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Tuesday September 27, 2022

Pakistan reaches staff-level agreement with IMF

Pakistan to get $1.17 billion tranche; IMF agrees to extend EFF until end-June 2023 and increase facility to $7 billion

July 14, 2022
The headquarters of the International Monetary Fund (IMF) in Washington.
The headquarters of the International Monetary Fund (IMF) in Washington.

ISLAMABAD: Pakistan and the International Monetary Fund (IMF) have reached a staff-level agreement to complete the combined 7th and 8th reviews of Pakistan’s Extended Fund Facility (EFF) with an increased size of $7 billion.

An IMF team, led by Nathan Porter, has finalized discussions for the combined seventh and eight reviews of Pakistan’s economic program supported by an IMF Extended Fund Facility (EFF). 

 The agreement is subject to approval by the IMF’s Executive Board, according to a statement issued by the IMF on Thursday. 

The IMF statement reads: "Subject to Board approval, about $1,177 million (SDR 894 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 by SDR 720 million that will bring the total access under the EFF to about US$7 billion."

“Pakistan is at a challenging economic juncture. A difficult external environment combined with procyclical domestic policies fueled 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."

The statement stated that to stabilize the economy and bring policy actions in line with the IMF-supported program, while protecting the vulnerable, policy priorities include:

  • 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% of GDP, underpinned by current spending restraint and broad revenue mobilization 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. On the back of weak implementation of the previously agreed plan, the power sector circular debt (CD) flow is expected to grow significantly to about PRs 850 billion in FY22, 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 load shedding.
  • Proactive monetary policy to guide inflation to more moderate levels . Headline inflation exceeded 20% 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%. 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. During FY22, the unconditional cash transfer (UCT) Kafalat scheme reached nearly 8 million households, with a permanent increase in the stipend to PRs 14,000 per family, while a one-off cash transfer of PRs 2,000 (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 PRs 364 billion to BISP (up from PRs 250 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 anticorruption institutions (including the National Accountability Bureau) to enhance their effectiveness in investigating and prosecuting corruption cases.

The IMF said that the 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.

The IMF team thanks the Pakistani authorities, private sector, and development partners for fruitful discussions and cooperation during the discussions, it added.