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IMF approves $7 billion loan for Pakistan | Economist Shahbaz Rana's Analysis
IMF approves $7 billion loan for Pakistan | Economist Shahbaz Rana's Analysis
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00:00Assalam-o-Alaikum, with the program Khabar Lahariya, I am Maria Memon.
00:04The government must have breathed a sigh of relief, because we just received the news that IMF has approved Pakistan's $7 billion bailout package.
00:14There were some worrisome signs before this, because this item did not come for discussion on the agenda of Pakistan.
00:23This time, this loan for Pakistan was not only approved,
00:28but also created a gap of three years for the current set-up.
00:32The Executive Board has also approved the issuance of the first case of $1.1 billion after the approval.
00:40The new loan program for Pakistan will cover 37 months, which is more or less a three-year period.
00:48In July, a staff level agreement was signed between Pakistan and the IMF.
00:52After that, there were delays, so there was a little concern, a little excitement, that why is this case not being approved?
00:59But today, the government has got a shot in the arm.
01:02After this, Zaraik says that the IMF loan will be 5% less than the interest rate.
01:08Pakistan completed its last $3 billion loan program in April.
01:13And last month, the World Ratings Agency, Fitch, and the World Credit Rating Agency, Moody's, also upgraded Pakistan's credit rating.
01:21Under the conditions of the IMF, Pakistan had to pay a bailout package from a friendly country to obtain this loan program.
01:28And the loan amount was required.
01:30And due to the lack of confidence from the friendly country, the acquisition of this program was still in doubt.
01:36We will talk about the first part of the program.
01:38Mr. Shahbaz Rana is with us.
01:40He has been consistently reporting on this reference and the economy.
01:44He has been ahead of the curve.
01:45Shahbaz, when this news broke,
01:48First of all, what are the biggest conditions of this agreement?
01:54So that we know what guarantees we have given in return for this loan.
01:59What are the conditions that we have to abide by?
02:04Thank you very much, Ms. Maria.
02:06There are four big pillars of this program.
02:09One is to invest in it.
02:11Second, the government institutions have to be improved.
02:15Third, there is a fiscal sustainability in it.
02:18That you have to improve the overall financial system of Pakistan.
02:22And fourth, there is a plan to increase the tax revenue of the IMF.
02:27Overall, if you give a general statement, then this kind of thing is made.
02:31But if you look at their conditions further,
02:36According to the size of today's economy of Pakistan,
02:40The government has to increase the tax net by an additional 3,600 billion rupees.
02:48Which is called equal to 3% of GDP.
02:51But today's GDP size is about 3,600 billion rupees.
02:55Which has to be done over a period of three years.
02:58The power sector's sustainability is also a pillar.
03:01Which is the fourth pillar.
03:02The major focus of the IMF in this new program is to increase electricity prices.
03:10You have seen that the government has increased electricity prices by 51% since July.
03:16There is also a focus on expenses, but not so much.
03:20One new thing in this program is that unlike in the past,
03:25When the IMF program was a loyalty program.
03:28This time, all four provincial governments and their budgets are included in the program.
03:33There are about 10 to 12 such conditions in this new program.
03:37Which are directly hitting the budget of the provinces.
03:41As you said, there are two big things.
03:44One is to increase the tax revenue.
03:46Then the increase in electricity prices.
03:48This is directly hitting the people here.
03:51It will have an effect on their lives.
03:53Why did you say that the Subo program is a new thing?
03:56Why was it included?
03:57In the past, it was said that we are setting milestones for Subo.
04:02Is it because of the electricity subsidies that were announced from Subo?
04:07Without talking to the IMF, without taking approval from them.
04:10That's why they have crystallized it in a written format.
04:14That you will inform us first.
04:16You can't do anything without that.
04:19See, in the past programs, there was only one thing related to Subo.
04:24And that was that the four provincial governments had to save a specific amount from their budget.
04:30It had to show cash surplus.
04:32Then it was included in the overall goal of the IMF program.
04:36This time things are different from that.
04:38And the basic reason for that is that the National Finance Commission is the seventh.
04:42Under that, the resources have been transferred to the provinces.
04:46And their expenses have not been transferred.
04:48If they had been transferred, then for political reasons, the loyal government took responsibility for those expenses.
04:53Like health, education, social safety net.
04:56So this is the fundamental issue due to which this time the IMF program is directly including Subo.
05:02This is the reason that you see that the IMF has talked about signing a national fiscal pact.
05:08Its deadline is September 30.
05:11And in that, all four provincial governments have to sign a pact.
05:15In which there are three to four types of expenses.
05:17Partly or fully.
05:19The loyal government on health.
05:21Still on health, sorry, on education.
05:24Social safety net, in which the Beneficial Income Support Program.
05:27All of that will not be transferred.
05:28Partly, if there is a duplication somewhere, that will end.
05:30And then the road infrastructure that comes in the domain of the provinces.
05:34The expenses related to that will be transferred to the provinces.
05:37The agriculture sector, you know that Pakistan's economy accounts for about 20 to 24% of the economy.
05:44And this is almost outside the tax net.
05:46It is written in the IMF that the loyal government will not impose income tax on the agriculture sector in the provinces.
05:54So to address that issue, there is a condition in this program.
05:58That by October 30, the loyal government's federal income tax rates.
06:05Which are of mine, yours and the companies.
06:07With that, all four provincial governments will align their agricultural income tax rates.
06:13Which are of business individuals in particular.
06:15Which is 45%.
06:16Because its deadline is October 30.
06:18Then there are special economic zones.
06:20Which are made in the provinces.
06:24And the loyal government also makes them.
06:27You talked about electricity subsidies.
06:29It was in general that the provinces would not give subsidies.
06:32But the Punjab government made this decision suddenly.
06:36In which the loyal government, especially the Ministry of Treasury, was not taken on board.
06:40Where they gave subsidies in the provinces.
06:43They also gave in Islamabad Capital Territory.
06:45So after that, a new condition has been added to it.
06:48Which is the program of Pakistan.
06:50This program is of 37 months.
06:56Neither will they give subsidies on electricity nor on gas.
07:00So there are some other conditions related to this.
07:02Which were implemented in the provinces for the first time.
07:05Okay.
07:06For the next three years, the 7 billion will be released from time to time.
07:12Will there be audits in between?
07:15Are there any milestones in between?
07:17Are there any checks and balances?
07:19Or should we expect smooth sailing for the next three years?
07:24No, there is no such thing.
07:26Smooth sailing has never been in the past.
07:28And the program of the IMF this time is a very difficult program.
07:31I am covering the fourth program of the IMF in my professional career.
07:35And this is probably the most difficult program that Pakistan has agreed.
07:39The reason for this is that we take programs and do not implement them.
07:43The things of the past are saved and now the IMF has started to include them in the next program.
07:48So there will probably be at least two reviews in a year.
07:52And there will be benchmarks for each review.
07:54There are three to four basic conditions in this.
07:57There is a performance criteria.
07:59There are three, four, five big ones.
08:01Like what will be the loss of the budget?
08:03How much will be the expenditure on health, education?
08:05How much will be the net reserves of the State Bank of Pakistan?
08:08The government will not give the tax amnesty scheme.
08:11These are the performance criteria.
08:13Then there is a structural benchmark.
08:15You have to make some changes in the covenants.
08:17You have to take some other steps.
08:19Like you have to sign the National Fiscal Pact.
08:21There are things related to agriculture income tax.
08:23There are things related to the special economic zone.
08:25And there are some prior actions that have to be done in advance.
08:28Like we have put new taxes of 1400 to 1800 billion rupees.
08:31We have increased the prices of electricity.
08:33These were the prior actions.
08:34These things, these benchmarks, these goals have been set.
08:37Which will be reviewed by the IMF.
08:39Especially the goals of your tax are also set.
08:42There is a shortfall of 98 billion rupees in two months.
08:47There is a shortfall of 100 billion rupees.
08:49There is an internal assessment of the FBR.
08:55There is a shortfall of 200 to 250 billion rupees.
09:01For this, you will have to bring a mini budget.
09:03The government is not denying this mini budget.
09:08They are not denying it.
09:09They agree on small levels.
09:11Do you think that the pressure of foreign actors on Pakistan will make a difference?
09:21If you ask what is the biggest weakness of this program.
09:25The biggest weakness of this program is that the core issue of the economy of Pakistan.
09:31Because of which Pakistan is repeatedly participating in the IMF program.
09:34That it does not have the funds of foreign countries.
09:38And the loans that you have to pay in one year are more than double.
09:44If we are sitting on a reserve of 9.5 billion dollars today.
09:46Then in this financial year alone, Pakistan has to return 26.3 billion dollars of foreign loans.
09:51Ali Parvez Malik has said that in the next four years, we have to return at least 100 billion dollars.
09:57The fundamental weakness of this program is that the debt issue of Pakistan.
10:03The restructuring of the debt issue has not been included in this program.
10:08You can say that oxygen has been installed.
10:12As long as you are in the IMF program, you will not be able to return the cash deposit of Saudi Arabia, China, the United Arab Emirates, and Kuwait.
10:21They will take a rollover every year.
10:23With that, there is a commercial loan of 4 billion dollars from China.
10:26Its rollover is included.
10:27Some additional financing is also included.
10:29So this arrangement of the IMF and the way the IMF is still calling Pakistan's loans sustainable.
10:37It is just that those who have to return the loan, do not do it bilaterally.
10:41If you roll it over, your debt will be sustainable.
10:44The day that country says Saudi Arabia or China or the United Arab Emirates, I want my money back.
10:50I will not extend you after a year.
10:52So the debt of Pakistan will be unsustainable in the eyes of the IMF.
10:55That is a problematic thing.
10:57So instead of taking this thing head-on, that you have gone under the umbrella of the IMF.
11:01Under the IMF umbrella, you have to restructure all your loans, including domestic debt.
11:08So that you can find a solution to this problem once and for all.
11:11Neither the government is ready to go for political reasons.
11:15There is also a pressure from the banks.
11:17Because the biggest lender of the government is the domestic bank.
11:20And neither is the IMF ready to follow that path.
11:23So this is the reason.
11:24I think that until this problem is solved,
11:26it is possible that this 25th program, which the Prime Minister said was the last program of Pakistan,
11:31may not be the last program.
11:33Thank you very much, Mr. Shahbaz Rana.
11:35You were explaining to us in great detail why this is the most difficult IMF program in the history of Pakistan.
11:40And we are all running on eggshells right now.
11:43Because the future of this program depends on the basis of many of our foreign relations.
11:51So the foreign policy and the IMF program are very closely linked.