Pakistan fails to meet IMF targets on currency swap, budgetary loans

• Fund dubs elimination of SROs “critical” to economic future
• Pakistan to get $550mn EFF by end-March
• IMF team clears Islamabad’s new economic policies in updated LoI

Projecting Pakistan’s improving economic growth at 3.1 percent for fiscal year 2014 (FY14), the International Monetary Fund (IMF) Sunday said the dollar-hungry country had not been able to achieve its target on bringing the volume of the State Bank of Pakistan’s currency swap agreements and forward positions in conformity to the lender’s program.

Also, the fund was far from satisfied over the cash-strapped government’s increased reliance on the banks for its ever-burgeoning budgetary loans and the resultant violation of fiscal discipline in the financially-troubled country.

Further, the IMF also stressed the need for making “decisive” efforts to broaden the country’s narrowed tax net.

To this effect, the fund said, the elimination of tax exemptions and loopholes granted through Statutory Regulatory Orders (SROs) were critical to the future of Pakistan’s economy.

“The authority’s reform program remains broadly on track, with the government meeting all of the quantitative performance criteria by end of December 2013, with the exception of the targets on SBP’s net swap or forward positions and the ceiling on government borrowing from the SBP,” observed Jeffrey Franks.

Franks was the leader of the IMF’s staff mission that met Pakistani authorities in Dubai from February 1 to 9 for discussions on the second review of Pakistan’s IMF-supported program under the Extended Fund Facility (EFF).

Islamabad is likely to add $550 million to its depleting dollar reserves by the end of next month when the IMF mission staff will prepare a report for the fund’s Executive Board on the second review under the EFF.

“Upon approval, SDR 360 million (about US$550 million) will be made available,” Franks said.

He said the mission held productive discussions with Finance Minister Senator Ishaq Dar, State Bank of Pakistan (SBP) acting Governor Ashraf Wathra, Finance Secretary Dr Waqar Masood Khan and other senior officials.

“Progress on the unwinding of the SBP’s swap or forward positions to reach programme limits is underway,” said the IMF official.

By June last year, the central bank, reportedly, had borrowed at least $3.17 billion, $2.3 billion from the banks in short-term forward contracts and $871 million from China through a trade financing facility Islamabad had got in May 2013 under a three-year bilateral pact with Beijing.

An earlier IMF report calculated that about 58 percent of Pakistan’s total dollar reserves belonged to the commercial banks or China.

The IMF is reported to have termed Pakistan’s enhanced exposure to such currency swaps and forward positions as “a flawed strategy to artificially top up its reserves.”

The Pakistan authorities are reported to have assured the IMF of gradually reducing the size of all such short-term transactions.

“(The) progress on this front is satisfactory so far,” Franks said.

Also, he said the Pakistan authorities had reaffirmed their commitment to adopt the necessary corrective actions, including measures to improve the financing of government debt through a medium-term strategy of institutional development and deepening of the government’s securities market.

The SBP recently has allowed the trading of the government securities, calculated at Rs 8 trillion by September last year, on the country’s stocks market. Having held “constructive” talks with Pakistani side, the IMF mission said it was encouraged by the overall progress made in pushing ahead with policies to strengthen macro-economic stability and reviving economic growth.

“The mission reached staff-level understandings with the authorities on a set of economic policies detailed in an updated Letter of Intent, which will be subject to Executive Board’s approval,” said Franks.

He said Pakistan’s economy was showing signs of improved economic activity.

The services and manufacturing are driving better-than-expected GDP growth, as reforms in the electricity sector seem to be bearing fruit with electricity shortages and unscheduled load-shedding declining, the official said.

Led by large-scale manufacturing and service sectors, the economic growth was picking up and is expected to reach about 3.1 percent for FY2013/14 as a whole compared to the earlier estimate of 2.8 percent.

“Fiscal performance continued on track in the second quarter of 2013/14, with initial consolidation efforts relying on revenue mobilisation and reduction in energy subsidies,” the IMF official said.

On the external side, the mission said while the SBP has continued its efforts to rebuild reserves, and the foreign exchange market has stabilised, pressures on the balance of payments were likely to persist for some months.

“The mission recognises the authorities’ resolve to pursue agreed structural reforms to enhance medium term growth prospects and rebuild foreign exchange reserves to underpin investor confidence,” he said.

It termed the timely implementation of reform measures articulated in the National Energy Policy as of a high priority in ensuring affordable and reliable supply of energy.

Recognising that fixing Pakistan’s energy problem calls for a medium-term strategy of sustained reform, the authorities agreed to press forward with efforts to improve energy sector governance, promote private investment in electricity power generation and modernisation and transition to a market-based system of gas pricing.

Furthermore, Franks said, the government’s privatisation agenda remained on track with capital market transactions for some companies, investments by strategic investors in others, and restructuring to improve resource allocation and limit poor performance.

“Protecting the most vulnerable from the direct and indirect impact of fiscal adjustment continues to be a priority of the IMF as well as Government of Pakistan,” he said.