Saul Loeb—AFP
The International Monetary Fund (IMF) on Thursday announced it has reached a staff-level agreement with Pakistan, subject to approval by the lender’s Executive Board, on policies to complete the combined 7th and 8th reviews of a suspended Extended Fund Facility (EFF).
“The IMF team has reached a staff-level agreement (SLA) with the Pakistan authorities for the conclusion of the combined seventh and eight reviews of the EFF-supported program,” said Nathan Porter, who led the IMF team negotiating with Islamabad. “Subject to Board approval, about $1,177 million will become available, bringing total disbursements under the program to about $4.2 billion. Additionally, in order to support program implementation and meet the higher financing needs in FY23, as well as catalyze additional financing, the IMF Board will consider an extension of the EFF until end-June 2023 and an augmentation of access … that will bring the total access under the EFF to about $7 billion,” he added.
Noting Pakistan was at a “challenging economic juncture,” the global lender’s statement said a “difficult” external environment coupled with “procyclical” domestic policies had boosted domestic demand to unsustainable levels. “The resultant economic overheating led to large fiscal and external deficits in FY22, contributed to rising inflation, and eroded reserve buffers,” it said, laying out priorities needed to stabilize the economy and bring policy actions in line with the IMF-supported program.
Key priorities
The IMF has called for “steadfast” implementation of the budget for fiscal year 2022-23. “The budget aims to reduce the government’s large borrowing needs by targeting an underlying primary surplus of 0.4 percent of GDP, underpinned by current spending restraint and broad revenue mobilization efforts focused particularly on higher income taxpayers,” it said, adding that development spending would be protected and fiscal space created to expand social support schemes. “The provinces have agreed to support the federal government’s efforts to reach the fiscal targets, and Memoranda of Understanding have been signed by each provincial government to this effect,” it added.
The IMF statement also calls for power sector reforms, stressing that “weak implementation” of the previously agreed plan had resulted in the circular debt boosting to about Rs. 850 billion in the ongoing fiscal, overshooting program targets, threatening the power sector’s viability, and leading to frequent power outages. “The authorities are committed to resuming reforms including, critically, the timely adjustment of power tariff including for the delayed annual rebasing and quarterly adjustments, to improve the situation in the power sector and limit loadshedding,” it added.
On inflation, the IMF emphasized that it particularly hurt the most vulnerable. Hailing the recent interest rate hike by the State Bank of Pakistan, it said the monetary policy would need to be geared toward ensuring inflation is brought steadily down to the medium-term objective of 5–7 percent. “Greater exchange rate flexibility will help cushion activity and rebuild reserves to more prudent levels,” it added.
The global lender also noted the government’s efforts to reduce poverty and strengthen social safety, stating that authorities had allocated Rs. 364 billion to the Benazir Income Support Program for fiscal year 2023. It said the government was also establishing a “robust electronic asset declaration system and plan to undertake a comprehensive review of the anticorruption institutions (including the National Accountability Bureau) to enhance their effectiveness in investigating and prosecuting corruption cases” to improve governance and mitigate corruption.
“Steadfast implementation of the outlined policies, underpinning the SLA for the combined seventh and eighth reviews, will help create the conditions for sustainable and more inclusive growth. The authorities should nonetheless stand ready to take any additional measures necessary to meet program objectives, given the elevated uncertainty in the global economy and financial markets,” Porter added.
Praising the staff-level agreement, Prime Minister Shehbaz Sharif congratulated the finance ministry and the Foreign Office. “Congratulations to our finance and Foreign Office teams led ably by ministers Miftah Ismail and Bilawal Bhutto for their efforts in getting the IMF program revived,” he said in a posting on Twitter. “It was a great team work. The agreement with the Fund has set the stage to bring country out of economic difficulties,” he added.