ISLAMABAD  - With approval of third tranche of $555.6 million, International Monetary Fund (IMF) has one again directed Pakistan to do more to reduce vulnerabilities of economy including increase in gas prices, hiking interest rate and to enhance central bank’s independence.

“Progress on structural reforms is welcome but more remains to be done. The rationalization of gas prices should move beyond the gas levy; regulation of the energy sector needs to be strengthened; privatization of public sector enterprises should move forward; and bolder actions are needed to improve trade policies and the business climate”, said David Lipton, First Deputy Managing Director and Acting Chair IMF, in a statement after approving third tranche for Pakistan.

As per conditions of the $6.64 billion bailout package, the government had committed with IMF to introduce new gas levy by December 2013. The new levy would raise around Rs 105 billion (0.4 per cent of the GDP) for the cash-strapped government, however, Pakistan has not yet introduced this gas levy.

Similarly, the Fund has indirectly asked the government to increase the interest rate to control inflation rate and government’s borrowing from the central bank. “Monetary policy should increasingly focus on containing inflationary pressures and every effort should be made to reduce the stock of government borrowing from the State Bank of Pakistan in line with programme targets”, the Fund said. Similarly, it added that efforts to build up foreign reserves should continue, including through greater exchange rate flexibility and a higher policy rate. IMF has once again directed Islamabad to enhance central bank independence through parliamentary approval without undue delay.

“Fiscal consolidation is on track, but additional efforts to broaden the revenue base and improve tax administration are needed to sustain the adjustment. Recent steps to increase the equity and transparency in taxation are in the right direction. However, the December 2013 investment incentive package runs against these steps. Slippages on targeted cash transfers should be avoided to protect the most vulnerable segments of the population. It will also be important to strengthen public debt management”.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     policy priority. In particular, capital shortfalls at some banks and high non-performing loans need to be addressed promptly. Additional steps to deepen the government debt market would also strengthen financial stability.

“The Pakistani authorities have made commendable progress in stabilizing the economy and launching important structural reforms. However, economic conditions remain challenging, and more needs to be done to reduce vulnerabilities”, said David Lipton.

The Executive Board of IMF on Monday approved the third tranche worth of $555.6 million for Pakistan under the Extended Fund Facility. The 36-month extended arrangement under the EFF in the amount of SDR 4.393 billion (about $6.78 billion, or 425 per cent of Pakistan’s quota at the IMF) was approved by the Executive Board on September 4, 2013

In completing the second review, the Executive Board also approved the authorities’ request for waivers of non-observance of the end-December 2013 performance criteria on net swap/forward position and government borrowing from the State Bank of Pakistan (SBP) based on corrective actions taken by the authorities.

The government had sought waivers from the IMF for failure to meet two performance benchmarks including performance criteria on net swap/forward position and government borrowing from the State bank of Pakistan. Government borrowing from the State Bank of Pakistan (SBP) which stood at Rs 2,611 billion by end-December 2013 as opposed to the agreed target of Rs 2,560 billion. Similarly, the ceiling on SBP stock of net foreign currency swap/forward position was set at Rs 2,255 billion for end-December 2013 but in fact was Rs 2,650 billion. Therefore, the Fund has approved the government’s request.