Pakistan’s 9-month SBA was approved by the Executive Board
on July 12, 2023, for the amount of SDR 2.250 billion (about US$3 billion at
the time of approval), aims to provide a policy anchor for addressing domestic
and external balances and a framework for financial support from multilateral
and bilateral partners.
The program is focused on: 1) implementation of the FY24
budget to facilitate Pakistan’s needed fiscal adjustment and ensure debt
sustainability, while protecting critical social spending; 2) a return to a
market-determined exchange rate and proper FX market functioning to absorb
external shocks and eliminate FX shortages; 3) an appropriately tight monetary
policy aimed at disinflation; and 4) further progress on structural reforms,
particularly with regard to energy sector viability, SOE governance, and climate resilience.
Macroeconomic conditions have generally improved, with
growth of 2% expected in FY24 as the nascent recovery expands in the second
half of the year.
The fiscal position also strengthened in Q1FY24 achieving a
primary surplus of 0.4% of GDP driven by overall strong revenues. Inflation
remained elevated, although with appropriately tight policy, anticipated to decline
to 18.5% by end-June 2024. Gross reserves increased to US$8.2 billion in
December, up from US$4.5 billion in June 2023. The exchange rate remained
broadly stable.
The current account deficit is expected to rise to around 1.5%
of GDP in FY24 as the recovery takes hold. Assuming sustained sound
macroeconomic policy and structural reform implementation, inflation should
return to the SBP target and growth continue to strengthen over the medium
term.
Following the Executive Board discussion, Antoinette Sayeh,
Deputy Managing Director and Chair, made the following statement:
“Pakistan’s program performance under the Stand-By
Arrangement has supported significant progress in stabilizing the economy
following significant shocks in 2022-23. There are now tentative signs of
activity picking-up and external pressures easing. Continued strong ownership
remains critical to ensure the current momentum continues and stabilization of
Pakistan’s economy becomes entrenched.
“The authorities’ strong revenue performance in Q1FY24 as
well as federal spending restraint have helped to achieve a primary surplus in
line with quarterly program targets. However, in the context of pressures,
including from provincial spending, efforts at mobilizing revenues and ongoing
non-priority spending discipline need to continue to ensure that the budgeted
primary surplus and debt goals remain achievable. Going forward, broad-based
reforms to improve the fiscal framework—mobilizing additional revenues
particularly from non-filers and under-taxed sectors and improving public
financial management—are required to create fiscal space for further social and
development spending.
“The authorities took challenging steps to bring both
electricity and natural gas prices closer to costs in 2023. Continuing with
regularly-scheduled adjustments and pushing cost-side power sector reforms are
vital to improving the sector’s viability and protecting fiscal sustainability.
“Inflation remaied high, affecting particularly the more
vulnerable, and it was appropriate that the SBP maintains a tight stance to
ensure that inflation returns to more moderate levels. Pakistan also needs a
market-determined exchange rate to buffer external shocks, continue rebuilding
foreign reserves, and support competitiveness and growth. In parallel, further
action to address undercapitalized financial institutions and, more broadly,
vigilance over the financial sector is necessary to support financial
stability.
“Boosting jobs and inclusive growth in Pakistan requires
continuing protection of the vulnerable through BISP and accelerating
structural reforms, most notably around improving the business environment and
leveling the playing field for investors, advancing the SOE reform agenda and
safeguards related to the Sovereign Wealth Fund; strengthening governance and
anti-corruption institutions; and building climate resilience.”
