02 September 2022

Pakistan Economy
KSE100 Index: Closing 42,460.08 ↑ (108.93)

A brief on IMF Staff Report – Surveillance on reforms

increase
▪ Following IMF’s initial press release regarding approval of Pakistan’s 7th and 8th reviews of the ongoing Extended Fund
Facility (EFF), the Fund has released its Staff Report today.
▪ As briefed in our earlier note, the approval makes way for the release of US$1.2bn, while the Fund has also accepted the
extension request leading to another ~US$2.5bn by Jun-2023.
▪ We understand that the final talks between IMF and Pakistan took place pre-floods, hence absence of any remark on the
event or its risks (barring climate change risk), making IMF’s FY23 macro targets not as pertinent standing in Aug-2022.
▪ On the monetary policy stance, IMF pressed on the importance of a tightening policy to reduce inflation and for the central
bank to be proactive as the situation unfolds. The report stated achieving real positive interest rates through a tightening cycle
and control CPI to target a medium-term range of 5% - 7%.
▪ Structural reforms outlined for the energy sector are in-line with previous recommendations, in addition to emphasis on
workable models to reduce subsidies. Successful implementation of these and improvements in the various segments of the
energy chain is a positive for the reduction in Circular Debt pile up, hence, the govt-owned Exploration & Production
Companies and Oil & Gas Marketing Cos. listed on PSX.
▪ For the financial sector, the report highlights (1) the need for a plan for the phasing out of SBP refinance facilities and (2) the
need to address high levels of NPLs in some banks through a strategy to allow for the write-off of fully provisioned NPLs in
general by Jun-2023. This is in addition to update on TSA implementation.
▪ IMF has identified key risks to targets and implementation of reforms, while the Fund has also explained to reach out to agreed
contingencies at the earliest signs of fiscal program underperformance, including withdrawal of tax exemptions that currently
benefit exporters.

Macro targets - disconnected to current situation

Following IMF’s initial press release regarding approval of Pakistan’s 7th and 8th Amreen Soorani, FCCA
reviews of the ongoing Extended Fund Facility (EFF), the Fund has released its amreen.soorani@js.com
Staff Report. As briefed in our earlier note, the approval makes way for the release +9221 111-574-111 Ext: 3099
of US$1.2bn, while the Fund has also accepted the extension request leading to
another ~US$2.5bn by Jun-2023.

IMF Staff Report: Proposed Schedule after Program extension

% of
SDRm n
Quota
July 3, 2019 716 35 Approval of arrangement
December 6, 2019 328 16 1st review and end-Sept-19 performance/continuous criteria
March 5, 2021 350 17 2nd, 3rd, 4th & 5th review s performance/continuous criteria
September 3, 2021 750 37 6th review and FY21 performance/continuous criteria
June 3, 2022 894 44 7th & 8th review s and FY22 performance/continuous criteria
November 3, 2022 894 44 9th review and 1QFY23 performance/ continuous criteria
February 3, 2023 528 26 10th review and 2QFY23 performance/continuous criteria
May 3, 2023 528 26 11th review and 3QFY23 performance/continuous criteria
Total 4,988 246
Source: IMF Staff Report, JS Research

Research Entity Notification Number: REP-084 JS Research is available on Bloomberg, Thomson Reuters, CapitalIQ and www.jsgcl.com
www.jamapunji.pk Please refer to the important disclosures and disclaimer on the last page
 A brief on IMF Staff Report – Surveillance on reforms increase
02 September 2022

The tone of the report suggests Pakistan is now back on track with regards to IMF’s
targets and proposed structural reforms. We understand that the final talks between
IMF and Pakistan took place pre-floods, hence absence of any remark on the event
or its risks (barring climate change risk). This makes IMF’s macro targets,
especially for FY23, not as pertinent standing in Aug-2022, as we believe
repercussions of the floods would lead to higher expenditure, higher imports and
sharper increase in inflation, as compared to FY23 targets. The current
circumstances become tricky for the government given IMF increasing vigilance on
Pakistan by monthly and quarterly updates on various measures, in addition to
agreed contingency plans in case of any slippages.

NIR target likely to be met this time

On the monetary policy stance, IMF pressed on the importance of a tightening
policy to reduce inflation and for the central bank to be proactive as the situation
unfolds. The report stated achieving real positive interest rates through a tightening
cycle and control CPI to target a medium-term range of 5% - 7%, also considering
degree of fiscal adjustment.

IMF Staff Report: Projected Disbursements

1QFY23 2QFY23 3QFY23 4QFY23
Multilateral and bilateral disbursements 3,667 7,558 4,694 3,634
of which: in cash 3,485 7,289 4,560 3,503
in cash of which: Saudi oil facility and
928 960 647 226
IDB commodity loans
in cash of which: project support 498 672 0 0
International bond issuance 200 1,200 200 1,200
Commercial borrowing 415 2,449 2,220 2,000
Gross inflows 4,282 11,207 7,114 6,834
of which: in cash 4,100 10,938 6,980 6,703
Source: IMF Staff Report, JS Research

The Fund has once again put much emphasis on missing the Net International
Reserves target (NIR: difference between usable gross international reserve
assets and reserve-related liabilities). These targets continue in the Program,
where this year external support from various sources are likely to assist in meeting
the same (refer to table below).

IMF Staff Report: Select Quantitative Performance Criteria and Indicative Targets
4QFY22 1QFY23 2QFY23 3QFY23
Adjusted
Actual Status Proposed
Program
Performance Criteria
Floor on Net Int'l Reserves of SBP US$mn (4,653) (10,784) Not met (11,450) (10,300) (9,800)
Ceiling on net domestic assets of the SBP Rsbn 10,895 10,850 Met 11,127 11,213 11,327
Ceiling on primary budget deficit Rsbn 267 1,900 Not met (339) (924) (897)
Ceiling on net govt budgetary borrowing stock from
Rsbn … 5,077 Met 5,791 5,791 5,791
SBP
Ceiling on govt guarantees stock Rsbn … 2,771 Met 2,978 3,077 3,102
Indicative Targets
Floor on net tax revenues collected by FBR Rsbn … 6,126 Met 1,569 3,511 5,304
Ceiling on net accumulation of tax refund arrears Rsbn … 147 Not met 0 0 0
Ceiling on power sector payment arrears Rsbn … 536 Not met (208) (157) 30
Gross issuance of PIBs, Sukuks, and Eurobonds Rsbn … 6,267 Met … … …
Source: IMF Staff Report, JS Research

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 A brief on IMF Staff Report – Surveillance on reforms increase
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Energy – lesser reliance on subsidies

Structural reforms outlined for the energy sector are in-line with previous
recommendations, in addition to emphasis on workable models to reduce
subsidies. As per the report, the government has agreed to gradually absorb
maturing publicly-guaranteed PHPL debt into cheaper central government debt if
fiscal space allows and use proceeds to reduce Circular Debt stock (including
privatization proceeds from power sector assets and recoveries from the
outstanding stock of receivables). Successful implementation of these and
improvements in the various segments of the energy chain is a positive for the
reduction in Circular Debt pile up, hence, the govt-owned Exploration & Production
Companies and Oil & Gas Marketing Cos. listed on PSX.

Power: While delay in increasing base power tariffs was blamed for missing the
power sector payment arrears target, the Fund made the increase a part of prior
actions this time, where the first leg of increase has already been executed. Limiting
subsidies to the energy sector was among the key focal points in the report. Power
subsidies would limit to Rs570bn this year, a substantial decline from previous
years, owing to adjustment of power tariffs and reduction in IPP/GPP payments
(Rs130bn).

Gas: With approval of OGRA Act by the parliament this year, IMF has expressed
it feels the government may require more time than granted to work out distribution
of OGRA’s annual Estimated Revenue Requirement (ERR) for FY22 across the
slab system. The Fund however has advised a swift execution on the same. The
government, in its Letter of Intent, had apprised IMF regarding working on the
mechanism for rationalizing gas subsidies and implementation of weighted average
cost of gas (WACOG) pricing.

POL pricing: On adjustments to POL product prices through unwinding of

subsidies, resumption of levies (as scheduled) and taxes (as required) has been
much talked about already, the report introduced the concept of automatic pricing
mechanism on fuel once the aforementioned adjustments have taken place.

Other reforms include: (1) improvement in governance and accountability of

DISCOs, (2) unlocking lower capacity charges including through renegotiated
PPPs and PPAs with other IPPs, (3) encouraging private sector to participate in
the sector and (4) introduce competition.

Financial sector – Strategy needed to write off provided NPLs

Usual reforms related to the financial sector included update on implementation of
TSA (by CY22 end), ensuring all banks meet capital requirements, liquidation of a
public sector bank post removal from the privatization list. Moreover, the report
highlights (1) the need for a plan for the phasing out of SBP refinance facilities and
(2) the need to address high levels of NPLs in some banks through a strategy to
allow for the write-off of fully provisioned NPLs in general by Jun-2023. The Fund
once again discouraged housing lending targets for the banking sector, terming it
misallocation of credit.

Update on TSA: The MoF has created a Treasury and Cash Management Unit and
a Cash Forecasting Unit in the Federal Treasury Office in Islamabad. Monthly and
quarterly cash forecasts have been developed since Jan-2022, with technical
assistance from the ADB. In Mar-2022, new guidelines were issued on the

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 A brief on IMF Staff Report – Surveillance on reforms increase
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implementation of annual and multiannual commitment control systems, to

strengthen budget execution and expenditure controls.

While impact on govt deposits in the banking sector is yet unclear, NBP (~30% of
deposits from govt) and AKBL (~30% of deposits from govt) are among the banks
that would bear a higher impact from any sizable deposit withdrawals.

Key risks to the implementation of reforms…

IMF has identified key risks to targets and implementation of reforms, which include
(1) spill overs from the war in Ukraine and global financial conditions, (2) timing of
elections uncertain given the complex political setting, (3) significant containment
of current spending relative to GDP in a pre-election year, (4) contingent liabilities
related to SOEs hindering public debt management, (5) delay on structural reforms,
especially those related to the financial sector reducing effectiveness of the
monetary policy, (6) weakness in commitment from provinces to deliver the
historically high surpluses agreed and (7) government’s ability to collect revenue
from novel taxes and staggered PDL implementation.

...attached with contingencies

The Fund has also suggested to reach out to contingencies at the earliest signs of
fiscal program underperformance, where any signs of slippages in monthly data
sets regarding revenue collection should be followed by (1) immediate increase in
GST on fuel (currently zero), (2) further streamlining of GST exemptions including
on sugary drinks and other unwarranted exemptions such as those benefiting
exporters, and/or (3) increasing Federal Excise Duty on Tier I and Tier II cigarettes.

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A brief on IMF Staff Report – Surveillance on reforms increase
02 September 2022

Annexure I

IMF Staff Report: Structural Benchmarks

Structural Benchmarks Date Revised Date Status
Fiscal
Commit to not grant further tax amnesties Continuous Not met
Avoid practice of issuing new preferential tax treatments or exemptions Continuous Not met
Preparation of draft personal income tax (PIT) legislation Feb-22 Not met

Monetary and Financial

Adoption of measures to strengthen the effectiveness of the AML/CFT framework to support the
country’s efforts to exit the Financial Action Task Force (FATF) list of jurisdictions with serious Mar-22 Not met
deficiencies
Preparation of a plan by MoF and SBP, in consultation with other stakeholders, to establish an
appropriate Development Finance Institution to support the eventual phasing out of SBP refinance Apr-22 Dec-22 Not met
facilities

Completion of the first-stage recapitalization of the two private sector banks that are
May-22 Mar-23 Not met
undercapitalized

Energy Sector, State-Owned Enterprises, and Governance

Parliamentary approval of new SOE law in line with staff recommendations Jun-22 Sep-22 Not met

Establish a robust asset declaration system with a focus on high-level public officials Mar-22 Sep-22 Not met

Issuance of regulations by the Public Procurement Regulatory Authority (PPRA) to require

collection for publication of beneficial ownership information from companies which are awarded Mar-22 Not met
public procurement contracts for >Rs50mn

New Structural Benchmarks Date

Targeted increase of the BISP Kafalat beneficiary base to 9 million families using the NSER. Jun-23

Finalization of the combined annual rebasings (AR) for FY22 and FY23 to take effect on October 1, 2022 Sep-22

Submission to NEPRA of petitions for the (i) FY23-July FPA by end-August; (ii) FY23-Q1 QTA by end-Oct Sep-22

Adoption of a comprehensive strategy to address high levels of NPLs in some banks, including by requiring bank-specific plans for
Jun-23
reducing NPLs, and to write-off of fully provisioned NPLs

Initiate orderly liquidation (resolution) of either or both of the two currently undercapitalized private sector banks by end-May 2023 should
May-23
that they remain undercapitalized at that point

Submission to Cabinet of amendments to align Pakistan’s early intervention, bank resolution, and crisis management arrangements with
Oct-22
international good practices, in line with IMF staff recommendations

Operationalization of a Central Monitoring Unit (CMU) within the Ministry of Finance Jan-23

Publication of a comprehensive review of the anticorruption institutional framework (including the National Accountability Bureau) by a
Jan-23
task force with participation and inputs from reputable independent experts with international experience and civil society organizations
Source: IMF Staff Report, JS Research

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A brief on IMF Staff Report – Surveillance on reforms increase
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Annexure II

IMF Staff Report: External account and financing needs

FY22 estimates FY23 estimates FY24 FY25 FY26 FY27
US$mn FY21
Prev. Revised Prev. Revised Revised estimates
Current account (1,916) (12,994) (17,461) (12,163) (9,280) (9,959) (10,598) (11,492) (12,583)
Current account (% of GDP) -0.5 -4 -4.7 -3.5 -2.5 -2.5 -2.5 -2.5 -2.6
Current account (% of GDP; excl fuel imports) 2.2 0.1 0.3 0.5 3.2 2.4 1.9 1.5 1.1
Trade balance (28,188) (36,686) (40,140) (35,514) (32,856) (37,695) (38,715) (41,178) (44,141)
Exports, f.o.b. 25,630 30,078 31,877 31,642 35,900 36,900 38,319 41,286 44,064
Imports, f.o.b. 53,818 66,764 72,017 67,157 68,756 74,595 77,034 82,464 88,205
Oil imports 9,747 13,273 18,423 13,912 21,200 19,579 18,631 18,155 18,070
Services (net) (1,957) (3,603) (3,691) (4,428) (3,507) (3,596) (3,813) (4,207) (5,000)
Income (net) (4,613) (4,983) (5,288) (5,515) (4,763) (5,230) (5,295) (6,025) (7,053)
Workers' remittances 29,370 29,621 30,117 30,285 28,958 33,080 34,444 36,013 38,014
Capital account 235 223 208 127 161 180 103 68 54
Financial account 7,726 14,806 10,355 11,525 12,682 12,669 13,765 14,171 14,749
Disbursements 9,304 11,148 10,729 12,565 19,476 14,240 18,106 17,572 16,979
Amortization 5,855 8,658 8,288 10,977 12,414 12,326 16,286 15,151 16,389
Balance of payments 5,054 1,851 (7,504) (511) 3,563 2,890 3,270 2,747 2,221
Change in reserve assets (denotes
(4,473) (3,900) 7,469 533 (6,405) (1,211) (1,707) (2,167) (1,520)
accumulation)
External debt 122,209 129,574 121,504 138,568 135,931 144,160 148,431 149,620 148,630
Gross external financing needs 21,551 30,417 34,331 35,068 30,757 36,621 35,717 38,469 39,265
End-period gross official reserves 17,297 21,211 9,821 20,678 16,226 17,436 19,143 21,311 22,831
Import cover (x) 2.5 3.2 1.5 3.0 2.3 2.3 2.4 2.5 2.5

Source: IMF Staff Report, JS Research

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 A brief on IMF Staff Report – Surveillance on reforms increase
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