According to the Ministry of Finance, the UAE has assured that it will provide an additional deposit of US$1bn to Pakistan, paving the way for Pakistan to sign a Staff Level Agreement (SLA) with IMF. SBP is engaging for documentation to receive the deposit. To recall, receiving funding assurances from friendly countries is one of the major hurdles in completing the 9th review of the IMF program. Saudi Arabia has already committed to the IMF that it will provide US$2bn to Pakistan. According to the Ministry of Finance, China has also rolled over a debt of US$2bn to Pakistan, which was due on 23rd March 2023.
SBP, in its last analyst briefing, stated that the total funding requirement till the end of June 2023 was US$4.4bn, and the central bank expected that US$2.3bn would be rolled over while US$2bn would be arranged from other sources and repaid.
While major prerequisites are complete for the 9th review, including but not limited to tax increases, a market-based exchange rate and higher interest rates, the IMF might require explanations on announced cross-subsidy on fuel and a shortfall in tax collection, which clocked in at Rs5.155trn for 9MFY23 against a target of Rs5.433trn.
Assurances of funding should also lead to alleviating some pressure off the Pak Rupee, which is currently trading at 284.5 against the US$.
On the back of high external financing needs, we believe that Pakistan will enter another IMF program after the current IMF program is completed. Negotiations for the next IMF program will likely commence after elections scheduled for October 2023.
The IMF executive board signed a US$6bn EFF program with Pakistan in Jul-2019. In Nov-2019, Pakistan completed its first review, and in Feb-2020 reached a staff-level agreement on the second review. However, the release of the tranche under the second review was delayed due to COVID-19 outbreak.
To combat the challenges of COVID-19, IMF also disbursed US$1.4bn in April 2020 under the Rapid Financing Agreement.
Later on, after a prolonged discussion with Abdul Hafeez Shaikh (Former Finance Minister), the IMF board successfully approved the Second, Third, Fourth and Fifth Tranche in Mar 2021.
Abdul Hafeez Shaikh was replaced by Shaukat Tarin in April 2021, who then talked with IMF and reached a staff-level agreement in Nov-21 for the Sixth review after a delay due to differences and lack of implementation on a few of the proposed policy actions.
The Seventh and Eighth reviews of the Pakistan EFF program were initially scheduled for March 2022 and June 2022. Still, Pakistan could not reach Staff level agreement with IMF due to delays in proposed policy actions like removing petroleum subsidies, imposition of a Petroleum Development Levy (PDL), energy tariff rationalisation & increased tax measures. The review was then completed on Jul 13, 2022. The IMF board also approved an extension of the EFF until June 2023 and augmentation of access by SDR 720mn (US$1bn), bringing total access to about US$7bn.
Similarly, the 9th review of the Pakistan EFF program was initially scheduled for September 2022. Still, it was delayed due to a lack of imposition of policy actions, including market-driven exchange rate, energy tariff rationalisation & increased tax measures.
This is Pakistan’s 23rd IMF program which is likely to complete in June 2023.
Courtesy- Topline Securities