Progress Towards Reforms is Credit Positive: Moodys #Pakistan

Progress Towards Reform Goals is

Credit Positive

On Thursday, the International Monetary Fund (IMF) published a statement1 after a visit to

Pakistan (Caa1 stable), in which it commended the government’s progress on economic and fiscal reforms. This is credit positive for the sovereign as it indicates that its structural reform agenda is regaining momentum after some slippage in 2014, and that Pakistan is on track to receive its next disbursement under the IMF’s Extended Fund Facility (EFF).

The IMF’s remarks follow a mission in February, during which it reached staff-level

understandings with the Pakistani authorities on its sixth EFF review. If the IMF’s executive board approves the agreement, the fund will provide Pakistan with a disbursement of SDR 360 million ($494 million per current exchange rates). The IMF has already disbursed a total of $3.2 billion under the SDR 4.4 billion ($6.0 billion), 36-month EFF program, which commenced in September 2013.

In its latest statement, the IMF noted that immediate crisis risks had greatly receded, and

that the authorities were gradually addressing vulnerabilities. It highlighted Pakistan’s

progress in bolstering macroeconomic stability, public finances and foreign exchange buffers.

Another disbursement of funds under the IMF program would further strengthen Pakistan’s foreign reserves, which climbed to $11.3 billion as of 6 March 2015, from $3.2 billion at the start of 2014. Lower oil prices, the prospective privatization of two financial companies, and funding from multilateral and bilateral lenders should continue to bolster foreign reserves. Pakistan’s score on Moody’s External Vulnerability Indicator (EVI), which measures foreign reserves relative to residual maturity short-term external debt payments, reflects its strengthening reserve adequacy. We estimate that the EVI will fall to 89.7% in the fiscal year ending June 2015 from a peak of 122.5% last fiscal year.

Pakistan has made steady progress achieving reforms under the IMF program, implementing eight of 14 structural benchmarks and partially meeting one (see exhibit on p.2). It is striking that reforms have continued despite disruptive domestic political

challenges over the last year, and heightened security threats from Islamist terrorism.

Still, some of the items outstanding under the IMF program may face greater opposition domestically than those that the government has already ticked off its list. These include the passage of legislation to promote the autonomy of the central bank, which the administration has delayed by one year to June 2015. This would also support a reduction in lending from the central bank to the government to PKR1.9 trillion at the end of fiscal 2015 from PKR2.3 billion at the end of fiscal 2014, as per one of the IMF’s quantitative performance criteria. While we expect the authorities will strive toward continued fiscal consolidation, their goal of reducing the deficit to 4.9% of GDP this fiscal year from 5.5% last year will be challenging, given downside risks to revenue growth projections.

Other potentially contentious issues are the full or partial privatization of a number of state-owned enterprises, including the national airline, which is a major public-sector employer, and the application of market-based pricing of energy to prevent arrears from rebuilding in that sector. The fall in international oil prices provides an opportunity for the authorities to implement reforms in the latter case.

Structural Benchmarks Timeframe Status

1. Improve revenue collections by issuing a stipulated number of initial and second notices to

incorporate new taxpayers into the income tax net

Mar-14 Met

2. Eliminate exemptions and concessions granted through Statutory Regulatory Orders (SRO) for an

amount consistent with fiscal deficit reduction objective

Jun-14 Met

3. Amend relevant tax laws to comply with Anti-Money Laundering Act Sep-14 Rescheduled to Dec 2014

4. Approve an administrative order to consolidate responsibilities of public debt management Sep-14 Partially Met

5. Enact amendments to central bank law granting greater autonomy Jun-14 Not met, rescheduled to end June


6. Improve the internal operations of the central bank by reestablishing an advisory monetary policy

committee, a committee to oversee risk management activities, and by publishing summaries of

monetary policy proceedings

Aug-14 Met

7. Enactment of Securities Bill Dec-14 Not met, rescheduled to end June


8. Enactment of Deposit Protection Fund Act Jun-15

9. Initiate revenue-based load shedding in the six remaining electricity distribution companies Jan-14 Met

10. Hire financial advisors for public sector enterprises in the capital market transactions and to handle

strategic private-sector transactions

Mar-14 Met

11. Conduct diagnostic study of regulatory framework of the power sector Apr-14 Met

12. Offer minority shares in United Bank Limited and Pakistan Petroleum Limited Jun-14 Met

13. Fill vacancies in the National Electric Power Reg Auth Board Jul-14 Met

14. Sell 26% of Pakistan International Airlines’ shares to strategic investors Dec-14 Not met, rescheduled to end

December 2015

15. Draft legislation to permanently prohibit the issuance of SROs to grant exemptions New benchmark

16. Announce a time-bound plan to improve the central bank’s interest rate corridor New benchmark

17. Improve the internal operations of the central bank by regular oversight and approval of reserves

management strategy, risk practices, conducting internal audit reviews of monetary data provided to

the IMF

New benchmark

18. Reorganize the Debt Policy Coordination Office as a middle office for updating the debt strategy

and coordinating risk management functions

New benchmark

19. Conduct a review to reduce the number of existing processes and forms for paying sales and

income taxes


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