Pakistan finally strikes staff-level agreement with IMF

Agreement subject to approval by IMF executive board; IMF says Pakistan at a "challenging economic juncture"

Mehtab Haider
Image showing the exterior of the International Monetary Funds building. — Reuters
Image showing the exterior of the International Monetary Fund's building. — Reuters
  • According to agreement, IMF will release $1.17 billion.
  • Pakistan is at a challenging economic juncture, says IMF.
  • It says IMF Board will consider an extension of EFF until end-June 2023.

ISLAMABAD: Pakistan and the International Monetary Fund (IMF) have finally reached a staff-level agreement over the release of $1.17 billion to support the country’s fragile economy, the international money lender revealed Thursday.

"[The] IMF staff and the Pakistani authorities have reached a staff level agreement on policies to complete the combined 7th and 8th reviews of Pakistan’s Extended Fund Facility (EFF)," a statement by the IMF read.

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[me] to about $4.2 billion," it said.

In June, Pakistan and the Fund staff achieved substantial progress to strike a consensus on budget 2022-23 after which the IMF shared a draft Memorandum of Economic and Financial Policies (MEFP).

On June 28, Finance Minister Miftah Ismail had announced that Pakistan had received the MEFP from the IMF for the combined seventh and eighth reviews.

The IMF team, led by Nathan Porter, has finalised discussions for the combined seventh and eight reviews of Pakistan’s economic program supported by an IMF EFF.

The IMF, in its statement, further said that, to support programme implementation and meet the higher financing needs in FY23, as well as catalyse 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 IMF statement read.

The statement from the international money lender further stated that the programme will stabilise the economy of Pakistan and bring policy actions in line with the IMF-supported programme while protecting the vulnerable, policy priorities, which include the following.

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 the 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 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.

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 team also thanked the Pakistani authorities, private sector, and development partners for fruitful discussions and cooperation during the discussions to revive programme.

Read experts' take on the IMF-Pakistan staff-level agreement here.