Saul Loeb—AFP
The International Monetary Fund (IMF) last week announced that it had reached a staff-level agreement with Pakistan on a Stand-By Arrangement for $3 billion spread over nine months.
The staff-level agreement is subject to approval by the IMF Executive Board, which is expected to deliberate on the deal by mid-July. “I am pleased to announce that the IMF team has reached a staff-level agreement with the Pakistani authorities on a nine-month Stand-by Arrangement (SBA) in the amount of SDR2,250 million (about $3 billion or 111 percent of Pakistan’s IMF quota). The new SBA builds on the authorities’ efforts under Pakistan’s 2019 EFF-supported program, which expires end-June. This agreement is subject to approval by the IMF’s Executive Board, which is expected to consider this request by mid-July,” said Nathan Porter, the mission chief for Pakistan.
“Since the completion of the combined seventh and eight reviews under the 2019 Extended Fund Facility (EFF) in August 2022, the economy has faced several external shocks such as the catastrophic floods in 2022 that impacted the lives of millions of Pakistanis and an international commodity price spike in the wake of Russia’s war in Ukraine,” he said. “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 further buildup of arrears (circular debt) and frequent loadshedding,” he said, adding that the new SBA would provide a policy anchor and a framework for financial support from multilateral and bilateral partners in the period ahead.
Detailing the steps already taken by authorities ahead of the new program, he noted that the budget for fiscal year 2023-24 was in line with the goals of supporting fiscal sustainability and mobilizing revenue, which would enable greater social and development spending. “The FY24 budget advances a primary surplus of around 0.4 percent of GDP by taking some steps to broaden the tax base and increase tax collection from undertaxed sectors, as well as improving progressivity, while ensuring space to strengthen support for the vulnerable through the BISP program,” he said, stressing that it was “important” the budget be executed as planned and authorities resist pressures for unbudgeted spending or tax exemptions.
“The SBP [State Bank of Pakistan] has withdrawn the guidance on import prioritization and is committed to ensuring the full market determination of the exchange rate. Going forward, the SBP should remain proactive to reduce inflation, which particularly affects the most vulnerable, and maintain a foreign exchange framework free of restrictions on payments and transfers for current international transactions and multiple currency practices,” he said.
On the government’s ongoing efforts to mobilize financial support from multilateral institutions and bilateral partners, the statement said that in addition to climate-related pledges from the January 2023 Conference on Climate Resilient Pakistan held in Geneva, authorities’ efforts had focused on obtaining new financing and securing the rollover of debt falling due. This will support near-term policy efforts and replenish gross reserves, with the aim of bringing them to more comfortable levels, read the statement. “The authorities’ program also includes ongoing efforts to strengthen the viability of the energy sector (including through a timely FY24 annual rebasing), improving SOE governance, and strengthening the public investment management framework, including for projects needed to build resilience to climate change,” said Porter, while emphasizing that the full and timely implementation of the program would be critical for its success in light of the difficult challenges.
“The IMF team would like to thank the authorities for the open and constructive dialogue and collaboration that have brought us to today’s successful conclusion,” he added.