Frequently Asked Questions on Pakistan

Last Updated: April 8, 2021

The Executive Board of the International Monetary Fund (IMF) completed today the pending reviews (i.e. second through fifth) of the extended arrangement under the Extended Fund Facility (EFF) for Pakistan. The Board’s decision allows for an immediate disbursement of SDR 350 million (about US$500 million), bringing total disbursements for budget support under the arrangement to about US$2 billion.

Pakistan’s 39-month EFF arrangement was approved by the Executive Board on July 3, 2019 (see Press Release No. 19/264) for SDR 4.268 billion (about $6 billion at the time of approval of the arrangement, or 210 percent of quota). The program aims to support Pakistan’s policies to support the economy and save lives and livelihoods amid the still unfolding Covid-19 pandemic, ensure macroeconomic and debt sustainability, and advance structural reforms to lay the foundations for strong, job-rich, and long-lasting growth that benefits all Pakistanis.

The 39-month EFF approved in July 2019 remains in effect. Discussions for the EFF were paused in late-March 2020 to focus on a purchase under the Rapid Financing Instrument (RFI).

Back to Top

How did COVID-19 crisis affect Pakistan’s economic performance of the authorities’ reform program supported by the Fund’s Extended Fund Facility (EFF)? What are the reasons for the delay of the reviews? When are the next EFF reviews?

The pandemic disrupted the progress that Pakistan made under the IMF-supported program through March 2020 and triggered a shift in government’s priorities. Prior to COVID-19, Pakistan was making good progress with the implementation of the economic reform program supported by the IMF Extended Fund Facility (EFF). But because of COVID-19, GDP is estimated to have contracted by 0.4 percent in FY2020 for the first time since the 1950s.

The progress that Pakistan made under the program through March 2020 opened space for the authorities to devise a response to the shock, which included a temporary fiscal stimulus (1.2 percent of GDP), mostly a large expansion of the social safety net via the Ehsaas Emergency Cash Program, monetary policy support (625 bp rate cut) and targeted financial initiatives, as well as sizeable emergency financial support from the international community, including from the Fund’s Rapid Financing Instrument (RFI) and G-20 debt suspension.

Since the onset of the COVID-19 shock, the authorities and IMF team have been engaged on discussions to continue with the implementation of the economic reform program supported by the IMF EFF. The discussions revealed that making progress would necessitate a throughout recalibration of the macroeconomic policy mix and the structural reforms calendar, as well a modification of the EFF’s review schedule. After the completion of the 2nd to 5th reviews, next review is scheduled for June 2021.

Back to Top

What specific policy actions are needed to address the effects of COVID19 and ensure quick recovery including social protection measures to support the most vulnerable?

The progress made through March 2020 with the economic reform program supported by the IMF EFF, allowed the authorities to implement decisively health containment measures, a large temporary fiscal stimulus, monetary policy support and targeted financial initiatives. The package of measures adopted by the authorities has been well targeted to support growth and the most vulnerable, while aiming at preserving fiscal sustainability. Emergency support for the most vulnerable was significantly scaled up, with the Ehsaas Emergency Cash Program. The State Bank of Pakistan also swiftly adopted measures to support liquidity and credit conditions (e.g expansion of refinancing facilities), and to safeguard financial stability (including a cumulative 625 bps in interest rate cut). Since the onset of the crisis, the authorities have moved quickly to secure additional extra external funding.

Back to Top

There had been governance issues with the government’s reported data especially on debt. How will the program help improve the quality of data?

The Pakistani authorities have embarked on an ambitious process to strengthen their debt management and institutional capacity. During that process new information came to the authorities’ attention that revealed that the data on government guarantees dating back to FY 2016 were reported inaccurately.

The revised data indicates an increase in the volume of outstanding guarantees in PRs 357 billion (about 0.9 percent of GDP). The statistical revision only had a small impact on public debt. The authorities have taken strong corrective actions to avoid such unintentional mistake could reoccur in the future, including: (i) creating a working group to reconcile and cross-check guarantees and debt data; (ii) announcing additional functions for the Debt Policy Coordination Office (DPCO), including to act as custodian of all guarantees issued by the federal government; and (iii) publishing a semi-annual debt bulletin that consolidates key debt statistics. Beyond these actions, the authorities have committed to include a list of all new guarantees expected to be issued in the FY 2022 budget submitted to Parliament.

Back to Top

How will the additional money received after these program reviews be used? And how can the Fund ensure that they are not misused?

As with all other countries, IMF financing aims at supporting the implementation of policies and reforms to remove vulnerabilities, strengthen growth, and improve living standards. Pakistan’s performance under the IMF-supported program will be assessed with periodical reviews. The authorities are also mobilizing financing support from other Pakistan’s international partners, which are also assisting the Pakistani authorities in ensuring the program’s objectives are achieved. 

Back to Top

Why should Pakistan reduce its budget deficit in the middle of a pandemic?

The Covid-19 shock has required a careful recalibration of Pakistan’s macroeconomic policy mix and the reforms calendar. The authorities have formulated a package of measures that strikes an appropriate balance between supporting the economy, ensuring debt sustainability, and advancing structural reforms. The fiscal strategy therefore remains anchored by the sustainable primary deficit (i.e. excluding interest payments) of the FY2021 budget and allows for higher-than-expected COVID-related and social spending to minimize the short-term impact on growth and the most vulnerable. The targets are supported by careful spending management and revenue measures, including reforms of corporate taxation to make it fairer and more transparent.

Back to Top

How will the reforms in the program affect gas and power tariffs?

Long-standing deficiencies over the past decades and the COVID-19 shock have severely strained the energy sector, resulting in an unsustainable stock of arrears (circular debt) that weighs on the financial sector, budget, and the real economy. There are multiple causes, including delayed price adjustments, deferred payments, postponing key investment, and granting ill-targeted subsidies, among others. The energy sector’s strategy under the IMF-supporting program aims at restoring its financial viability, through a comprehensive plan, that includes strengthening the legal framework of regulatory agencies, management improvements, cost reductions, and adjustments in tariffs and subsidies calibrated to attenuate social and sectoral impacts. 

Back to Top

What is the government doing to bring inflation under control?

Inflation picked last year in January 2020 at 14.6 percent (y-o-y), and again in late summer, but since then, it has fallen to its lowest rate in 2 years to 5.7 percent in January 2021, reflecting soft domestic demand, low international process, and the recent improvements in supply conditions of food items, including strategic imports by the government. More recently, in February it increased to 8.7 percent, mostly reflecting volatility of food prices. Except for this volatility, the increases in other prices (i.e. the so-called core inflation) remain subdued in line with tepid demand-side pressures. The authorities have taken several measures to address price spikes derived from supply disruptions. In addition, the State Bank of Pakistan (SBP) remains vigilant, and will adjust monetary policy if needed be, on a data-driven forward-looking approach, with an aim at anchoring inflation expectations within the SBP’s target range of 5-7 percent over the medium term, with due consideration of public policies’ price impact and tradeoffs.

Back to Top

How does the program make sure that those who can afford it pay their fair share in taxes?

The authorities’ key fiscal objective remains to broaden the tax base, reduce informality, and simplify and modernize the tax system. Therefore, they are introducing a high-quality tax reform package, based on the recommendations provided by the IMF’s technical assistance. As a first step, the authorities have adopted a comprehensive corporate income tax (CIT) in March 2021. This reform simplifies the CIT system by streamlining numerous tax exemptions and bringing provisions in line with best international practices (including tax credits, accelerated depreciation, exempt income, reduced tax rates, and tax liability reductions). In addition, the Pakistani authorities are conducting tax administration reforms to strengthen compliance and ensure fairness and transparency.

Back to Top

How is the gray-list status by FATF since June 2018 impacting Pakistan’s borrowing ability from the IMF?

The authorities have made substantial progress by satisfactorily completing 24 of the 27 items in their AML/CFT action plan, which was recognized by the February 2021 FATF plenary. Capacity constraints and the COVID-19 context have hampered to achieve full progress, which is now scheduled to be achieved by June 2021. In parallel, the authorities are addressing the priority recommendations identified by the Asia Pacific Group on Money Laundering in the 2019 Mutual Evaluation Report, including deficiencies in the legal framework. Being in the FAFT gray-list has not had direct consequences on Pakistan’s borrowing ability from the IMF, although its economic consequences could include higher costs of borrowing for the private sector on foreign financial transactions.

Back to Top

Why is the IMF supporting taxes increases during COVID-19 times? Would this not depress investment and hamper job creation?

At 10-11 percent, Pakistan’s tax ratio, i.e. the amount of revenue collected by the government as a percent of GDP, is one of the lowest in the world. With such a low ratio, the government of Pakistan has difficulties to provide good public services to the population (e.g. education, health) or to adopt ambitious public investment projects. In addition, in the face of shocks it needs to resort to more borrowing, which increases debt and financial vulnerabilities. The increase in tax collections is focused on removing tax exemptions and privileges in a way that could make the most affluent segments of the population pay their fair share. This strategy will help maintain Pakistan’s macroeconomic stability and therefore foster investment and job creation.

Back to Top

Why does the IMF’s conditionality include the independence of the State Bank of Pakistan? Would this reform not provide the SBP with exorbitant and unaccountable powers?

In 2015, Pakistan already conducted a reform of the State Bank of Pakistan that incorporated a few elements of central banking’s best international practices, such as the creation of the Monetary Policy Committee, aimed at making its decision making data-based and free from undue interference. However, other elements were still missing. The reform recently approved by the government would bring the State of Pakistan Bank’s Act in line with best international best practices in the areas of clarifying objectives, strengthening accountability and legal protection, as well as introducing collegiality in the decision-making process. 

Back to Top

What is the Fund’s recommendation about the phasing-out of the State Bank of Pakistan’s (SBP) temporary support facilities?

As stated at the time of the Rapid Financing Instrument (RFI) approval, the Fund welcomes the SBP’s swift adoption of measures to support liquidity and credit conditions, and to safeguard financial stability. In addition, Fund’s advice is that regulatory measures and expanded refinancing schemes must be targeted and temporary, and their design should not create moral hazard nor foster poor credit risk management practices.