Pakistan, IMF reach staff-level agreement on new $3bn stand-by arrangement

In a major breakthrough, the International Monetary Fund (IMF) announced on Friday that its staff and Pakistani authorities have reached an agreement on policies to be supported by a $3-billion, nine-month Stand-By Arrangement (SBA).

The staff-level agreement is subject to approval by the IMF Executive Board, with its consideration expected by mid-July.

“The new SBA builds on the authorities’ efforts under Pakistan’s 2019 EFF-supported programme which expires end-June,” Nathan Porter, IMF Mission Chief to Pakistan, was quoted as saying in the press release on the day the Extended Fund Facility expired.

The new IMF arrangement, seen as a massive positive for the government and the economy reeling from crisis, extends Pakistan’s commitment with the lender well into the second half of fiscal year 2023-24, and is also an upgrade from the earlier expectation that the country would receive $1.1 billion at the conclusion of the ninth review.

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Porter said the new SBA would provide a policy anchor and a framework for financial support from multilateral and bilateral partners in the period ahead 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.

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: IMF Mission Chief to Pakistan Nathan Porter

“As a result of these shocks as well as some policy missteps—including shortages from constraints on the functioning of the foreign exchange 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.

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“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.”

‘Measures taken, but authorities must resist pressure for unbudgeted spending’

Porter said Pakistan has already taken a number of measures ahead of the new programme, including a FY24 budget in line with the goals of supporting fiscal sustainability and mobilising revenue, which will enable greater social and development spending.

However, the official added that the government must resist pressures for unbudgeted spending or tax exemptions in the period ahead, a remark that comes as Pakistan also prepares for elections this year.

“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.

“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.”

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: IMF Mission Chief

Porter said the State Bank of Pakistan (SBP) has withdrawn the guidance on import prioritisation 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.

“Continued efforts to mobilise 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.

The IMF said that full and timely implementation of the program will be critical for its success in light of the difficult challenges.

Background

The IMF agreement comes hours after Finance Minister Ishaq Dar stated that he expected a staff level agreement for a crucial bailout deal with the IMF in the next 24 hours.

“We are very close to signing a staff level agreement with the IMF,” Dar told Reuters late on Thursday.

“I think it should come some time tonight or maximum within 24 hours … we have finalised everything.”

Dar had earlier also stated that the government was making efforts to secure more than $1.1 billion in funding.

“We are making efforts to ensure that Pakistan not only gets the funds from the ninth review before June 30, but a mechanism is also found to get the ‘balance’,” said Dar during his appearance on ‘Capital Talk’ aired on Geo News on Tuesday.

“There is roughly $2.6 billion (in disbursement) left in Pakistan’s IMF programme, according to my calculations.”

The development comes at a time when Pakistan’s economy is reeling from crisis with foreign exchange reserves at only a month of import cover. The depleting level prompted Pakistan’s central bank to impose import restrictions, much to the dismay of industries heavily reliant on inward shipments to produce goods in the country.

While the SBP removed restrictions, many believe that imports would not truly begin until Pakistan secured lines of credit that would boost foreign exchange reserves.

Programme seen as crucial to help battered economy

Experts have regularly stated the resumption of the IMF bailout package is crucial for the cash-strapped South Asian economy facing a balance of payment crisis.

The funding from the international lender would pave the way for further inflows from Pakistan’s multilateral and bilateral partners reducing risks of a potential default, experts have said.

In addition, it lends stability to the currency market, and anchors expectations of economic growth, inflation and interest rates.