By Staff Reporter
ISLAMABAD: The International Monetary Fund (IMF) and Pakistan have reached a staff-level agreement on the seventh and eight reviews of the Fund’s $6 billion bailout programme that will allow for a disbursement of $1.177 billion, the IMF said on Wednesday.
The Washington-based lender is also considering adding additional funds to the programme.
“The agreement is subject to approval by the IMF’s Executive Board. Subject to Board approval, about $1,177 million (SDR 894 million) will become available, bringing total disbursements under the program to about $4.2 billion,” the Fund said in a statement.
“Additionally, in order to support program implementation and meet the higher financing needs in FY23, as well as catalyze additional financing, the IMF Board will consider an extension of the EFF (Extended Fund Facility) until end-June 2023 and an augmentation of access by SDR720 million ($1 billion) that will bring the total access under the EFF to about $7 billion.”
Like most emerging economies, Pakistan was badly hit by soaring global oil and food prices over the past year, but the new government’s economic troubles were exacerbated by the failure of the previous administration of cricketer-turned-politician Imran Khan to cut fuel subsidies. Khan, just before voted out in a no confidence move in the parliament, massively subsidized fuel prices and electricity rates.
Aside from the unsustainable external deficit, Pakistan is also faced with inflation close to 22 percent, depleting foreign currency reserves, a rapidly falling economic growth rate, and excessive government borrowing to finance a budget deficit.
Pakistan entered the IMF programme in 2019, but only half the funds have been disbursed to date as Islamabad has struggled to keep targets on track.
The agreement is a step towards inflows of much-needed dollar into the cash-strapped country. Analysts say other multilateral lenders and friendly governments will be more willing to help if they see the IMF bringing some discipline to Pakistan’s efforts to put its economy in order.
IMF said Pakistan is at a challenging economic juncture and 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.
“To stabilize the economy and bring policy actions in line with the IMF-supported program, while protecting the vulnerable, policy priorities include:
Steadfast implementation of the FY2023 budget
The budget aims to reduce the government’s large borrowing needs by targeting an underlying primary surplus of 0.4 percent of GDP, underpinned by current spending restraint and broad revenue mobilization efforts focused particularly on higher income taxpayers. Development spending will be protected, and fiscal space will be created for expanding social support schemes. The provinces have agreed to support the federal government’s efforts to reach the fiscal targets, and Memoranda of Understanding have been signed by each provincial government to this effect.
Catch-up in power sector reforms
On the back of weak implementation of the previously agreed plan, the power sector circular debt (CD) flow is expected to grow significantly to about PRs 850 billion in FY22, overshooting program targets, threatening the power sector’s viability, and leading to frequent power outages. The authorities are committed to resuming reforms including, critically, the timely adjustment of power tariff including for the delayed annual rebasing and quarterly adjustments, to improve the situation in the power sector and limit load shedding.
Proactive monetary policy to guide inflation to more moderate levels
Headline inflation exceeded 20 percent in June, hurting particularly the most vulnerable. In this regard, the recent monetary policy increase was necessary and appropriate, and monetary policy will need to be geared towards ensuring that inflation is brought steadily down to the medium-term objective of 5–7 percent. Importantly, to enhance monetary policy transmission, the rates of the two major refinancing schemes EFS and LTFF (which have over recent months been raised by 700 bps and 500 bps respectively) will continue to be linked to the policy rate. Greater exchange rate flexibility will help cushion activity and rebuild reserves to more prudent levels.
Reducing poverty and strengthen social safety
During FY22, the unconditional cash transfer (UCT) Kafalat scheme reached nearly 8 million households, with a permanent increase in the stipend to PRs 14,000 per family, while a one-off cash transfer of PRs 2,000 (Sasta Fuel Sasta Diesel, SFSD) was granted to about 8.6 million families to alleviate the impact of rampant inflation. For FY23, the authorities have allocated PRs 364 billion to BISP (up from PRs 250 in FY22) to be able to bring 9 million families into the BISP safety net, and further extend the SFSD scheme to additional non-BISP, lower-middle class beneficiaries.
Strengthen governance
To improve governance and mitigate corruption, the authorities are establishing a robust electronic asset declaration system and plan to undertake a comprehensive review of the anticorruption institutions (including the National Accountability Bureau) to enhance their effectiveness in investigating and prosecuting corruption cases.
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