• $1bn more and 9-month extension of EFF


ISLAMABAD: Pakistan and the International Monetary Fund (IMF) reached staff-level agreement in the early hours of 14 July, Pakistan time, on the combined seventh and eight reviews, with an additional one billion dollars and a nine-month extension of Extended Fund Facility (EFF) programme.

The original programme loan of $ 6 billion and the scheduled date of completion September 2022 has been revised to $ 7 billion and June 2023 with the global lender stating that these measures were taken to “support programme implementation and meet the higher financing needs in fiscal year 2023, as well as catalyze additional financing.”

The agreement, subject to approval by the IMF’s Executive Board, envisages disbursement of about $1,177 million (SDR 894 million), bringing total disbursements under the programme to about $4.2 billion, leaving $ 2.8 billion pending over the next 11 months.

The Fund has however cautioned the authorities to stand ready to take any additional measures necessary to meet programme objectives, given the elevated uncertainty in the global economy and financial markets.

The Fund statement noted that 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 EFF. At the conclusion of the discussions, Porter issued the following statement:

“The IMF team has reached a staff-level agreement (SLA) with the Pakistan authorities for the conclusion of the combined seventh and eight reviews of the EFF-supported program. The agreement is subject to approval by the IMF’s Executive Board. 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 $7 billion.

“Pakistan is at a challenging economic juncture. A difficult external environment combined with pro-cyclical domestic policies fueled domestic demand to unsustainable levels. The resultant economic overheating led to large fiscal and external deficits in fiscal year 2022, contributed to rising inflation, and eroded reserve buffers.

“To stabilize the economy and bring policy actions in line with the IMF-supported program, while protecting the vulnerable, policy priorities include:

The Fund stressed on steadfast implementation of the fiscal year 2023 budget. “The budget aims to reduce the government’s large borrowing needs by targeting an underlying primary surplus of 0.4 percent 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”, noted the Fund statement.

The Fund also underlined the need for 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 fiscal year 2022, 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”.

On proactive monetary policy to guide inflation to more moderate levels, the Fund stated that headline inflation exceeded 20 percent 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 percent. 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.

Regarding reducing poverty and strengthen social safety, the statement noted that during fiscal year 2022, the unconditional cash transfer (UCT) Kafaalat 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.

The statement while underling the need for strengthening governance noted that 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.

“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 thanked the Pakistani authorities, private sector, and development partners for fruitful discussions and cooperation during the discussions,” noted the statement.