Days after Pakistan reached a staff-level agreement with the International Monetary Fund (IMF), Islamabad received the global lender’s letter of intent (LOI) — a document declaring one party’s preliminary commitment to do business with another.
The receipt of a LOI indicates that Pakistan’s agreement with the IMF to release two tranches totaling $1.17 billion under a stalled loan facility is nearing completion.
Finance Minister Miftah Ismail and Acting State Bank of Pakistan (SBP) governor Murtaza Syed will now sign the letter jointly.
After months of deeply unpopular belt-tightening by the government, which took power in April and has effectively eliminated fuel and power subsidies, the IMF and Pakistan reached a staff-level agreement in the second week of July.
The Fund’s board would review the staff-level agreement at its meeting on August 29. In addition, the board would consider adding $1 billion to a $6 billion programme agreed upon in 2019.
To meet the demands of global financial institutions, the new government has reduced a slew of subsidies, risking the wrath of an electorate already reeling from double-digit inflation.
Former Prime Minister Imran Khan signed a $6 billion bailout package in 2019, but it was repeatedly stalled when his government breached subsidy agreements and failed to significantly improve tax collection.
‘The IMF is the best anchor for avoiding distress’
“It is indeed encouraging to learn that the LOI signed by Pakistan will be forwarded to the IMF immediately in order to ensure Board approval in August,” said former Finance Ministry adviser Dr Khaqan Najeeb.
“Hopefully, this will ensure disbursement of $1.17 billion by the end of August,” he said, adding that the IMF is the best anchor to avoid distress for countries like Pakistan, which has a vulnerable balance of payments position and low reserves of $7.8 billion.
“We must recognize that the scarcity of foreign inflows to Pakistan in recent months is largely due to the delay in completing the seventh and eighth reviews of the programme with the IMF,” the economist said.
He maintained that the news of the IMF program’s continuation has a lot to do with the currency market’s strength, a reversal in Pakistan Eurobond yields, and improvements in Pakistan’s central depository system.
Mini-budget on cards
An official previously told that the government was forced to present “a mini-budget for reviving the suspended IMF programme” after the Pakistan Democratic Movement (PDM)-led government caved into retailer pressure and waived their fixed tax, which was supposed to be collected through electricity bills.
“A mini-budget is in the works as the government has decided to issue an ordinance to implement additional taxation measures in order to raise Rs18 billion for the national coffers,” an official said.
Different sectors are being considered for additional taxes in order to satisfy the IMF, such as cigarettes, tobacco leaves, and fertilizer, among others. A Presidential Ordinance may be used to raise taxes on cigarettes and tobacco leaf processing.
It remains to be seen how the government will amend the Finance Act 2022 via Presidential Ordinance, which will raise Rs27 billion from retailers.
Miftah, the finance minister, also confirmed the government’s intention to levy additional taxes. “Different proposals are being considered, and the prime minister will make a decision soon.”
Petrol prices to go low
After receiving the letter of intent from IMF, it is said that the petrol prices may be decreased by Rs 10 and the announcement of new prices expected on 15 August.
