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$3bn Standby Arrangement programme: Pakistan, IMF clinch deal for $700m tranche

Agreement underlined forex exchange should not be managed through artificial means and asked for reducing fiscal deficit

By Mehtab Haideri & News Desk
November 16, 2023
A pedestrian walks past the International Monetary Fund headquarters in Washington, DC. — AFP/File
A pedestrian walks past the International Monetary Fund headquarters in Washington, DC. — AFP/File

ISLAMABAD: After moving towards taping external inflows and commitment to a complete return to a market-based exchange rate, Pakistan and the IMF on Wednesday struck a staff-level agreement for the release of a $700 million tranche under the $3 billion Standby Arrangement (SBA) programme.

The agreement underlined that the forex exchange should not be managed through artificial means and asked for reducing the yawning fiscal deficit by achieving Rs 9.415 trillion tax revenue target, reducing expenditures and hiking both electricity and gas tariffs in months to come.

“The authorities have accelerated the engagement with multilateral and official bilateral partners. Timely disbursement of committed external support remains critical to support the authorities’ policy and reform efforts” the IMF made it clear. The lender also pointed out that the agreement supports the Pakistani authorities’ commitment to advance the planned fiscal consolidation, accelerate cost-reducing reforms in the energy sector, complete the return to a market-determined exchange rate, and pursue state-owned enterprise and governance reforms to attract investment and support job creation while continuing to strengthen social assistance.

However, the officials of the Ministry of Finance remained afraid to face the media as no one was ready to talk to journalists despite hours-long wait outside the Q-Block at the Federal Secretariat. When Federal Secretary Finance Imdad Bosal was asked whether the talks succeeded or failed, he only replied “jee [Yes]” and rushed to the second floor of the Ministry of Finance block.

According to the IMF’s announcement on Wednesday night, IMF staff and the Pakistani authorities have reached a staff-level agreement on the first review under the SBA, subject to approval by the IMF’s Executive Board. Upon approval, Pakistan will have access to SDR 528 million (around $700 million).

At the conclusion of the discussions, Nathan Porter issued a statement.

“The IMF team has reached a staff-level agreement with the Pakistani authorities on the first review of their stabilisation programme supported by the IMF’s US$3 billion. The agreement is subject to the approval of the IMF’s Executive Board. Upon approval around US$700 million (SDR 528 million) will become available bringing total disbursements under the programme to almost US$1.9 billion.

“Anchored by the stabilisation policies under the SBA, a nascent recovery is underway, buoyed by international partners’ support and signs of improved confidence. The steadfast execution of the FY24 budget, continued adjustment of energy prices, and renewed flows into the foreign exchange (FX) market have lessened fiscal and external pressures. Inflation is expected to decline over the coming months amid receding supply constraints and modest demand. However, Pakistan remains susceptible to significant external risks, including the intensification of geopolitical tensions, resurgent commodity prices, and the further tightening of global financial conditions. Efforts to build resilience need to continue.

“In this regard, strengthening macroeconomic sustainability and laying the conditions for balanced growth are key priorities under the SBA. The authorities’ policy priorities include: Continued fiscal consolidation to reduce public debt, while protecting development needs. The authorities are determined to achieve a primary surplus of at least 0.4 percent of GDP in FY24, underpinned by federal and provincial government spending restraint and improved revenue performance supported, if necessary, by contingent measures. The authorities are building capacity to expand the tax base and raise revenue mobilisation and are committed to improving the quality of public investment and spending.

“Strengthening the social safety net to better protect the vulnerable: The authorities will continue the timely disbursements for social protection under BISP’s budget allocation—which are about a third higher than in FY23. This will allow for the expansion of the Unconditional Cash Transfers (UCT) Kafaalat programme to 9.3 million families this fiscal year, with an annual inflation adjustment of the stipend. Looking forward, the authorities are seeking to improve the UCT Kafaalat generosity level and to increase enrollment into the Conditional Cash Transfer programmes supporting children’s education and health.

The IMF called for “further reforms to reduce costs in the energy sector and restore its viability: With the combined circular debt (CD) across power and gas sectors exceeding 4 percent of GDP, immediate action was critical. While protecting vulnerable consumers, the authorities implemented power tariff adjustments that were pending since July 2023 and increased gas prices after a long time, effective November 1, 2023. While these increases were substantial, they were necessary to avoid further arrears that threatened the viability of these sectors and the provision of critical energy supplies. The authorities are also moving to tackle cost-side pressures, including bringing private sector participation to Discos, institutionalising recovery and anti-theft actions, improving PPA terms, and reducing the incentives for captive power.

“Returning to a market-determined exchange rate and rebuilding FX [forex] reserves: While inflows following increased regulatory and law enforcement helped normalise import and FX payments and rebuild reserves, the authorities recognise that the rupee must remain market-determined to sustainably alleviate external pressures and rebuild reserves. To support this, they plan to strengthen the transparency and efficiency of the FX market and to refrain from administrative actions to influence the rupee.

“Proactive monetary policy to lower inflation toward its target: With appropriately tight monetary policy, inflation should steadily decline and the authorities stand ready to respond resolutely if near-term price pressures reemerge, including due to second-round effects on core inflation or renewed exchange rate depreciation.

“Building financial sector resilience: Continued vigilance is warranted to safeguard the soundness of the banking system. Priorities include addressing undercapitalised financial institutions, ensuring foreign exchange exposures within regulatory limits, and aligning bank resolution and crisis management frameworks with best practices.

It said the continuation of state-owned enterprise and governance reforms to improve the business environment, investment, and job creation. Following the passage of the State-Owned Enterprises (SOE) law, the authorities are moving forward with their SOE policy and implementation of their triage plan, including the privatisation of select SOEs. High governance and transparency standards will apply to the management of assets under the ownership of the newly created Sovereign Wealth Fund (SWF) and the operations of the SIFC. To further strengthen governance, the authorities will ensure public access to asset declarations from Cabinet members and a task force, with participation from independent experts, will complete a comprehensive review of the anticorruption framework.

The authorities have accelerated the engagement with multilateral and official bilateral partners. Timely disbursement of committed external support remains critical to support the authorities’ policy and reform efforts, the IMF said.

“The IMF team thanks the Pakistani authorities, private sector, and development partners for fruitful discussions and cooperation throughout this mission,” concludes the Washington-based lender’s statement.

Meanwhile, in a conversation with Geo News, the Ministry of Finance’s former adviser Dr Khaqan Hassan Najeeb said the board’s approval will help Pakistan unlock more funding from other multilateral and bilateral donors. “That is a good development and a satisfying one for Pakistan indeed,” he said, noting that inflation should steadily decline “is the thought process moving forward”.

Earlier, talking to Bloomberg IMF Managing Director Kristalina Georgieva said: “The Pakistani authorities and the minister of finance deserve credit for, in a very difficult time, sticking to the programme that they had.” She said the major issue in Pakistan was tax collection. “The country today collects 12 percent tax to GDP. We are saying [that] it has to be at least 15 percent to have the revenues, to sustain the functioning of your economy.” “So, please, for the people in Pakistan that can pay taxes, collect it from them,” she added.

IMF Mission Chief for Pakistan Nathan Porter led the IMF mission into negotiations with the Pakistani delegation was led by Caretaker Finance Minister Shamshad Akhtar and comprised State Bank of Pakistan (SBP) Governor Jameel Ahmad, Federal Board of Revenue (FBR) Chairman Malik Amjed Zubair Tiwana, and officials from the finance and energy ministries.

The IMF delegation and the economic team are likely to prepare the Memorandum of Economic and Financial Policies (MEFP) draft, said the sources. The parties have also agreed not to increase the interest rate further, added the Finance Ministry sources.

Meanwhile, Nathan Porter and IMF Resident Representative for Pakistan Esther Perez called on Caretaker Prime Minister Anwaar-ul-Haq Kakar.

Porter acknowledged the efforts made by the Government of Pakistan in meeting the various programme quarterly targets. He said that these efforts have resulted in a positive conclusion of the technical-level talks. He said that both the teams have had extensive talks on various aspects of the SBA. Porter also appreciated the role played by the Finance Minister and her team and Governor SBP along with his team in technical-level talks.

The interim PM thanked the IMF team for its ongoing work with Pakistan and praised the leadership of the Minister for Finance and Revenue and the contribution of her team in taking the programme forward. He also appreciated the role of the SBP governor.

Meanwhile, citing his Oct 29 post on X, Pakistan Stock Exchange analyst and Topline Securities CEO Mohammed Sohail wrote on the micro-blogging platform : Within 2 weeks. IMF staff and the Pakistani authorities have reached a staff-level agreement on the first review under Pakistan’s Stand-By Arrangement.”