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JS Securities Limited – JS Research (September 02, 2022)

Karachi, September 02, 2022 (PPI-OT): A brief on IMF Staff Report – Surveillance on reforms increase

Following IMF’s initial press release regarding approval of Pakistan’s 7th and 8th reviews of the ongoing Extended Fund Facility (EFF), the Fund has released its Staff Report today.

As briefed in our earlier note, the approval makes way for the release of US$1.2bn, while the Fund has also accepted the extension request leading to another ~US$2.5bn by Jun-2023.

We understand that the final talks between IMF and Pakistan took place pre-floods, hence absence of any remark on the event or its risks (barring climate change risk), making IMF’s FY23 macro targets not as pertinent standing in Aug-2022.

On the monetary policy stance, IMF pressed on the importance of a tightening policy to reduce inflation and for the central bank to be proactive as the situation unfolds. The report stated achieving real positive interest rates through a tightening cycle and control CPI to target a medium-term range of 5% – 7%.

Structural reforms outlined for the energy sector are in-line with previous recommendations, in addition to emphasis on workable models to reduce subsidies. Successful implementation of these and improvements in the various segments of the energy chain is a positive for the reduction in Circular Debt pile up, hence, the govt-owned Exploration and Production Companies and Oil and Gas Marketing Cos. listed on PSX.

For the financial sector, the report highlights (1) the need for a plan for the phasing out of SBP refinance facilities and (2) the need to address high levels of NPLs in some banks through a strategy to allow for the write-off of fully provisioned NPLs in general by Jun-2023. This is in addition to update on TSA implementation.

IMF has identified key risks to targets and implementation of reforms, while the Fund has also explained to reach out to agreed contingencies at the earliest signs of fiscal program underperformance, including withdrawal of tax exemptions that currently benefit exporters.