IMF says Pakistan at a challenging economic juncture

The Executive Board of the International Monetary Fund (IMF) on Monday completed the combined 7th and 8th reviews of the Extended Arrangement under the Extended Fund Facility (EFF) for Pakistan allowing for an immediate disbursement of SDR 894 million (about US$1.1 billion), bringing total purchases for budget support under the arrangement to about $3.9 billion, reported 24NewsHD TV channel on Tuesday.

According to a press release issued by the Fund in Washington, the EFF was approved by the Executive Board on July 3, 2019 for SDR 4,268 million (about US$6 billion at the time of approval, or 210 percent of quota). In order to support programme implementation and meet the higher financing needs in FY23, as well as catalyze 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 US$6.5 billion.

As per the assessment of the IMF, Pakistan is at a challenging economic juncture. A difficult external environment combined with procyclical domestic policies fueled domestic demand to unsustainable levels. The resultant economic overheating led to large fiscal and external deficits in FY22, contributed to rising inflation, and eroded reserve buffers.

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.

The Executive Board also approved the authorities' request for waivers of nonobservance of performance criteria.

However, the IMF estimated that the real growth rate of Pakistan would likely to remain 3.5% and the unemployment rate would also be reduced. 

Following the Executive Board's discussion on Pakistan, Ms. Antoinette Sayeh, Deputy Managing Director and Acting Chair, issued the following statement:

“Pakistan’s economy has been buffeted by adverse external conditions, due to spillovers from the war in Ukraine, and domestic challenges, including from accommodative policies that resulted in uneven and unbalanced growth. Steadfast implementation of corrective policies and reforms remain essential to regain macroeconomic stability, address imbalances and lay the foundation for inclusive and sustainable growth.

“The authorities’ plan to achieve a small primary surplus in FY2023 is a welcome step to reduce fiscal and external pressures and build confidence. Containing current spending and mobilizing tax revenues are critical to create space for much-needed social protection and strengthen public debt sustainability. Efforts to strengthen the viability of the energy sector and reduce unsustainable losses, including by adhering to the scheduled increases in fuel levies and energy tariffs, are also essential. Further efforts to reduce poverty and protect the most vulnerable by enhancing targeted transfers are important, especially in the current high-inflation environment.

“The tightening of monetary conditions through higher policy rates was a necessary step to contain inflation. Going forward, continued tight monetary policy would help to reduce inflation and help address external imbalances. Maintaining proactive and data-driven monetary policy would support these objectives. At the same time, close oversight of the banking system and decisive action to address undercapitalized financial institutions would help to support financial stability. Preserving a market-determined exchange rate remains crucial to absorb external shocks, maintain competitiveness, and rebuild international reserves.

“Accelerating structural reforms to strengthen governance, including of state-owned enterprises, and improve the business environment would support sustainable growth. Reforms that create a fair-and-level playing field for business, investment, and trade necessary for job creation and the development of a strong private sector are essential.”

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

Islamabad received that last disbursement in February and the next tranche was to follow after review in March, but the PTI-led government slashed the petroleum prices by giving subsidies to the people which threw fiscal targets and the program off track.

After hectic efforts by the PDM government, Pakistan reached the staff-level agreement with the Fund in July after completing all prior conditions. The executive board Monday reviewed the progress and decided to resume the program and approved the seventh and eighth loan tranches.

Pakistan is now likely to receive a $1.17 billion loan tranche from Fund within six days.

PM says Pakistan must break out of economic straitjacket 

While welcoming the revival of the IMF loan programme, Prime Minister Shehbaz Sharif has said that though it is critical for Pakistan’s economy but we must work hard to become self-sufficient stressing the need to break out of economic straitjacket. 

On his Twitter handle, Pm Shehbaz wrote: “Revival of IMF program, though critical to our economy, is not an end in itself. It offers a pathway to reorient our economy. We will have to work hard to make it self-sufficient. Pakistan must break out of economic straitjacket, which is only possible through structural reforms.”

Revival of IMF program, though critical to our economy, is not an end in itself. It offers a pathway to reorient our economy. We will have to work hard to make it self-sufficient. Pakistan must break out of economic straitjacket, which is only possible through structural reforms.

— Shehbaz Sharif (@CMShehbaz) August 30, 2022

“The formal resumption of an IMF program is a major step forward in our efforts to put Pakistan's economy back on track. It is outcome of an excellent team effort. I commend Finance Minister Miftah Ismail & his team and other stakeholders for their hard work.”

The formal resumption of an IMF program is a major step forward in our efforts to put Pakistan's economy back on track. It is outcome of an excellent team effort. I commend Finance Minister Miftah Ismail & his team and other stakeholders for their hard work.

— Shehbaz Sharif (@CMShehbaz) August 29, 2022

Reporter Waqas Azeem