Pakistan and IMF reach staff-level agreement after final review of Stand-By Arrangement
Business
Washington-based lender warns of higher inflation and modest economic growth
ISLAMABAD/WASHINGTON (Web Desk) – The International Monetary Fund (IMF) and Pakistan have reached a staff-level agreement on the second and final review under Stand-By Arrangement, subject to the IMF Executive Board's approval.
A statement issued by the IMF says Pakistan will have access to $1.1 billion after the final approval, which is expected next month. “Given the timing of the Second Review mission, immediately following the formation of the new cabinet, we expect the review to be considered by the IMF’s Board in late April.”
The IMF mentions that the agreement recognises the strong programme implementation by the State Bank of Pakistan (SBP) and the caretaker government in recent months, as well as the new government’s intentions for ongoing policy and reform efforts to move Pakistan from stabilization to a strong and sustainable recovery.
In his comments, IMF Pakistan Mission Chief Nathan Porter said Pakistan’s economic and financial position had improved in the months since the first review, with growth and confidence continuing to recover on the back of prudent policy management and the resumption of inflows from multilateral and bilateral partners.
But at the same time, Porter warned about inflation exceeding the target and the modest nature of economic growth as well as stressing the need for a swift reform process.
“However, growth is expected to be modest this year and inflation remains well above target, and ongoing policy and reform efforts are required to address Pakistan’s deep-seated economic vulnerabilities amidst the ongoing challenges posed by elevated external and domestic financing needs and an unsettled external environment.”
About the Shehbaz Sharif-led government, the statement says it is committed to continue the policy efforts that started under the current SBA to entrench economic and financial stability for the remainder of the fiscal year [2023-24 or FY24].
It notes that the government is determined to deliver the FY24 general government primary balance target of Rs401 billion (0.4 per cent of GDP) and making efforts to broaden the tax base.
But sadly for the people, the IMF statement is also pointing to further increase in energy prices, saying Islamabad will also “continue with the timely implementation of power and gas tariff adjustments to keep average tariffs consistent with cost recovery while protecting the vulnerable through the existing progressive tariff structures, thus avoiding any net circular debt accumulation in FY24.”
When it comes to the higher interest rates and a weakened rupee which have crippled the country’s economy, the IMF praises the State Bank of Pakistan (SBP) for “maintaining a prudent monetary policy to lower inflation and ensure exchange rate flexibility and transparency in the operations of the FX market”.
On the subject of any future agreement between the two sides, Porter said the Pakistani authorities also expressed interest in a successor medium-term IMF-supported programme “with the aim of permanently resolving Pakistan’s fiscal and external sustainability weaknesses, strengthening its economic recovery, and laying the foundations for strong, sustainable, and inclusive growth”.
He also underlined “key objectives” that will determine Pakistan’s ability to secure another deal:
(i) Strengthening public finances, including through gradual fiscal consolidation and broadening the tax base (especially in undertaxed sectors) and improving tax administration to improve debt sustainability and create space for higher priority development and social assistance spending to protect the vulnerable
(ii) Restoring the energy sector’s viability by accelerating cost reducing reforms including through improving electricity transmission and distribution, moving captive power demand to the electricity grid, strengthening distribution company governance and management, and undertaking effective anti-theft efforts.
(iii) Returning inflation to target, with a deeper and more transparent flexible FX market supporting external rebalancing and the rebuilding of foreign reserves.
(iv) Promoting private-led activity through the above mentioned actions as well as the removal of distortionary protection, advancement of SOE reforms to improve the sector’s performance, and the scaling-up of investment in human capital, to make growth more resilient and inclusive and enable Pakistan to reach its economic potential.
