The deal — subject to approval by the IMF Board in July — comes after an eight-month delay and offers some respite to Pakistan, which is battling an acute balance of payments crisis and falling foreign exchange reserves.
The positive point is that the US$3 billion funding, spread over nine months, is higher than expected for Pakistan. The country was awaiting the release of the remaining US$2.5 billion from a US$6.5 billion bailout package agreed in 2019, which expires on June 30, 2023.
The new stand-by arrangement is built on the 2019 program, IMF official Nathan Porter said in a statement on Thursday, adding that Pakistan’s economy had faced several challenges in recent times, including devastating floods last year and commodity price hikes following the war in Ukraine.
“As a result of these shocks as well as some policy missteps — including shortages from constraints on the functioning of the FX market — economic growth has stalled. Inflation, including for essential items, is very high,” he added.
“Despite the authorities’ efforts to reduce imports and the trade deficit, reserves have declined to very low levels. Liquidity conditions in the power sector also remain acute,” Porter said in a statement.
“Given these challenges, the new arrangement would provide a policy anchor and a framework for financial support from multilateral and bilateral partners in the period ahead,” he said.
The IMF’s press release states, “The IMF staff and the Pakistani authorities have reached a staff-level agreement on policies to be supported by a Stand-By Arrangement (SBA).”
It added that the new SBA will “support the authorities’ immediate efforts to stabilize the economy from recent external shocks, preserve macroeconomic stability and provide a framework for financing from multilateral and bilateral partners”.
“The new SBA will also create space for social and development spending through improved domestic revenue mobilization and careful spending execution to help address the needs of the Pakistani people,” the IMF said.
It further said, “Steadfast policy implementation is key for Pakistan to overcome its current challenges, including through greater fiscal discipline, a market-determined exchange rate to absorb external pressures, and further progress on reforms, particularly in the energy sector, to promote climate resilience, and to help improve the business climate.”
It added that the budget advances a primary surplus of around 0.4% of GDP by taking some steps to broaden the tax base and increase tax collection from under taxed sectors, as well as improving progressivity, while ensuring space to strengthen support for the vulnerable through the BISP (Benazir Income Support Program)”.
“It will be important that the budget is executed as planned, and the authorities resist pressures for unbudgeted spending or tax exemptions in the period ahead,” the lender emphasized.
It went on to note that the State Bank of Pakistan (SBP) has “withdrawn the guidance on import prioritization and is committed to ensuring the full market determination of the exchange rate”.
“Going forward, the SBP should remain proactive to reduce inflation, which particularly affects the most vulnerable, and maintain a foreign exchange framework free of restrictions on payments and transfers for current international transactions and multiple currency practices,” the IMF highlighted.
