IMF reaches staff-level agreement with Pakistan. The International Monetary Fund (IMF) has secured a staff-level agreement with Pakistani authorities on a $3 billion Stand-by Arrangement (SBA).
“The new SBA builds on the efforts of the authorities under Pakistan’s 2019 EFF-supported programme, which expires at the end of June.” This agreement is subject to approval by the IMF’s Executive Board, which is expected to evaluate this proposal by mid-July, according to a news release from the global lender.
As IMF reaches staff-level agreement with Pakistan, the news comes just hours after Finance Minister Ishaq Dar stated that a staff-level agreement for a vital rescue deal with the IMF was “very close” and expected within the next 24 hours.
For some months, Islamabad has been rushing to finish the ninth review in order to unlock at least $1.1 billion under the lender’s $6.5 billion Extended Fund Facility approved in 2019. The programme was supposed to end on Friday, June 30th.
According to the IMF, the new SBA will aid the government’s immediate attempts to stabilize the economy after recent external shocks, maintain macroeconomic stability, and offer a framework for funding from multilateral and bilateral partners. It would also make room for social and development spending through improving domestic income mobilization and rigorous spending execution to assist meet Pakistanis’ needs.
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“Steadfast policy implementation is key for Pakistan to overcome its current challenges, including through greater fiscal discipline, a market-determined exchange rate to absorb external pressures, and further progress on reforms, particularly in the energy sector, to promote climate resilience, and to help improve the business climate,” reads the statement.
According to an IMF staff team led by Nathan Porter, Pakistan’s economy has faced several external shocks since the completion of the combined seventh and eighth reviews under the 2019 Extended Fund Facility (EFF) in August 2022, including catastrophic floods in 2022 that impacted the lives of millions of Pakistanis and an international commodity price spike in the aftermath of Russia’s war in Ukraine.
“As a result of these shocks as well as some policy missteps—including shortages from constraints on the functioning of the FX market—economic growth has stalled. Inflation, including for essential items, is very high. Despite the authorities’ efforts to reduce imports and the trade deficit, reserves have declined to very low levels. Liquidity conditions in the power sector also remain acute, with the further buildup of arrears (circular debt) and frequent load-shedding.
“Given these challenges, the new SBA would provide a policy anchor and a framework for financial support from multilateral and bilateral partners in the period ahead,” he said.
He admitted that Pakistan has already made a number of significant steps in advance of the new initiative.
The Pakistan Parliament has adopted the FY24 budget, which aims to ensure fiscal sustainability and raise revenue, allowing for increased social and development investment. The FY24 budget aims for a primary surplus of roughly 0.4 percent of GDP by broadening the tax base and increasing tax collection from undertaxed sectors, as well as boosting progressivity and leaving room to expand help for the disadvantaged through the BISP programme. It will be critical that the budget is carried out as planned, and that the authorities reject temptations for unbudgeted spending or tax breaks in the coming months.
The SBP has discontinued import prioritisation guidance and is committed to ensuring full market determination of the currency rate. Going forward, the SBP should maintain a foreign exchange framework devoid of restrictions on payments and transfers for current international transactions and multiple currency practices, as well as be proactive in reducing inflation, which disproportionately impacts the most vulnerable.
Continuation of efforts to secure financial assistance from international institutions and bilateral partners. In addition to significant climate-related pledges from the January 2023 Conference on Climate Resilient Pakistan in Geneva, the authorities’ efforts have concentrated on collecting fresh financing and securing debt rollover.
This will help to sustain near-term policy initiatives and restore gross reserves, bringing them back to more comfortable levels.The authorities’ programme also includes ongoing efforts to strengthen the energy sector’s viability (including timely FY24 annual rebasing), improve SOE governance, and strengthen the public investment management framework, including for projects needed to build resilience to climate change.
