Wednesday, August 31, 2022

Pakistan's dwindling forex reserves get a boost with much-needed $1.16bn IMF deposit

SBP says IMF deposit will facilitate realisation of other planned inflows from multilateral, bilateral sources

State Bank of Pakistan building. — APP/File
State Bank of Pakistan building. — APP/File 
  • SBP's says funds will improve bank's foreign exchange reserves.
  • Funds will facilitate realisation of other planned inflows from multilateral and bilateral sources, says bank.
  • Deposit comes two days after IMF Executive Board approved 7th and 8th review of stalled $6bn programme.

In a boost to the dwindling Forex reserves, the State Bank of Pakistan Wednesday received much-needed $1.16 billion deposit from the International Monetary Fund (IMF).

"Today, SBP has received proceeds of USD 1.16 billion (equivalent of SDR 894 million) after the IMF Executive Board completed the combined seventh and Eight reviews under the Extended Fund Facility (EFF) for Pakistan," wrote the bank.

The bank said that the funds will improve the SBP's foreign exchange reserves.

"[It] will also facilitate realisation of other planned inflows from multilateral and bilateral sources," read the statement.

IMF revives bailout programme after months-long efforts

The deposit comes two days after, the IMF Executive Board approved the seventh and eighth review of the stalled $6 billion Pakistan programme, announced Finance Minister Miftah Ismail.

The finance minister announced the development on his Twitter handles saying: “Alhamdolillah the IMF board has approved the revival of our EFF programme. We should now be getting the seventh and eighth tranche of $1.17 billion.”

In a statement issued in this regard, the Fund announced that the Executive Board completed the combined seventh and eighth reviews of the "extended arrangement" under the Extended Fund Facility (EFF) for Pakistan.

"The board’s decision allows for an immediate disbursement of SDR 894 million (about $1.1 billion), bringing total purchases for budget support under the arrangement to about US$3.9 billion," the statement read.

The global lender also approved to increase the loan size and extended it till June 2023.

The Fund further added that in order to support programme implementation and meet the higher financing needs in FY23, as well as "catalyse additional financing, the IMF Board approved an extension of the EFF until end-June 2023, rephasing and augmentation of access by SDR 720 million that will bring the total access under the EFF to about $6.5 billion."

"Pakistan is at a challenging economic juncture. A difficult external environment combined with procyclical domestic policies fuelled domestic demand to unsustainable levels," the global lender noted, adding that the resultant economic overheating led to large fiscal and external deficits in FY22, contributed to rising inflation, and eroded reserve buffers.

It mentioned that the programme seeks to address domestic and external imbalances, and ensure fiscal discipline and debt sustainability while protecting social spending, safeguarding monetary and financial stability, and maintaining a market-determined exchange rate and rebuilding external buffers.

Moreover, the executive board has also approved today the authorities' request for waivers of nonobservance of performance criteria.

Timeline of Pakistan's IMF programme

Pakistan entered the programme with the Fund in 2019, however, Islamabad struggled to keep targets on track due to which only half the funds had been disbursed.

The cash-strapped nation received that last disbursement in February and the next tranche was to follow after review in March, but the government of ousted prime minister Imran Khan slashed the petroleum prices by massively giving subsidies to the nation which threw fiscal targets and the programme off track.

However, after months-long efforts of the coalition government — that came into power in April — Pakistan reached the staff-level agreement with the Washington-based lender in July after completing all prior conditions.

The Executive Board on Monday reviewed the progress and decided to resume the programme and approved the seventh and eighth loan tranches.

Following the approval, Pakistan received $1.16 billion loan tranche from Fund today.