Climate related spending for FY 2023-24 published in the Performance Based Budgeting Book (Green Book); a green budget statement included in the Annual Budget Statement for FY 2023-24.
- Budget Call Circular (BCC) for FY 2024-25 preparation underway with plans to provide more guidance to line ministries on climate budgeting and extend tracking to revenue measures.

### SOE policy, CMU actions, and sovereign wealth fund
- Central Monitoring Unit (CMU) created in September 2022; staffing completed November 2023; CMU compiled and published a consolidated SOE performance report end December 2023 after Cabinet Committee on SOEs approval.
- SOE Policy developed and implemented end November 2023 after Federal Government approval.
- Sovereign Wealth Fund (SWF) created in August 2023 with assets from seven large SOEs; seven SOEs will be audited by the Auditor General of Pakistan.
- Authorities seeking MDB technical assistance for operationalizing the SWF, developing an annual public investment plan and an overall investment strategy to be approved by the Supervisory Council.

### Program assessment and outlook
- Program status: on track; all except one end-September 2023 quantitative performance criteria (QPCs) and almost all indicative targets were met.
- Missed QPC: general government primary deficit missed by a small margin due to exchange rate valuations.
- Missed IT: deviation on power sector payment arrears attributed to annual rebasing; annual target expected to be met despite quarterly miss.
- Authorities’ corrective actions: structural reforms in the exchange companies sector to keep average premium between interbank and open market exchange rates within agreed range.
- Staff assessment: public debt assessed as sustainable in the baseline case scenario.
- Authorities reiterate commitment to achieve all program targets under the SBA and continue reforms to improve economic governance.

*Source: Pakistan — IMF staff report and authorities’ statement (relevant tables and text as provided).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1pakea2024001.pdf_