Pakistan reaches last-minute $3bn IMF deal before expiry of program

The government’s efforts have finally paid off as Pakistan and IMF have reached the Staff-Level Agreement on a US $3 billion Stand-By Arrangement (SBA), reported 24NewsHD TV channel on Friday.

According to the announcement made by the International Monetary Fund, Pakistan will receive US$3 billion under the 9-month Stand-By Agreement. The agreement will bring economic stability in Pakistan and will protect it from external economic problems. The agreement will enable the country to receive financing from foreign countries and financial institutions.According to the IMF press release dated June 29, the global lender said that its staff and the Pakistani authorities have reached a staff-level agreement on policies to be supported by a Stand-By Arrangement (SBA). The staff-level agreement is subject to approval by the IMF Executive Board, with its consideration expected by mid-July.

The press release further states: “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 Fund says: “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.”

The press release says an IMF staff team led by Mr. Nathan Porter held in person and virtual meetings with the Pakistani authorities to discuss a new financing engagement for Pakistan under an IMF Stand-by Arrangement (SBA).

At the conclusion of the mission, Mr. Porter issued the following statement:

“I am pleased to announce that the IMF team has reached a staff-level agreement with the Pakistani authorities on a nine-month Stand-by Arrangement (SBA) in the amount of SDR2,250 million (about $3 billion or 111 percent of Pakistan’s IMF quota). The new SBA builds on the authorities’ efforts under Pakistan’s 2019 EFF-supported program which expires end-June. This agreement is subject to approval by the IMF’s Executive Board, which is expected to consider this request by mid-July.

“Since the completion of the combined seventh and eight reviews under the 2019 Extended Fund Facility (EFF) in August 2022, the economy has faced several external shocks such as the catastrophic floods in 2022 that impacted the lives of millions of Pakistanis and an international commodity price spike in the wake of Russia’s 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. 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, with further buildup of arrears (circular debt) and frequent loadshedding.

“Given these challenges, the new SBA would provide a policy anchor and a framework for financial support from multilateral and bilateral partners in the period ahead. The authorities have already taken a series of important actions ahead of the new program:

• Parliament has approved FY24 budget in line with the goals of supporting fiscal sustainability and mobilizing revenue, which will enable greater social and development spending. The FY24 budget advances a primary surplus of around 0.4 percent of GDP by taking some steps to broaden the tax base and increase tax collection from undertaxed sectors, as well as improving progressivity, while ensuring space to strengthen support for the vulnerable through the BISP 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 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.

Continued efforts to mobilize financial support from multilateral institutions and bilateral partners. In addition to generous climate-related pledges from the January 2023 Conference on Climate Resilient Pakistan held in Geneva, the authorities’ efforts have focused on obtaining new financing and securing the rollover of debt falling due. This will support near-term policy efforts and replenish gross reserves, with the aim of bringing them to more comfortable levels. “The authorities’ program also includes ongoing efforts to strengthen the viability of the energy sector (including through a timely FY24 annual rebasing), improving SOE governance, and strengthening the public investment management framework, including for projects needed to build resilience to climate change.

The full and timely implementation of the program will be critical for its success in light of the difficult challenges.

“The IMF team would like to thank the authorities for the open and constructive dialogue and collaboration that have brought us to today’s successful conclusion.”

Yesterday, Finance Minister Ishaq Dar told Reuters that a staff level agreement for a crucial bailout deal with the IMF was “very close” and expected in the next 24 hours.

The government is racing against time to unlock at least $1.1 billion under the lender’s ninth review of a $6.5-billion Extended Fund Facility agreed in 2019. The programme expires on Friday.

“We are very close to signing a staff level agreement with the IMF,” Dar told Reuters late on Thursday.

“I think it should come some time tonight or maximum within 24 hours … We have finalised everything.”

Prime Minister Shehbaz Sharif held a phone call with Fund’s Managing Director Kristalina Georgieva on Tuesday during which he expressed hope that the lender would announce a decision pertaining to the release of bailout funds within a day or two.

A handout released by the Prime Minister’s Office (PMO) on Tuesday said, “In connection with the meetings held in Paris, the IMF director general acknowledged efforts by the finance minister and his team for completion of the programme.”

“The prime minister also reiterated his determination to achieve the goals of improving the economic situation through joint efforts,” the handout added.

It also quoted Georgieva as saying that the Fund wanted Pakistan’s economic situation to improve and appreciated the commitment of the premier.

Earlier this month, the IMF had raised several issues with Pakistan’s budget for fiscal year 2024, saying that some of the proposed measures went against the EFF programme’s conditionality.

Esther Perez Ruiz, IMF representative for Pakistan, had earlier said Pakistan needed to satisfy the IMF on three counts, including the budget for the upcoming fiscal year, before its board would review whether to release the pending tranche.

In compliance with the Fund’s conditions, the finance minister made changes in the budget, imposed Rs215bn additional tax measures, made Rs85bn spending cut, withdrew an amnesty on foreign exchange inflows, lifted import restrictions, increased Benazir Income Support Programme allocations by Rs16bn, and hiked petroleum levy from Rs50 to Rs60 per litre.

Besides this, the State Bank of Pakistan also raised the policy rate to 22% effective June 27, 2023 to stem the inflation, as per the requirement of the IMF.

Pakistan could get temporary relief for its ballooning foreign debt with a new stand-by arrangement worth $3 billion announced by the IMF in Washington late Thursday.

The economy has been stricken by a balance-of-payments crisis as it attempts to service crippling external debt, while months of political chaos have scared off potential foreign investment.

Inflation has rocketed, the rupee has reached a record low against the dollar, and the country can no longer afford imports, causing a severe decline in industrial output.

Pakistan's Finance Minister Ishaq Dar celebrated the new potential deal by tweeting "AlhamdoLilah!", meaning "praise be to God!".

But Michael Kugelman, director of the South Asia Institute at the Wilson Center, criticised Pakistan's slow progress on meeting IMF requirements for a deal.

"Islamabad waited until the very final hour to take the (politically risky) fiscal policy steps that the IMF had been hoping to see for months," he tweeted.

Years of financial mismanagement have pushed Pakistan's economy to the limit, exacerbated by the Covid pandemic, a global energy crisis since Russia's invasion of Ukraine, and record monsoon floods that submerged a third of the country in 2022.

The grim data gave the government little room to introduce vote-attracting budget measures ahead of an election due in October.

The IMF had told Pakistan it needed to secure additional external financing, scrap a swathe of populist subsidies, and allow the rupee to float freely against the dollar, before unlocking more funds.

Mohammed Sohail, chief of Topline Securities, told AFP the IMF's additional loan would restore some investor confidence.

"This new programme is far better than our expectations. There were a lot of uncertainties on what will happen after June 2023 as there will be new government coming to power," he said.

Pakistan needs billions of dollars in financing to service staggering levels of external debt, and foreign exchange reserves have dwindled to just $3.5 billion, roughly enough for three weeks of imports.

- History of bailouts -

The crisis prompted the government to temporarily impose a months-long broad import ban, stalling multiple industries.

Pakistan failed to meet any economic growth targets for the fiscal year 2022-23, with GDP growth at 0.3 percent, while the country's standing on the global economic rank fell from 24th in 2017 to 47th.

Inflation reached a record 38 percent in May, after more than a decade of declining real wages for working-class Pakistanis.

The IMF acknowledged the external shocks to the economic system, "as well as some policy missteps", in its deal.

The stand-by deal would support government's economic stability efforts and "provide a framework for financing from multilateral and bilateral partners", the IMF said.

Decades of mismanagement have seen Pakistan broker nearly two dozen arrangements with the IMF, most of which have gone uncompleted.

Thursday's deal struck an optimistic note, but also warned that Pakistan's crisis required consistent economic firefighting.

 

Reporter Waqas Azeem and input from AFP