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.”

 

IMF approves US$15.6 billion loan for Ukraine

The International Monetary Fund said on Friday its executive board approved a four-year US$15.6 billion loan program for Ukraine.

The decision clears the way for an immediate disbursement of about US$2.7 billion to Kyiv, and requires Ukraine to carry out ambitious reforms, especially in the energy sector, the Fund said in a statement.

The Extended Fund Facility (EFF) loan is the first major conventional financing program approved by the IMF for a country involved in a large-scale war.

Ukraine's previous, US$5 billion long-term IMF program was canceled in March 2022 when the fund provided US$1.4 billion in emergency financing with few conditions. It provided another US$1.3 billion under a "food shock window" program last October.

Ukraine must meet certain conditions over the next two years, including steps to boost tax revenue, maintain exchange rate stability, preserve central bank independence and strengthen anti-corruption efforts.

Deeper reforms will be required in the second phase of the program to enhance stability and early post-war reconstruction, returning to pre-war fiscal and monetary policy frameworks, boosting competitiveness and addressing energy sector vulnerabilities, the IMF said.

A senior US Treasury official said the program was really solid and included commitments from Ukrainian authorities to achieve 19 structural benchmarks over the next year alone.

IMF First Deputy Managing Director Gita Gopinath said the program faced exceptionally high risks, and its success depended on the size, composition and timing of external financing to help close fiscal and external financing gaps and restore Ukraine's debt sustainability.

The decision formalizes an IMF staff-level agreement reached with Ukraine on March 21 that takes into consideration Ukraine's path to accession to the European Union after the war.

Ukrainian President Volodymyr Zelenskiy welcomed the new funding.

"It is an important help in our fight against Russian aggression," he said on Twitter. "Together we support the Ukrainian economy. And we are moving forward to victory!"

US Treasury Secretary Janet Yellen, who pushed hard for the past year to secure the IMF funding package and paid a surprise visit to Ukraine in February, said the package would help secure the country's economic and financial stability and set the foundation for long-term reconstruction.

"I call on all other official and private creditors to join this initiative to assist Ukraine as it defends itself from Russia’s unprovoked war," she said in a statement. "The United States will continue to stand by Ukraine and its people for as long as it takes."

The IMF said international financial institutions, private-sector firms, and most of Ukraine's official bilateral creditors and donors backed a two-step debt treatment process for Ukraine that includes adequate financing assurances on debt relief and concessional financing during and after the program.

The broad support reassured the IMF, the senior Treasury official said, adding, “That was really helpful for them to see that we really mean to be there for the long haul."

LONGER WAR SCENARIO

IMF official Gavin Gray told reporters the fund's baseline scenario assumed the war would wind down in mid-2024, resulting in the projected financing gap of $115 billion, which would be covered by the multilateral and bilateral donors and creditors.

The fund's "downside scenario" saw the war continuing through the end of 2025, opening a much larger $140 billion financing gap that would require donors to dig deeper, he said.

Gray said the program had been designed to function, even if economic circumstances were "considerably worse" than the baseline. He said the countries providing financing assurances had agreed to work with the IMF to ensure Ukraine was able to service its debt to the IMF if larger sums if needed.

Ukraine will face quarterly reviews beginning as early as June, he said.