Pakistan Economy

Oct 07, 2023

REP-057

Pakistan IMF Loan Review

Funding Requirement, Primary Deficit, Gas Pricing & Monetary Policy

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 IMF approved SBA Program in June 2023 for Pakistan
History of IMF Lending Commitments to Pakistan (amount in mn SDR)  Pakistan has depended on the IMF for many decades to overcome its external account funding
needs.
Date of Amount Amount
Program Name Expiration Date
Arrangement Agreed Drawn  To recall, in July 2019, the IMF Executive Board approved a US$6bn Extended Fund Facility
(EFF) program for Pakistan. By August 2022, Pakistan had successfully completed the eighth
Standby Arrangement Jun 30, 2023 Mar 30, 2024 2,250 -
Extended Fund Facility Jul 03, 2019 Jun 30, 2023 4,988 2,144 review out of total eleven reviews and withdrawn SDR 2,144mn, compared to the agreed SDR
Rapid Financing Apr 16, 2020 Apr 20, 2020 1,016 1,016 amount of SDR 4,988mn.
Extended Fund Facility Sep 04, 2013 Sep 30, 2016 4,393 4,393  The ninth review, originally scheduled for November 2022, was delayed because Pakistan was
Standby Arrangement Nov 24, 2008 Sep 30, 2011 7,236 4,936 unable to reach a Staff Level Agreement (SLA) due to the lack of implementation of proposed
Extended Credit Facility Dec 06, 2001 Dec 05, 2004 1,034 861 policy actions and meeting external funding requirements.
Standby Arrangement Nov 29, 2000 Sep 30, 2001 465 465
 On the last day of the EFF program i.e. June 30, 2023, Pakistan achieved a significant
Extended Fund Facility Oct 20, 1997 Oct 19, 2000 455 114
breakthrough by signing a new Stand-By Arrangement (SBA) with the IMF worth US$3bn (SDR
Extended Credit Facility Oct 20, 1997 Oct 19, 2000 682 265
2.25bn). This SBA was surprise for many as it exceeded expectations both in terms of the
Standby Arrangement Dec 13, 1995 Sep 30, 1997 563 295
Extended Credit Facility Feb 22, 1994 Dec 13, 1995 607 172
duration and size of new program.
Extended Fund Facility Feb 22, 1994 Dec 04, 1995 379 123  Policies under the new program (SBA) aim to support immediate efforts to stabilize the
Standby Arrangement Sep 16, 1993 Feb 22, 1994 265 88 economy and rebuild buffers. Key policy pillars include: (i) an appropriate FY24 budget to
Structural Adjustment Dec 28, 1988 Dec 27, 1991 382 382 support needed fiscal adjustment; (ii) a return to a market-determined exchange rate and
Standby Arrangement Dec 28, 1988 Nov 30, 1990 273 194 proper functioning of the foreign exchange (FX) market to absorb balance of payment (BOP)
Extended Fund Facility Dec 02, 1981 Nov 23, 1983 919 730 pressures and eliminate FX shortages; (iii) adequately tight monetary policy to support
Extended Fund Facility Nov 24, 1980 Dec 01, 1981 1,268 349 disinflation and anchor expectations; and (iv) continuation of structural efforts to strengthen
Standby Arrangement Mar 09, 1977 Mar 08, 1978 80 80 energy sector viability, SOE governance, and the banking sector, while supporting efforts to
Standby Arrangement Nov 11, 1974 Nov 10, 1975 75 75
build Pakistan’s climate resilience.
Standby Arrangement Aug 11, 1973 Aug 10, 1974 75 75
Standby Arrangement May 18, 1972 May 17, 1973 100 84
 Pakistan has already received US$1.2bn in July 2023 and second review is scheduled for Nov-
Standby Arrangement Oct 17, 1968 Oct 16, 1969 75 75 2023.
Standby Arrangement Mar 16, 1965 Mar 15, 1966 38 38  Despite challenges and few missed targets, related to external funding, primary deficit, gas
Standby Arrangement Dec 08, 1958 Sep 22, 1959 25 - prices adjustment, etc, we think that there are high probability that Pakistan will get the next
Source: IMF, Topline Research IMF tranche.

Pakistan Economy 2
More focus will be on Quantitative Performance Criteria
Quantitative Performance Criteria, Indicative Targets and Structural Benchmark  The latest IMF program has set 9 Performance Criteria (including 2 continuous), 4 Indicative
Performance Criteria Sep-End Targets, 10 Structural Benchmarks for upcoming second review as mentioned in
Floor on net international reserves of the SBP (US$mn) (14,550) accompanying table.
Ceiling on net domestic assets of the SBP (Rsbn) 15,048
 Of the 10 structural benchmarks, 3 are continuous, while the remaining 7 targets are to be
Ceiling on SBP's stock of net foreign currency swaps position (US$mn) 4,200
met post-September 2023.
Ceiling on net government budgetary borrowing from the SBP (Rsbn) 4,708
Ceiling on the general government primary budget deficit (Rsbn) (87)  If Pakistan misses a Performance Criteria condition, the IMF Executive Board may approve a
Ceiling on the amount of government guarantees (Rsbn) 4,000 waiver if it is satisfied that the program will still succeed. Missed structural benchmarks and
Cumulative floor on targeted cash transfers spending (BISP) (Rsbn) 87.5 indicative targets do not require waivers but are assessed by the staff in the context of
Continuous Performance Criteria overall program performance.
Zero new flow of SBP's credit to general government 0
 State Bank Governor in his post MPC briefing on Sep 14, 2023 highlighted that all
Zero ceiling on accumulation of external public payment arrears by the
0 quantitative performance targets related to SBP which includes Net Domestic Assets (NDA),
general government
swaps and net international reserves have been met.
Indicative Targets

Cumulative floor on general government budgetary health and  Similarly Finance Ministry also told Bloomberg on Sep 21, 2023 that Government is
465
education spending (Rsbn) committed to maintaining fiscal discipline and achieve primary balance targets.
Floor on net tax revenues collected by the FBR (Rsbn) 1,977

Ceiling on net accumulation of tax refund arrears (Rsbn) 32

Ceiling on power sector payment arrears (Rsbn) (155)
Selected Structural Benchmark

Commit to not grant further tax amnesties. Continuous

Avoid the practice of issuing new preferential tax treatments or

Continuous
exemptions.
Avg premium between the interbank and open market rate will be no
Continuous
more than 1.25% during any consecutive 5 business day period.

Source: IMF Country Report, Topline Research

Pakistan Economy 3
External Funding Requirements
Gross External Financing Requirements  Ministry of Finance has projected gross external financing requirements of US$28.4bn
US$bn including Current Account Deficit (CAD) of US$6.5bn for FY24. These numbers are also in line
40.0 with IMF projections, quoted in latest country report.
34.4
35.0 31.9 32.9

30.0
28.4 27.2
28.9  In terms of funding sources, the government plans to secure a total of US$11bn, with
25.6
25.0 22.5 contributions of US$5bn from China and US$6bn from Saudi Arabia in the form of rollovers
20.0 and an oil facility with deferred payments.
15.0  The government anticipates around US$6.3bn from multilateral creditors, including the World
10.0
Bank (WB), Asian Development Bank (ADB), Islamic Development Bank (IDB), and the Asian
5.0
Infrastructure Investment Bank (AIIB).
0.0
FY21A FY22A FY23P FY24P FY25P FY26P FY27P FY28P  Additionally, US$3bn allocation has been envisioned under a nine month SBA program from
Source: IMF the IMF. To highlight, Pakistan has already secured US$1.2bn and is expecting an additional
US$700mn upon the completion of the first review and release of the second tranche by
External Financing Requirements and Funding Arrangements for FY24 December this year. Government is also eying of commercial loans worth US$5bn followed by
US$bn US$0.7bn from various other avenues, bringing the total projected foreign inflows to US$26bn
External Financing Requirement for FY24 28.4 for FY24.

 SBP Governor in post monetary policy analyst briefing on Sep 14, 2023 stated that total
Saudi Arabia 6.0
external financing requirement for FY24 is US$24.6bn out of which US$2.8bn has already been
China 5.0
Multilateral Creditors 6.3
paid. According to him SBP has received commitments for rollovers worth US$8bn, with an
IMF 3.0 additional expectation of US$3bn to be rolled over. The net payable amount stands at US$8bn.
Commercial Loan 5.0
 We believe that if the government can successfully manage the CAD to around US$4bn for
Others 0.7
FY24 vs US$6.5b, it can meet its financing requirements especially when commercial
Total 26.0
borrowing is next to impossible.
Funding Gap 2.4
Source: News Paper

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Compliance of Primary Deficit target will be a challenge
FBR Revenue Collection  Based on our analysis, meeting Primary Budget Surplus target of Rs87bn will be a biggest task
Rsbn FBR Tax Collection YoY Growth for the Finance Ministry.
1,000 40%
35%  FBR revenue collection during 1QFY24 was Rs2,041bn up 24% YoY and was better than target
800
30% of Rs1,977bn, as reported.
600 25%
20%
 According to IMF country report released post SBA agreement in July 2023 Pakistan was given
400 15% an Indicative Target of net revenue collection of Rs1,977bn.
10%
200  Similarly we expect that non tax revenues for July-Sep period will be Rs600-650bn vs annual
5%
budgeted amount of Rs2,963bn. We expect Petroleum Development Levy (PDL) to be Rs200-
0 0%
Jul-22
Aug-22
Sep-22
Oct-22

Dec-22
Jan-23
Feb-23

Apr-23
May-23
Jun-23
Jul-23
Aug-23
Sep-23
Nov-22

Mar-23

250bn in 1QFY24 as against annual target of Rs869bn.

 Considering provinces fiscal situation is not good, overall Primary deficit after incorporating all
Source: FBR, Topline Research expenses may pose challenges. Though official numbers of deficit are yet not available but
Government needs to convince the staff about the efforts being made to control this deficit.
Pakistan Primary Deficit Trend  World Bank in its latest report “Pakistan Development Update: Restoring Fiscal Sustainability”
Rsbn Primary Deficit as % of GDP stated that Pakistan’s primary deficit is expected to at 0.4% of GDP in FY24 vs IMF target of
1,000 1% 0.4% of primary surplus.
500
0%  Recently the caretaker government has announced to curtail expenditures by Rs1.9trn as part
-
of an austerity measure banning new posts, purchasing security vehicles, slashing down
(500) -1%
allocation for development, devolving the Higher Education Commission (HEC), and cost-
(1,000) -2% sharing of BISP with the provinces, as per news paper.
(1,500)
-3%  But it is yet to be seen if these measures will be implemented in letter and spirit.
(2,000)
(2,500) -4%  Further government needs to explain to IMF staff about enhancing tax revenues. As per media
FY19A FY20A FY21A FY22A FY23A FY24B reports, Caretaker Government is considering amendments to the taxation regime for retail,
Source: MOF, Topline Research
agriculture and real estate sectors and impose wealth tax on moveable assets.

Pakistan Economy 5
Gas and Power Sector viability
Pakistan Power Circular Debt Trend  According to IMF, timely alignment of energy tariff with cost structure is needed.
Rstrn
2.50 2.33 2.31
 On the Energy Sector the caretaker government has taken steps to pass on the impact of costs
2.25
2.15 in Petroleum and Electricity prices inspite of strong public reaction.
2.00
1.61  But the much awaited gas price revision has yet not been made. In the IMF country report,
1.50 where staff reiterated the importance of persevering with regular biannual end-user gas price
1.15
adjustments (as per established formulas and timelines), whilst sparing the protected slabs
1.00 0.73 which protect the most vulnerable consumers.
0.50  Besides, staff encouraged the authorities to work with the World Bank on: (i) preparing
guidelines for OGRA to implement the weighted-average cost of gas pricing (WACOG) law
-
FY17 FY18 FY19 FY20 FY21 FY22 FY23
adopted in March 2022 for the next regular OGRA determination; (ii) creating reliable CD data,
Source: Power Division, News Paper, Topline Research management, and projection capacity; and (iii) implementing cost-reducing reforms (notably
to reduce UFG losses, including through infrastructure improvements, network rehabilitation,
and theft control).
Pakistan Gas Circular Debt Trend
Rstrn  Based on news reports caretaker Energy Ministry said change in gas prices will be announced
2.5 soon. He said a formula was being worked out under which the lifeline consumers would be
2.1
given relief while imposing a significant tariff increase for other users and aligning the charges
2
for the largest users with the price of LPG.
1.5  For the industrial sector, there was a sharp difference in gas tariff between South and North
1 regions and for which modalities were being developed to bridge that gap, as per news.

0.35
 To recall rising circular debt in the gas sector is posing big risk to Pakistan economy. Currently,
0.5
as per available information, gas circular debt is Rs2.1trn (23% of Pakistan annual tax revenue
0 and 2% of GDP) and is increasing at the rate of Rs350-400bn per year. While power sector
FY18 Current
circular debt has reached Rs2.3trn as of FY23.
Source: News Papers, Media, Topline Research

Pakistan Economy 6
Monetary Policy and Exchange Rate Management
CPI and Policy Rate Trend  According to IMF Country Report, Pakistan Monetary Policy needs to remain tight, data driven
40.0% CPI Policy Rate and proactive.
35.0%  In last Monetary Policy meeting, SBP has maintain the Policy Rate at 22% amid expectations
30.0% real interest rates continue to remain in positive territory on a forward-looking basis.
25.0%  Many Economist including ourselves have revised upward CPI estimate for FY24. Topline now
20.0% expect FY24 inflation to be 23% from earlier estimate of 21% after incorporating rising energy

15.0%
and food prices.

10.0%  Here again the SBP needs to convince the IMF team about their outlook on inflation and how
Nov-22
Jul-22

Jan-23

Apr-23

Jul-23
Aug-22
Sep-22
Oct-22

Dec-22

Feb-23
Mar-23

May-23
Jun-23

Aug-23
Sep-23
they think current monetary stance is adequate considering agri growth, PKR and global
commodity prices.
Source: SBP, PBS, Topline Research  IMF has again reminded in July 2023 that Pakistan exchange rate will be allowed to be
determined by the market forces. Moreover it was also advised to abstain from informal
Interbank vs Open Market Dollar Premium Trend influence including import management and LC approval guidance
10.0%  Furthermore as per IMF average premium between the interbank and open market rate will
8.0% be no more than 1.25% during any consecutive 5 business day period.

6.0%  Over the last few months we have seen Pak Rupee first falling as soon as Caretaker

4.0%
Government charge by 6% from Rs288 to Rs307.

2.0%  Later on due to steps were taken by Government and SBP to curtail hoarding, speculation and
smuggling especially in the open market.
0.0%

-2.0%
 Resultantly, we saw PKR gaining 8% from Rs307 to Rs283 in 5 weeks. Moreover the premium
of open market over bank rate came down to 0.1% from as high as 7.4% seen on Sep 01, 2023.
Mar-23
Mar-23
Mar-23
Apr-23
Apr-23
Apr-23
May-23
May-23

Jul-23
Jul-23
Aug-23
Aug-23
Aug-23
Sep-23
Sep-23
Oct-23
Jun-23
Jun-23
Jun-23

 We believe that SBP and government can explain the situation and can get a relaxation of non
Source: SBP, Topline Research compliance of 1.25% band.

Pakistan Economy 7
 IMF Loan review in Sri Lanka and Bangladesh
History of IMF Lending Commitments to Sri Lanka (amount in mn SDR) Sri Lanka: Failed to reach IMF staff level agreement
Date of Expiration Amount Amount
Program Name
Arrangement Date Agreed Drawn  Recently IMF did not reach a staff-level agreement with Sri Lanka in its first review under a
Extended Fund Facility Mar 20, 2023 Mar 20, 2027 2,286
Extended Fund Facility Jun 03, 2016 Jun 02, 2019 1,071 715 US$2.9bn bailout package due to a (1) potential shortfall in revenue generation and (2)
Standby Arrangement Jul 24, 2009 Jul 23, 2012 1,654 1,654 financing reviews and engagement with external creditors.
Extended Credit Facility Apr 18, 2003 Apr 17, 2006 269 38
Extended Fund Facility Apr 18, 2003 Apr 17, 2006 144 21  Despite revenue mobilization having improved relative to last year, the IMF said revenue was
Standby Arrangement Apr 20, 2001 Sep 19, 2002 200 200
Extended Credit Facility Sep 13, 1991 Jul 31, 1995 336 280
expected to fall short of initial projections by nearly 15% by year end. To increase revenues
Structural Adj. Facility Mar 09, 1988 Mar 08, 1991 156 156 and signal better governance, it will be important to strengthen tax administration, remove tax
Standby Arrangement Sep 14, 1983 Jul 31, 1984 100 50
Extended Fund Facility Jan 01, 1979 Dec 31, 1981 260 260 exemptions and actively eliminate tax evasion.
Standby Arrangement Dec 02, 1977 Dec 01, 1978 93 93
Standby Arrangement Apr 30, 1974 Apr 29, 1975 25 7
 As per IMF there's big gap as expenditures are 19% of GDP where as revenue is 9% of GDP so
Standby Arrangement Mar 18, 1971 Mar 17, 1972 25 25 that gap needs to be filled.
Standby Arrangement Aug 12, 1969 Aug 11, 1970 20 20
Standby Arrangement May 06, 1968 May 05, 1969 20 20  On debt restructuring and engagement with external creditor, IMF needs a clear path towards
Standby Arrangement Jun 15, 1966 Jun 14, 1967 25 25
restoring debt sustainability.
Standby Arrangement Jun 15, 1965 Jun 14, 1966 30 23
Source: IMF Bangladesh: IMF review continue tough some targets missed
History of IMF Lending Commitments to Bangladesh (amount in mn SDR)
 An IMF team is in Dhaka from October 4-19 to hold the first review under a US$4.7bn loan
Date of Expiration Amount Amount
Program Name
Arrangement Date Agreed Drawn program.
Extended Credit Facility Jan 30, 2023 Jun 30, 2026 2,500
Extended Credit Facility Apr 11, 2012 Jul 31, 2015 640 457  As per Bloomberg, IMF holds loan talks with Bangladesh after some targets missed primarily
Extended Credit Facility Jun 20, 2003 Jun 19, 2007 400 317
not meeting foreign currency reserves by its central bank.
Extended Credit Facility Aug 10, 1990 Sep 13, 1993 345 330
Structural Adj. Facility Feb 06, 1987 Feb 05, 1990 201 201  One of the IMF's conditions was to maintain net Foreign Exchange FX reserves of US$24.46bn
Standby Arrangement Dec 02, 1985 Jun 30, 1987 180 180
Standby Arrangement Mar 28, 1983 Aug 31, 1983 68 68.4 in June, US$25.30bn in September and US$26.80bn in December.
Extended Fund Facility Dec 08, 1980 Jun 21, 1982 800 220
Standby Arrangement Jul 30, 1979 Jul 29, 1980 85 85  However as per news reports, Bangladesh Central Bank informs the IMF about the net FX
Standby Arrangement Jul 28, 1975 Jul 27, 1976 63 63 reserves, which now stand below US$20bn and gross FX exchange reserves stood at
Standby Arrangement Jun 14, 1974 Jun 13, 1975 31 31
Source: IMF US$21.15bn as of Sep 26, 2023.

Pakistan Economy 8
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expressed in this report.
Furthermore, it is stated that the research analyst or its close relative have neither served as a director/officer in the past 3 years nor received any compensation from the subject company in the past 12
months.
Additionally, as per regulation 8(2)(i) of the Research Analyst Regulations, 2015, we currently do not have a financial interest in the securities of the subject company aggregating more than 1% of the
value of the company.

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time horizon of 12-months.
Rating Expected Total Return
Buy Stock will outperform the average total return of stocks in universe
Neutral Stock will perform in line with the average total return of stocks in universe
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Rating Sector’s Proposed Weight in Portfolio
Over Weight > Weight in KSE-100 Index
Market Weight = Weight in KSE-100 Index
Under Weight < Weight in KSE-100 Index
Ratings are updated daily to account for the latest developments in the economy/sector/company, changes in stock prices and changes in analyst’s assumptions or a combination of any of these factors.

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Pakistan Economy 9
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Pakistan Economy 10