According to the $6 billion Dollar agreement with the International Monetary Fund, Pakistan is to eliminate regulatory duties on imports to support its balance of payments.
The document states “The authorities are committed to eliminating the existing administrative restrictions, which have been imposed to support the balance of payments,” and also, “During the programme period, they [Pakistan] will not introduce or tighten exchange restrictions, MCPs, or import restrictions for balance of payments purposes,”
The government has also removed any regulatory duty on imports of luxury goods and items. Following its implementation, the current account deficit, which the government in the previous year had succeeded to narrow down to $7bn, will probably increase.
The IMF has ordered the elimination of duties on intermediate, consumer, and luxury goods, as well as import restrictions and multiple currency practices (MCP) by requiring fully pre funded letters of credit introduced in 2017, and restrictions on advance payment for imports against letters of credit, introduced in July 2018.
The document also states: “The SBP has also initiated the liquidation of a small undercapitalised publicly-owned bank,”
State Bank of Pakistan has also issued a demand to the small undercapitalized banks to submit their plans pertaining to new mergers or selling to private owners as well as their strategies to meet their minimum capital requirement by September. Failure to comply will result in intervention by the State bank.
Pertaining to the exchange rates, this is what the document said: “going forward, we are committed to maintaining a flexible market determined exchange rate, with SBP intervention in the foreign exchange market limited to preventing disorderly market conditions and a possible exchange rate overshooting but not suppressing a trend.” And “The authorities (IMF) will closely monitor the potential adverse impact of adjustment policies on non-performing loans and individual banks’ capitalisation and will stand ready to take the necessary measures to ensure that all banks remain well capitalised,”
An independent central bank will come up with an appropriate monetary policy to contain inflation and boost confidence. Furthermore, the State Bank and Ministry of Finance have agreed to reprofile the short term debts held by the State Bank at close to market level interest rates.
“The strong financial support to the authorities’ policy efforts by Pakistan’s international partners is essential to meet the large external financing needs in the coming years and allow the programme to achieve its objectives,”
“The authorities recognize that incomplete policy implementation derailed past adjustment efforts and allowed for repeated cycles of economic and financial stress,”
The document has emphasized the need for strengthening Pakistan’s Anti-Money Laundering/Combating the Financial of Terrorism regime to smooth its exit from Financial Action Task Force (FATF) list of jurisdiction with serious deficiencies.
In addition the government has also agreed to make relative amendments to the SBP Act in hopes to improve central bank’s autonomy, governance, and mandate.
“Amendments to the SBP Act will be submitted to parliament by end-December, 2019.”
The amendments will pertain to the recommendations regarding 2019 Safeguards Assessment Report, including operational independence and governance, governor’s tenure, and financial autonomy and accountability. This will ensure price stability as a major SBP’s objective as well forbidding any direct credit towards the government.