WASHINGTON – The International Monetary Fund (IMF) has reached a staff-level agreement with the Pakistani authorities on a nine-month Stand-by Arrangement (SBA) in the amount of $3 billion.
“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,” the global lender said in its press release.
The development comes hours after Finance Minister Ishaq Dar said a staff level agreement for a crucial bailout deal with IMF was “very close” and expected in the next 24 hours.
Islamabad had been scrambling to complete the ninth review to unlock at least $1.1 billion under the lender’s $6.5-billion Extended Fund Facility agreed in 2019 for several months. The programme was set to expire on June 30 (Friday).
IMF said the new SBA will support the authorities’ immediate efforts to stabilize the economy from recent external shocks, preserve macroeconomic stability and provide a framework for financing from multilateral and bilateral partners. It will also create space for social and development spending through improved domestic revenue mobilization and careful spending execution to help address the needs of the Pakistani people.
“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,” reads the statement.
IMF staff team led by Nathan Porter said since the completion of the combined seventh and eight reviews under the 2019 Extended Fund Facility (EFF) in August 2022, the Pakistan’s economy had 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,” he said.
He acknowledged that Pakistan had already taken a series of important actions ahead of the new programme.
The Pakistan 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.
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