The International Monetary Fund (IMF) team has reached a staff-level agreement (SLA) with Pakistan authorities for the conclusion of the combined seventh and eighth reviews of the Extended Fund Facility (EFF), with the agreement now subject to approval of the Executive Board, it was formally announced by the Washington-based lender early on Thursday.

“Subject to Board approval, about $1,177 million (SDR 894 million) will become available, bringing total disbursements under the programme to about $4.2 billion,” said the IMF in its statement.

Nathan Porter, who led the IMF team in the discussions, said in order to support programme implementation and meet the higher financing needs in fiscal year 2022-23, as well as catalyse additional financing, the IMF Board will consider an extension of the EFF until end-June 2023 and an augmentation of access by SDR 720 million that will bring the total access under the EFF to about $7 billion.

Deal with IMF expected anytime

Pakistan had sought an increase in the size and duration of its $6-billion programme in April.

“Pakistan is at a challenging economic juncture,” Porter was quoted as saying in the statement.

“A difficult external environment combined with procyclical domestic policies fuelled 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."

Pakistan reaches agreement with IMF to resume programme: report

The statement added that to stabilise the economy and bring policy actions in line with the IMF-supported programme, policy priorities include the following:

Importantly, to enhance monetary policy transmission, the rates of the two major refinancing schemes EFS and LTFF (which have over recent months been raised by 700 bps and 500 bps, respectively) will continue to be linked to the policy rate: IMF statement

Steadfast implementation of the FY2023 budget

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 mobilisation efforts focused particularly on higher income taxpayers.

"Development spending will be protected, and fiscal space will be created for expanding 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."

Catch-up in power sector reforms

The IMF said that on the back of weak implementation of the previously-agreed plan, the power sector circular debt flow is expected to grow significantly to about Rs850 billion in FY22, overshooting programme 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 load shedding."

Authorities are establishing a robust electronic asset declaration system and plan to undertake a comprehensive review of the anti-corruption institutions (including the National Accountability Bureau): IMF statement

Proactive monetary policy to guide inflation to more moderate levels

Headline inflation exceeded 20 percent in June, hurting particularly the most vulnerable.

"In this regard, the recent monetary policy increase was necessary and appropriate, and monetary policy will need to be geared towards ensuring that inflation is brought steadily down to the medium-term objective of 5–7 percent."

Importantly, to enhance monetary policy transmission, the rates of the two major refinancing schemes EFS and LTFF (which have over recent months been raised by 700 bps and 500 bps, respectively) will continue to be linked to the policy rate. Greater exchange rate flexibility will help cushion activity and rebuild reserves to more prudent levels.

Reducing poverty and strengthen social safety

The IMF said that during FY22, unconditional cash transfer (UCT) Kafalat scheme reached nearly 8 million households, with a permanent increase in the stipend to Rs14,000 per family, while a one-off cash transfer of Rs2,000 (Sasta Fuel Sasta Diesel, SFSD) was granted to about 8.6 million families to alleviate the impact of rampant inflation.

"For FY23, the authorities have allocated Rs364 billion to BISP (up from Rs250 in FY22) to be able to bring 9 million families into the BISP safety net, and further extend the SFSD scheme to additional non-BISP, lower-middle class beneficiaries."

Strengthen governance

"To improve governance and mitigate corruption, the authorities are establishing a robust electronic asset declaration system and plan to undertake a comprehensive review of the anti-corruption institutions (including the National Accountability Bureau) to enhance their effectiveness in investigating and prosecuting corruption cases," the IMF stated.

It added that 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 programme objectives, given the elevated uncertainty in the global economy and financial markets.”

Earlier, the federal capital was rife with speculation that the staff-level agreement between Pakistan and the IMF had been reached, and will be announced soon.

The revival of the programme is widely considered as crucial for Pakistan that has seen its foreign exchange reserves fall relentlessly with import cover currently standing at less than two months. During the week ended on 30-Jun-2022, SBP’s reserves decreased by $493 million to $9.82 billion due to external debt and other payments.

At the same time, the rupee has consistently lost value against the dollar, and closed at 210.1 on Wednesday after falling another 1.04%.

Pakistan entered the current IMF programme in 2019, but only half the funds have been disbursed to date.

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