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Economic Activity Stabilizing in Pakistan amidst Challenging Outlook: IMF

Global lender’s executive board completes first review of $3 billion SBA, allowing immediate disbursement of around $700 million

by Staff Report

Saul Loeb—AFP

The International Monetary Fund (IMF)’s Executive Board on Thursday completed the first review of the ongoing $3 billion Standby Arrangement (SBA) with Pakistan, allowing for the immediate disbursement of around $700 million, bringing the total disbursed thus far to around $1.9 billion.

“Pakistan’s program performance under the Stand-By Arrangement has supported significant progress in stabilizing the economy following significant shocks in FY2022-23,” said Deputy Managing Director Antoinette Sayeh in a statement issued after the Board’s meeting. “There are now tentative signs of activity picking-up and external pressures easing. Continued strong ownership remains critical to ensure the current momentum continues and stabilization of Pakistan’s economy becomes entrenched,” she added.

“The authorities’ strong revenue performance in FY24Q1 as well as federal spending restraint have helped to achieve a primary surplus in line with quarterly program targets,” she continued. “However, in the context of pressures, including from provincial spending, efforts at mobilizing revenues and ongoing non-priority spending discipline need to continue to ensure that the budgeted primary surplus and debt goals remain achievable. Going forward, broad-based reforms to improve the fiscal framework—mobilizing additional revenues particularly from non-filers and under-taxed sectors and improving public financial management—are required to create fiscal space for further social and development spending,” she emphasized.

The IMF official noted “challenging steps” of authorities in withdrawing subsidies on electricity and natural gas prices, adding regularly scheduled adjustments and cost-side power sector reforms were vital to improve the sector’s viability and protect fiscal sustainability. On inflation, she said it remained high, especially for the most vulnerable, and considered it appropriate that the State Bank of Pakistan (SBP) maintained a tight stance to steer inflation to moderate levels.

“Pakistan also needs a market-determined exchange rate to buffer external shocks, continue rebuilding foreign reserves, and support competitiveness and growth. In parallel, further action to address undercapitalized financial institutions and, more broadly, vigilance over the financial sector is necessary to support financial stability,” she added.

“Boosting jobs and inclusive growth in Pakistan requires continuing protection of the vulnerable through BISP and accelerating structural reforms, most notably around improving the business environment and leveling the playing field for investors, advancing the SOE reform agenda and safeguards related to the Sovereign Wealth Fund; strengthening governance and anti-corruption institutions; and building climate resilience,” she stressed.

A press release issued by the IMF after the meeting, noted that macroeconomic conditions have generally improved, with growth of 2 percent expected in FY24. It noted the fiscal position had strengthened in the first quarter of the ongoing fiscal, achieving a primary surplus of 0.4 percent of GDP due to overall strong revenues. “Inflation remains elevated, although with appropriately tight policy, this could decline to 18.5 percent by end-June 2024,” it said, while noting foreign exchange reserves had increased to $8.2 billion in December 2023, up from $4.5 billion in June, with a “broadly stable” exchange rate. The current account deficit is expected to rise to around 1.5 percent of GDP in FY24 as the recovery takes hold. “Assuming sustained sound macroeconomic policy and structural reform implementation, inflation should return to the SBP target and growth continue to strengthen over the medium term,” it added.

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