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Pakistan, IMF & SBP

Huzaima Bukhari & Abdul Rauf Shakoori

Shehbaz Sharif, Prime Minister of Pakistan’s maiden visit to the Gulf seems to be fructuous and is expected to generate desired results. During this tour, he met with the leadership of Saudi Arabia and the United Arab Emirates (UAE). According to media reports, Saudi Arabia is expected to extend a US$ 8 billion economic package that includes deposits in the State Bank of Pakistan (SBP) to facilitate balance of payments crisis and a deferred oil payment facility. Similarly, Pakistan is looking forward to receiving an economic stimulus package along with investments from the UAE as well—a high-powered delegation visited Pakistan to explore investment opportunities and formalize Memorandums of Understanding (MoUs). The UAE has already rolled over the amount of US$ 2 billion as a deposit with the SBP.

Apart from securing financial support from the Gulf countries, the biggest task at hand for the incumbent government is negotiation with the team of International Monetary Fund (IMF), which is expected to visit Pakistan this month to discuss the modalities of Pakistan’s request for extension and enhancement of Extended Fund Facility (EFF).  It is expected that the IMF team will discuss implementation of the conditions agreed upon by the previous government under the IMF Country Report NO. 22/27, issued in February 2022.

The economic decision-making of the coalition Government of Pakistan Tehreek-e-Insaf (PTI) was completely subservient to IMF’s policies. All key steps were taken to facilitate objectives of the global lender. As per the commitment, PTI government approved the Finance (Supplementary) Act, 2022. It withdrew zero-rating and reduced rate treatment by moving most goods to the Fifth Schedule, Sixth schedule, and Eighth Schedule to the Sales Tax Act, 1990 to bring these within the ambit of standard sales tax rate of 17%. This ignited a new inflationary trend. However, the PTI government defended it, disregarding the interest of the public and businesses to abide by the IMF directions.

The PTI government was also committed to revising Personal Income Tax (PIT) in the upcoming budget to reduce income tax brackets, cut down tax credits/allowances and bring more persons into the tax net. The PTI government also reaffirmed its commitment of not granting further tax amnesties and giving up the practice of issuing new preferential tax treatments or exemptions.

To facilitate local and export-oriented business and to combat COVID-related challenges, the SBP offered multiple refinancing schemes.  IMF’s report warned against their expansion and opined that these will undermine efforts of SBP to credibly implement monetary policy and will hamper the achievement of its primary objectives. It called for the eventual phasing out of the refinance facilities. The IMF’s report mentions that the authorities agreed that the Ministry of Finance and SBP will jointly design a plan, in consultation with other stakeholders, to establish an appropriate Development Finance Institution, which shall provide the basis for a plan to transfer the refinancing schemes to the government. Further, after the adoption of State Bank of Pakistan (Amendment) Act, 2021, refinancing facilities are allowed only where it complements the SBP’s mandate and without compromising the primary objective.

On the energy sector, IMF emphasised regular implementation of tariff adjustments in line with established formulas, as it believes it is an important measure to avoid further accumulation of arrears/circular debt stock. IMF has further required better targeting of power subsidies and subsidy reforms with the objective of reducing the number of subsidised consumers and a more progressive tariff structure. The PTI government also accorded its written approval for raising petroleum development levy (PDL) by Rs, 4 p/liter/per month for the remaining  fiscal year (FY) 2022 until the maximum of Rs. 30/liter was achieved.

Interestingly, Dr. Reza Baqir, one of the signatories of the letter of intent and the main player in negotiating a deal with IMF has just relinquished his charge after completion of 3-years’ term. During his entire tenure, he was criticised by politicians and independent financial experts due to his previous affiliation with IMF. A new challenge for the current government will be finding his replacement and revisiting his actions during office which created problems like double-digit inflation, depleting reserves, and worst-performing currency. One of the most objectionable actions was generating foreign liquidity through “hot money” where funds were raised from the international market at exuberantly high rates.

It may be noted that the Pakistan Muslim League (Nawaz) and other partners of the current coalition government criticised the terms of loans agreed upon between the IMF and the previous government. Legislation regarding SBP was also termed as a conspiracy to undermine supremacy of the Parliament—a move to compromise financial independence of the country. The then opposition and currently the government told the public in media that these changes would be reversed, and no compromise would be made on the autonomy of SBP.

As per the State Bank of Pakistan (Amendment) Act, 2022 [“the Act’)], SBP will ensure domestic price stability. However, the law does not define ‘price stability’. In Pakistan, managing prices is in the domain of federal as well as the provincial governments—expecting SBP to work for domestic price stability is totally misplaced. Likewise, SBP has a limited role to play regarding food and energy inflation, which is based on tariffs, duties, domestic and international market prices, demand, and supply factors.

The Act increases functional and administrative autonomy of SBP, which bars role of the government in managing policy and exchange rates. Delegation of this power was a long-awaited objective of IMF and independent lenders as they advocated for driving the exchange rate through market forces.

The Act was expected to ease pressure on foreign exchange reserves especially when the government starts pumping dollars into the market to artificially maintain rupee parity. However, for economies like Pakistan, the regulator, and other government institutions must be cognizant of the fact that certain market forces can manipulate exchange rate, and in such circumstances, SBP cannot simply alienate itself.  Pakistan is an import-based country and slight devaluation can have a multiplier effect on the overall import bill. In order to avoid this vicious cycle, the oversight role is crucial. The new government should assess whether, by extending functional autonomy to SBP, we have been able to achieve the desired results.

Similarly, amendments related to borrowing facility and imposition of the condition that at the end of each quarter, it must be returned leading to zero net borrowings, immunity offered to functionaries of SBP regarding public filing of suits, prosecution or any other legal proceeding against the Bank, Board of Directors or member thereof, Governor, Deputy Governors, officers and employees of the SBP for any act done in exercise or performance of any functions, seems inconsistent with the overall legal framework of Pakistan. Further, the National Accountability Bureau, Federal Investigation Agency, provincial investigation agencies, etc. are completely barred from taking any action, inquiry, investigation, or proceedings without the prior consent of the Board of Directors of SBP. This special treatment is also extended to former Directors, Governors, and Deputy Governors. These blanket provisions are in sheer contrast with the spirit of accountability, especially when politicians have been sent to gallows merely on a random application from “undisclosed sources”. Institutions must be held accountable for their decisions and actions—no institution or department should have privileges of immunity or special relaxation. The law must be applied equitably to uphold the spirit of accountability under the Constitution of Islamic Republic of Pakistan.

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All these written commitments made by the PTI government are binding on the new coalition government. Therefore, while renewing the EFF facility terms, focus should be on revenue-generation and structural reforms. Catch-22 for the new government is to maintain equilibrium between protecting socio-economic status of the common man as well as addressing the concerns of global lenders. Any assurance to remove subsidies or imposition of additional taxes will badly impact the ordinary citizens’ lives therefore, the government should stress on structural reforms, control leakages, privatize loss-making entities, and revenue generation to fill the fiscal gap.


Huzaima Bukhari, Advocate High Court & Adjunct Faculty at Lahore University of Management Sciences (LUMS), is a member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have recently co-authored a book, Pakistan Tackling FATF: Challenges and Solutions, with Dr. Ikramul Haq

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