The International Monetary Fund (IMF) has released its 2024 Article IV Consultation and Extended Fund Facility (EFF) report, detailing the challenges and structural reforms tied to Pakistan’s $7 billion loan. The report highlights the country’s fragile economic condition, risks tied to soaring debt, delays in privatizing key state-owned enterprises (SOEs), and outlines 22 structural benchmarks the government must follow to keep the program on track.
1. Debt Sustainability and Sovereign Stress
The IMF paints a worrying picture of Pakistan’s debt situation, with elevated public debt and gross financing needs posing serious risks to long-term stability. The report warns that while Pakistan’s debt is currently deemed sustainable, any policy missteps could lead to a significant deterioration in debt sustainability.
The high risk of sovereign stress is exacerbated by low foreign reserves, which remain precariously low despite external financing from multilateral and bilateral partners. However, the IMF notes that debt is expected to decline gradually over the medium term with continuous fiscal consolidation efforts.
2. Privatization Delays and Missed Targets
The IMF expressed concern over the delays in privatizing key SOEs such as Pakistan International Airlines (PIA) and the Faisalabad Electric Supply Company (FESCO). The government had committed to completing these transactions by mid-2024, but progress has stalled.
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Despite these setbacks, the IMF emphasized that the privatization of two Distribution Companies (DISCOs) is expected to conclude by January 2025. Privatizing profitable SOEs remains a top priority for the government to attract foreign investment and reduce the state’s financial burden.
3. Energy Sector Reforms: DISCOs Privatization on Track
The government’s plan to sell off two DISCOs by January 2025 is progressing, but the IMF stresses the need for urgent reforms in the energy sector. It emphasizes that inefficiencies and losses in energy distribution must be tackled through updating tariff guidelines, managing employee concerns, and engaging in a public communication campaign.
The energy sector, according to the report, continues to be a major drag on Pakistan’s finances, and only substantial reform efforts can mitigate further strain on public finances
4. Security and Business Environment Risks
The report highlights the challenging security environment in Pakistan, which is undermining efforts to attract Foreign Direct Investment (FDI). The IMF estimates that FDI will remain low at 0.3% of GDP for the current fiscal year, a worrying sign given the government’s efforts to boost investments.
Additionally, the IMF warns that political instability and security risks could derail the programme’s progress. Security concerns also pose operational risks for IMF staff in Pakistan, as noted in the report.
5. Fiscal Policy Adjustments and External Financing Needs
The IMF report underscores the critical need for fiscal adjustments to reduce Pakistan’s growing budget deficit. The government has secured $16.8 billion in short-term financing rollovers and $2.1 billion in new commitments from key partners such as China, Saudi Arabia, and the Asian Development Bank (ADB).
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These commitments are vital to keeping Pakistan’s financial obligations on track and preventing further economic deterioration. Timely disbursements of this external financing will play a crucial role in maintaining fiscal stability.
- Short-Term Financing Risks and Debt Management
The IMF warns that Pakistan’s external debt is predominantly owed to bilateral and multilateral creditors, with short-term debt adding significant risk to the economy. The country’s reliance on rolling over short-term loans could prove dangerous if international partners do not come through with timely disbursements.
Domestically, debt owed to local banks is creating a sovereign-bank nexus, making the country more vulnerable to economic shocks. Careful planning and consistent fiscal management will be essential to navigate these risks.
7. Structural Reforms: Urgent Action Required
As part of the $7 billion Extended Fund Facility (EFF), the IMF has outlined 22 key Structural Benchmarks (SBs) that Pakistan must meet. These SBs are designed to ensure long-term fiscal sustainability and tackle various economic challenges. Here’s a breakdown of some of the most critical benchmarks:
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Fiscal Benchmarks:
- No Tax Amnesties: Pakistan must refrain from issuing new tax amnesties or preferential tax treatments such as exemptions and special rates. (Continuous)
- National Fiscal Pact: The government is tasked with approving a National Fiscal Pact to address the imbalance between federal and provincial revenues and expenditures. (End-September 2024)
- Expenditure Oversight: All non-budgeted expenditures require ex-ante parliamentary approval to enhance fiscal oversight. (Continuous)
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Energy and Privatization:
- DISCOs and Energy Sector Reforms: The government must complete all necessary actions to privatize two Distribution Companies (DISCOs) by January 2025. This includes updating tariff guidelines and employee treatment policies. (End-January 2025)
- Privatization Plan: The government is expected to issue Requests for Proposals (RfPs) for the privatization of key SOEs, including DISCOs and the Faisalabad Electric Supply Company (FESCO), to streamline energy distribution. (End-May and End-September 2025)
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Governance and Anti-Corruption:
- Civil Servants Act: Amendments to the Civil Servants Act will require high-level public officials to publicly disclose their assets, including those beneficially owned by family members. This aims to improve transparency. (End-February 2025)
- Corruption Diagnostic Report: The government must publish a full governance and corruption diagnostic assessment to identify vulnerabilities and enhance accountability. (End-July 2025)
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Monetary and Financial Sector Reforms:
- Foreign Exchange Stability: The average premium between the interbank and open market rate must not exceed 1.25% over any five consecutive business days. (Continuous)
- Recapitalization of Banks: Undercapitalized private banks must either fully recapitalize by October 2024 or face resolution. (End-October 2024)
- Risk Mitigation: Regulations to improve risk mitigation in monetary policy operations must be implemented. (End-December 2024)
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Social Sector Reforms:
- Social Protection Adjustment: The Kafaalat cash transfer program must undergo an annual inflation adjustment to maintain its purchasing power for vulnerable citizens. (End-January 2025)
Overall, the IMF report paints a mixed picture of Pakistan’s economic future. While there are significant risks tied to public debt, privatization delays, and external financing needs, the programme offers a path forward if the government can deliver on its promises. It stresses that with fiscal consolidation, structural reforms, and continued support from bilateral partners, Pakistan has the opportunity to navigate its financial challenges and regain economic stability.
