ISLAMABAD – Pakistan on Friday reached a staff-level agreement with the International Monetary Fund (IMF) over $3bn (£2.4bn) of funding.
The deal, which still needs to be approved by the global lender’s board, comes after an eight-month delay, according to a press statement issued by the global lander.
The South Asian nation is facing its worst economic crisis in the last two years. To help secure the deal, Pakistan’s central bank raised its main interest rate to a record high of 22% on Monday.
Alhamdulillah, I am pleased to announce that Pakistan has reached a Staff-Level Agreement with the IMF on a nine-month US$3 billion Stand-By Arrangement. This Arrangement will help strengthen Pakistan’s foreign exchange reserves, enable Pakistan to achieve economic stability, and…
— Shehbaz Sharif (@CMShehbaz) June 30, 2023
“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)”, said Nathan Porter, who was leading IMF staff team in meetings with Pakistan.
The staff-level agreement is subject to approval by the IMF Executive Board, with its consideration expected by mid-July, the statement added.
Federal Minister for Finance and Revenue, Senator Mohammad Ishaq Dar also shared the agreement on his tweeter Friday.
The new SBA will support the authorities’ immediate efforts to stabilize the economy from recent external shocks, preserve macroeconomic stability and provide a framework for financing from multilateral and bilateral partners.
It would also create space for social and development spending through improved domestic revenue mobilization and careful spending execution to help address the needs of the Pakistani people.
According to the statement, steadfast policy implementation was 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.
It is pertinent to mention, IMF staff team led by Nathan Porter held in person and virtual meetings with the Pakistani Authorities to discuss a new financing engagement for Pakistan under an IMF Stand-by Arrangement (SBA).
Nathan said, the new SBA builds on the authorities’ efforts under Pakistan’s 2019 EFF-supported program which expires end-June.
“Since the completion of the combined seventh and eighth 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,” Nathan 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, he added.
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.
“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. The authorities have already taken a series of important actions ahead of the new program.
Of these, parliament had approved FY24 budget in line with the goals of supporting fiscal sustainability and mobilizing revenue, which will 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 under-taxed sectors, as well as improving progressivity, while ensuring space to strengthen support for the vulnerable through the BISP program. It will be important that the budget is executed as planned, and the authorities resist pressures for unbudgeted spending or tax exemptions in the period ahead.
The SBP 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.
The fund urged for continued efforts to mobilize financial support from multilateral institutions and bilateral partners.
In addition to generous climate-related pledges from the January 2023 Conference on Climate Resilient Pakistan held in Geneva, the authorities’ efforts have 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.
“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,” he added.
The full and timely implementation of the program will 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.
