ISLAMABAD, JUN 30: Pakistan and the International Monetary Fund (IMF) on Friday reached a long-awaited staff-level agreement (SLA) on $3 billion “stand-by arrangement” (SBA), the global lender announced.
“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),” Nathan Porter, the IMF’s Mission Chief to Pakistan, said in a statement.
“The new SBA builds on the authorities’ efforts under Pakistan’s 2019 EFF-supported programme 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,” the statement added.
The $3 billion funding, spread over nine months, is higher than expected for Pakistan. The country was awaiting the release of the remaining $2.5 billion from a $6.5 billion bailout package agreed in 2019, which expires on Friday (today).
“Alhumdulillah,” tweeted Finance Minister Ishaq Dar after the deal was announced early on Friday. Dar had said on Thursday the deal was expected any time soon.
With sky-high inflation and foreign exchange reserves barely enough to cover one month of controlled imports, Pakistan has been facing its worst economic crisis in decades, which analysts say could have spiralled into a debt default in the absence of the IMF deal.
The deal comes after an eight-month delay and offers some respite to Pakistan, which is battling an acute balance of payments crisis and falling foreign exchange reserves.
In the statement issued today, the IMF said since the completion of the combined seventh and eight reviews under the 2019 EFF in August 2022, the Pakistan’s economy 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.
As a result of these shocks as well as some policy missteps — including shortages from constraints on the functioning of the forex 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,” the IMF’s statement said.
Moreover, it said liquidity conditions in the power sector also remain acute, with further buildup of circular debt and frequent loadshedding.
The global lender said new SBA will support Pakistan’s immediate efforts to stabilise the economy from recent external shocks, preserve macroeconomic stability and provide a framework for financing from multilateral and bilateral partners.
“The new SBA will also create space for social and development spending through improved domestic revenue mobilisation and careful spending execution to help address the needs of the Pakistani people.”
The IMF further added that steadfast policy implementation is 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.
Painful reforms
The federal government has taken a slew of policy measures since an IMF team arrived in Pakistan earlier this year, including a revised 2023-24 budget last week to meet the lender’s demands.
Other adjustments demanded by the IMF before clinching the deal included reversing subsidies in power and export sectors, hikes in energy and fuel prices, jacking up the key policy rate to 22%, a market-based currency exchange rate and arranging for external financing.
It also got Pakistan to raise over 385 billion rupee ($1.34 billion) in new taxation through a supplementary budget for the 2022-23 fiscal year and the revised budget for 2023-24.
The painful adjustments have already fueled all time high inflation of 38% year-on-year in May.
“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,” Porter said, adding it also ensured space to strengthen support for the vulnerable through a cash handout programme.
He said it will be important that the budget is executed as planned, and authorities resist pressures for unbudgeted spending or tax exemptions in the period ahead.
“This new programme is far better than our expectations,” said Mohammed Sohail of Topline Securities, adding, there were a lot of uncertainties on what will happen after June 2023 as there will be a new government coming to power.
“This funding of 3 billion dollars and for 9 months will definitely help restore some investor confidence,” he said.
‘Rupee expected to appreciate against dollar’
Renowned businessman Arif Habib termed the IMF’s agreement a positive development saying “this will definitely increase the business confidence” in the country.
He said the bilateral and multilateral donors will also start dealings with Pakistan after the IMF agreement.
“International investors, commercial markets and non-residents Pakistanis confidence [in the economy] will also improve,” he added.
Moreover, Habib said IMF-dictated reforms will ensure stability and bring down inflation in the country.
He also anticipated that the value of rupee is also expected to appreciate against the US dollar.
“[…] 5 to 7% improvement (meaning 15 to 20 rupees) is expected in the value of rupee against the dollar,” he added.
($1 = 286.1500 Pakistani rupees)
Washington, DC – June 29, 2023: An International Monetary Fund (IMF) staff team led by Mr. 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).
At the conclusion of the mission, Mr. Porter issued the following statement:
“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.
“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. 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.
“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:
• Parliament has 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 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.
• 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.
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.
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
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