IMF says to disburse $1.1bn after deal struck on final SBA review

ISLAMABAD: With a clear-headed approach adopted by newly-appointed Finance Minister Muhammad Aurangzeb, Pakistan and the IMF struck a staff-level agreement (SLA) for the completion of the second review and release of the third tranche of $1.1 billion under the Standby Arrangement (SBA) programme .

After striking the SLA, the IMF confirmed that Pakistani authorities expressed interest in a successor medium-term Fund-supported programme to permanently resolve Pakistan’s fiscal and external sustainability weaknesses, strengthening its economic recovery and laying the foundation for strong, sustainable and inclusive growth.

The IMF highlighted four major areas for signing the upcoming medium-term bailout package for Pakistan’s struggling economy.

While discussions are expected to start in the coming months, the IMF says the key objectives of the upcoming IMF sponsored programme are expected to include: (i) strengthening public finances, including through gradual fiscal consolidation and broadening the tax base (especially in undertaxed sectors) and improving tax administration to better debt sustainability and create space for higher priority development and social assistance spending to protect the vulnerable; (ii) restoring the energy sector’s viability by accelerating cost reducing reforms including improving electricity transmission and distribution, moving captive power demand to the electricity grid, strengthening distribution company governance and management, and undertaking effective anti-theft efforts; (iii) returning inflation to target, with a deeper and more transparent flexible FX market supporting external rebalancing and the rebuilding of foreign reserves; and (v) promoting private-led activity through the above mentioned actions as well as removal of distortionary protection, advancement of state-owned enterprise (SOE) reforms to improve the sector’s performance, and scaling-up of investment in human capital, to make growth more resilient and inclusive and enable Pakistan to reach its economic potential.

An IMF team, led by Nathan Porter, visited Islamabad from March 14 to 19, 2024, to hold discussions on the second review of Pakistan’s economic programme supported by an IMF Stand-By Arrangement (SBA). After the discussions, Porter issued the following statement: “The IMF team has reached a staff-level agreement with the Pakistani authorities on the second and final review of Pakistan’s stabilisation programme, supported by the IMF’s US$3 billion (SDR2,250 million) SBA approved in January 2024 (Press Release No. 23/261).

“This agreement is subject to approval by the IMF’s Executive Board, upon which the remaining access under the SBA, US$1.1 billion (SDR 828 million), will become available.

“Pakistan’s economic and financial position has improved in the months since the first review, with growth and confidence continuing to recover on the back of prudent policy management and the resumption of inflows from multilateral and bilateral partners.

“However, growth is expected to be modest this year and inflation remains well above target, and ongoing policy and reform efforts are required to address Pakistan’s deep-seated economic vulnerabilities amidst the ongoing challenges, posed by elevated external and domestic financing needs and an unsettled external environment.

“The new government is committed to continuing the policy efforts that started under the current SBA to entrench economic and financial stability for the remainder of this year. In particular, the authorities are determined to deliver the FY24 general government primary balance target of Rs401 billion (0.4 per cent of GDP), with further efforts towards broadening the tax base and continuing with the timely implementation of power and gas tariff adjustments to keep average tariffs consistent with cost recovery while protecting the vulnerable through the existing progressive tariff structures, thus avoiding any net circular debt (CD) accumulation in FY24. The State Bank of Pakistan remains committed to maintaining a prudent monetary policy to lower inflation and ensure exchange rate flexibility and transparency in the operations of the FX market.”

Dr Khaqan Najeeb, former adviser Ministry of Finance, said it is a sobering moment for Pakistan as the country reaches a staff-level agreement to complete the 23rd facility in terms of an SBA with the IMF. Being in a programme has helped create nascent macro stability, as inflation tapers, the current account improves and foreign exchange reserves are built.

However, he said that growth with a high policy rate and constrained imports will remain muted at levels below the population growth this year. The signs are that the country will remain in a mode of a holding pattern for the rest of FY24 with a tight monetary policy, continued fiscal consolidation and hiking of energy prices. This stabilisation phase continues to bite the common man and the manufacturing and agriculture sectors.

He felt it was now clear that macro stability is necessary but insufficient to propel Pakistan on sustained growth. In this regard, the upcoming budget and fundamental reforms would be necessary in getting Pakistan’s economy to endogenously grow through changing productivity patterns. Dr Khaqan concluded the task before the home team is to put together a programme package, which lays the foundation for change and is financeable with the IMF.

This scribe contacted renowned economist Dr Ashfaque Hasan Khan, former advisor to Ministry of Finance. In reply to questions, he said it appears that an IMF programme has become an absolute necessity for Pakistan. Hence, despite his extreme reservations, he offered suggestions for the negotiating team.

“1) Please don’t enhance the size and duration of the programme. The maximum duration should be three years. The size of the programme should not be more than $3-4 billion. If we keep increasing the size of the programme, Pakistan will be no different from Argentina. Argentina kept on increasing the size of the programme, which now is close to $43 billion and became the largest customer of the IMF. Hence, Argentina will never come out of the IMF clutches. It is believed that Pakistan will seek an $8 billion loan for a 5-year programme. This will be a disaster for Pakistan. The larger the amount, the larger will be repayment. Our foreign exchange earnings will not be enough to repay that. Hence, we will further increase the size of the IMF loan, ultimately becoming Argentina.

“2) The SIFC is a great initiative of Pakistan. We are making efforts to attract more and more investments. By doing so, we want to bring more dollars into the country. Hence, by seeking a larger IMF programme means we are demeaning the work of the SIFC. We are saying that we will not be able to attract more foreign exchange. In my view, this is the admission of our defeat. With the SIFC working, we don’t need a larger amount from the IMF.

“3) Our negotiating team must concentrate on reform rather than on policies.

“4) I would urge our authorities to declare that this will be the last IMF programme. The authorities must set up a high-level committee to prepare an alternative plan, which will be implemented after the expiry of the new programme in 2027.”