IMF Deal Agreement
On Tuesday, it was reported that Pakistan has received a Memorandum of Economic and Finance Policy (MEFP) from the IMF for the seventh and eighth reviews of its International Monetary Fund bailout programme. The MEFP is a key step to indicate that the two parties have reached an agreement and also contains certain prior actions that would be necessary for implementation before the IMF board takes up Pakistan’s case for approval and the subsequent disbursement of about $1bn next month.
This is a positive development considering how the government was aiming to conclude an agreement by June 28 before the approval of the federal budget for the upcoming fiscal year 2022-23. It is expected that the IMF will issue a statement confirming substantial progress on the fiscal framework that has been agreed between the two parties.
However, in order to win over the IMF mission, the government has had to make further concessions that will not do them any favours with regards to their political capital. On top of record-high inflation levels, the government last week had to take several tough steps such as the imposition of a super tax and imposition of petroleum development levy. Therefore, it will be a challenge for the government to implement additional harsh measures as part of the MEFP.
According to reports, the government has had to adjust the brackets for poverty tax as it agreed to tax people earning Rs150 million and upwards. In the original budget, the government had set a 2 percent poverty tax only on those earning Rs300 million and above. In addition to this, the government also agreed to do away with provisions for additional salaries and pensions, for which Rs200 billion had been set aside as block allocation. On top of all this, the IMF has asked to deliver a Rs152 billion primary budget surplus. This will not be easy for the government to do as it means that the revenues will finance all the expenditures in addition to interest payments.
Nonetheless, the revival of the IMF programme is essential to rescue Pakistan from the ongoing economic crisis and the government has no choice but to comply with the demands. Managing the budget on a surplus and exercising fiscal responsibility will also serve us well in the future too, so the government should look at this as an opportunity to address structural issues and must push ahead with tough but necessary stabilisation measures.