Pakistan: IMF reaches staff level agreement

An International Monetary Fund (IMF) team, led by Nathan Porter, visited Islamabad from March 14-19, 2024, to hold discussions on the second review of Pakistan’s economic program supported by an IMF Stand-By Arrangement (SBA). At the conclusion of the discussions, Porter issued the following statement:

“The IMF team has reached a staff-level agreement with the Pakistani authorities on the second and final review of Pakistan’s stabilization program supported by the IMF’s US$3 billion (SDR2,250 million) SBA approved in January 2024. This agreement is subject to approval by the IMF’s Executive Board, upon which the remaining access under the SBA, US$1.1 billion (SDR 828 million), will become available.

“Pakistan’s economic and financial position has improved in the months since the first review, with growth and confidence continuing to recover on the back of prudent policy management and the resumption of inflows from multilateral and bilateral partners. However, growth is expected to be modest this year and inflation remains well above target, and ongoing policy and reform efforts are required to address Pakistan’s deep-seated economic vulnerabilities amidst the ongoing challenges posed by elevated external and domestic financing needs and an unsettled external environment.

“The new government is committed to continue the policy efforts that started under the current SBA to entrench economic and financial stability for the remainder of this year. In particular, the authorities are determined to deliver the FY24 general government primary balance target of PRs 401 billion (0.4% of GDP), with further efforts towards broadening the tax base, and continue with the timely implementation of power and gas tariff adjustments to keep average tariffs consistent with cost recovery while protecting the vulnerable through the existing progressive tariff structures, thus avoiding any net circular debt (CD) accumulation in FY24. The State Bank of Pakistan remains committed to maintaining a prudent monetary policy to lower inflation and ensure exchange rate flexibility and transparency in the operations of the FX market.

The authorities also expressed interest in a successor medium-term Fund-supported program with the aim of permanently resolving Pakistan’s fiscal and external sustainability weaknesses, strengthening its economic recovery, and laying the foundations for strong, sustainable, and inclusive growth. While these discussions are expected to start in the coming months, key objectives are expected to include: 1) strengthening public finances, including through gradual fiscal consolidation and broadening the tax base (especially in undertaxed sectors) and improving tax administration to improve debt sustainability and create space for higher priority development and social assistance spending to protect the vulnerable;

2) restoring the energy sector’s viability by accelerating cost reducing reforms including through improving electricity transmission and distribution, moving captive power demand to the electricity grid, strengthening distribution company governance and management, and undertaking effective anti-theft efforts;

3) returning inflation to target, with a deeper and more transparent flexible forex market supporting external rebalancing and the rebuilding of foreign reserves; and

4) promoting private-led activity through the above mentioned actions as well as the removal of distortionary protection, advancement of SOE reforms to improve the sector’s performance, and the scaling-up of investment in human capital, to make growth more resilient and inclusive and enable Pakistan to reach its economic potential.

 

IMF Executive Board Completes First Review of Stand-By Arrangement for Pakistan

The Executive Board of the International Monetary Fund (IMF) has completed the first review of Pakistan’s economic reform program supported by the IMF’s Stand-By Arrangement (SBA). The Board’s decision allows for an immediate disbursement of SDR 528 million (around US$700 million), bringing total disbursements under the arrangement to SDR 1.422 billion (about US$1.9 billion).

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.”