The SLA paves the way for the disbursement to Pakistan next month of another USD 700 million to Pakistan under a 9-month SBA signed this July.
By Muhammad Ali
ISLAMABAD: The visiting International Monetary Fund (IMF) team has reached a staff-level agreement (SLA) with the Pakistani authorities on the first review of the country’s stabilisation program supported by the Fund’s USD3 billion Stand-By Arrangement (SBA), the global lender’s press centre at Washington DC said Wednesday.
The agreement’s approval by the IMF’s executive board will pave the way for the disbursement to Pakistan of around US$700 million, bringing total disbursements under the program to almost US$1.9 billion.
The agreement marks the culmination of an International Monetary Fund (IMF) team’s visit to Islamabad from 2-15 November 2023. The IMF press centre published mission chief Nathan Porter’s statement announcing the signing of the SLA.
“Anchored by the stabilisation policies under the SBA, a nascent recovery is underway, buoyed by international partners’ support and signs of improved confidence”, the statement said. “The steadfast execution of the FY24 budget, continued adjustment of energy prices, and renewed flows into the foreign exchange (FX) market have lessened fiscal and external pressures”.
The Fund hopes inflation to decline in Pakistan over the coming months amid receding supply constraints and modest demand, but warned Pakistan remains susceptible to significant external risks, including the intensification of geopolitical tensions, resurgent commodity prices, and the further tightening in global financial conditions. Efforts to build resilience need to continue.
“In this regard, strengthening macroeconomic sustainability and laying the conditions for balanced growth are key priorities under the SBA”, the statement said.
Pakistan’s policy priorities include continued fiscal consolidation to reduce public debt while protecting development needs; strengthening the social safety net to better protect the vulnerable; further reforms to reduce costs in the energy sector and restore its viability while protecting vulnerable consumers, returning to a market-determined exchange rate and rebuilding FX reserves; building financial sector resilience; and continuing state-owned enterprise and governance reforms to improve the business environment, investment, and job creation.
Fiscal consolidation
Pakistan is determined to achieve a primary surplus of at least 0.4 percent of GDP in FY24, underpinned by federal and provincial government spending restraint and improved revenue performance supported, if necessary, by contingent measures.
The authorities are building capacity to expand the tax base and raise revenue mobilization and are committed to improving the quality of public investment and spending.
Social safety net
The authorities will continue the timely disbursements for social protection under BISP’s budget allocation—which are about a third higher than in FY23. This will allow for the expansion of the Unconditional Cash Transfers (UCT) Kafaalat program to 9.3 million families this fiscal year, with an annual inflation adjustment of the stipend.
Looking forward, the authorities are seeking to improve the UCT Kafaalat generosity level and to increase enrollment into the Conditional Cash Transfers programs supporting children’s education and health.
Energy sector reforms
With the combined circular debt (CD) across power and gas sectors exceeding 4 percent of GDP, immediate action was critical. While protecting vulnerable consumers, the authorities implemented power tariff adjustments that were pending since July 2023 and increased gas prices after a long time.
While these increases were substantial, they were necessary to avoid further arrears that threatened the viability of these sectors and the provision of critical energy supplies.
The authorities are also moving to tackle cost-side pressures, including bringing private sector participation to DISCOs, institutionalising recovery and anti-theft actions, improving PPA terms, and reducing the incentives for captive power.
Exchange rate and rebuilding FX reserves
While inflows following increased regulatory and law enforcement action helped normalise import and forex payments and rebuild reserves, Pakistan needs the rupee to remain market-determined to sustainably alleviate external pressures and rebuild reserves.
To support this, the authorities plan to strengthen the transparency and efficiency of the forex market and to refrain from administrative actions to influence the rupee.
Monetary policy
Pakistan needs a proactive monetary policy to lower inflation toward its target. With appropriately tight monetary policy, inflation should steadily decline and the authorities stand ready to respond resolutely if near-term price pressures reemerge, including due to second-round effects on core inflation or renewed exchange rate depreciation.
Building financial sector resilience.
Continued vigilance is warranted to safeguard the soundness of the banking system. Areas identified for priority action include addressing undercapitalised financial institutions, ensuring foreign exchange exposures within regulatory limits, and aligning bank resolution and crisis management frameworks with best practice.
SOE & government reforms
Continuing state-owned enterprise and governance reforms is essential to improve the business environment, investment, and job creation. Following passage of the State-Owned Enterprises (SOE) law, the authorities are moving forward with their SOE policy and implementation of their triage plan, including the privatisation of select SOEs.
There are hopes that high governance and transparency standards will apply to the management of assets under the ownership of the newly created Sovereign Wealth Fund (SWF) and the operations of the SIFC.
To further strengthen governance, the authorities will ensure public access to asset declarations from Cabinet members and a task force, with participation from independent experts, will complete a comprehensive review of the anticorruption framework.
International cooperation
Deepening cooperation with international partners is an essential component of Pakistan’s action plan. The authorities have accelerated the engagement with multilateral and official bilateral partners. Timely disbursement of committed external support remains critical to support the authorities’ policy and reform efforts.
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