The government of Pakistan has reached a staff-level agreement with the International Monetary Fund (IMF) pertaining to policies and reforms required to complete the sixth review under the $6 billion Extended Fund Facility (EFF) which was derailed in April.

The IMF made an announcement on Monday explaining that the agreement is subject to approval by the Fund’s Executive Board, after the implementation of previous actions regarding the fiscal and institutional reforms.  Once the agreement gets the green light by the board, it will provide 750 million in Special Drawing Rights (SDR), equivalent to $,1059m as per the statement issued by the IMF.

It added that this takes the total disbursements under the program to $3,027m and helps make way for funding from bilateral and multilateral partners.

The SDR is a basket of mixed currencies made available to member countries of the IMF.

The IMF acknowledged Pakistan’s efforts and progress in implementing the program “despite a difficult environment”.

The Fund added, “All quantitative performance criteria (PCs) for end-June were met with wide margins, except for that on the primary budget deficit”.

It adding that finalization of the National Socio-economic Registry (NSER) update, adoption of amendments in the National Electric Power Regulatory Authority (Nepra) Act, notification of all pending quarterly power tariff adjustments, and payment of the first tranche of outstanding arrears to independent power producers (IPPs) were “notable” achievements on the structural front.

The Fund also took note of the country’s progress in enhancing its anti-money laundering and battling the financing of terrorism (AML/CFT) regime. However, the statement added that additional time was needed to strengthen its effectiveness.

Economic recovery

The IMF said, “Available data suggests that a strong economic recovery has gained hold, benefiting from the authorities’ multifaceted policy response to the Covid-19 pandemic that has helped contain its human and macroeconomic ramifications”. The Fund said that the tax revenue collection by the Federal Board of Revenue (FBR) had also been strong.

The statement added, “At the same time, external pressures have started to emerge: a widening of the current account deficit and depreciation pressures on the exchange rate — mainly reflecting the compound effects of the stronger economic activity, an expansionary macroeconomic policy mix, and higher international commodity prices.”

It noted that the government had gradually worked towards unwinding the pandemic-related stimulus measures in response.

The Fund said the State Bank of Pakistan (SBP) had “taken the right steps” by moving towards reversing the accommodative monetary policy stance, strengthening some macro-prudential measures to curtail consumer credit growth, and providing forward guidance.

Earlier last week the SBP had increased its benchmark interest rate by 150 basis points to 8.75 percent as it grappled with soaring inflation and uncertainty.

According to the Fund, the government’s policies would aid in safeguarding the positive near-term outlook, predicting that Pakistan’s economic growth rate would reach or go beyond four percent during the current fiscal year and 4.5pc in FY23.

It shared that inflation in Pakistan remained high, adding that it “should start to see a declining trend once the pass-through of rupee depreciation is absorbed, and temporary supply-side constraints and demand-side pressures dissipate”.

Addressing the current account deficit, the IMF stated that it was expected to widen in FY22.

Talks between the IMF and government officials further focused on policies to assist Pakistan in achieving sustainable and resilient growth, as per the statement.

It said, “On the fiscal policy front, staying on course on achieving small primary surpluses remains critical to reduce high public debt and fiscal vulnerabilities. Continued efforts to broaden the tax base by removing remaining preferential tax treatments and exemptions will help generate much-needed resources to scale up critical social and development spending.”

Monetary policy rate

The IMF stressed that the monetary policy must continue focusing on curtailing inflation, preserving exchange rate flexibility, as well as strengthening international reserves.

The Fund added that as economic stability deepens and the SBP Amendments Act is passed by parliament, the central bank should “gradually advance the preparatory work to formally adopt an inflation targeting regime in the medium term, underpinned by a forward-looking and interest-rate-focused operational framework”.

It also underscored the significance of reforms in the power sector to make it financially viable and address its adverse effects on the budget, real economy, and the financial sector.

It noted, “In this regard, steadfast implementation of the Circular Debt Management Plan (CDMP) will help guide the planned management improvements, cost reductions, timely alignment of tariffs with cost recovery levels, and better targeting of subsidies to the most vulnerable”.

The IMF said, increased focus was required to strengthen economic productivity, investment and private sector development, including enhancing the governance, transparency, as well as efficiency of the state-owned enterprise (SOE) sector, nurturing the business environment, governance, and the control of corruption, boosting exports and competitiveness, promoting financial deepening and inclusion and stepping up to climate change.

Talking about the development, Finance Ministry spokesperson Muzzammil Aslam noted that the agreement which took 45 days of discussions between the IMF and the government would “remove a lot of uncertainties”.

As per reports, discussions between the two parties had concluded on Friday. The announcement of the policy rate by the central bank was the last administrative and policy action in the domain of the economic team and was accomplished. According to reports, “Everything is agreed to, ready and finished, except legislative part”.

Earlier last week, the adviser to the Prime Minister on Finance and Revenue Shaukat Tarin had said that five prerequisites had been agreed upon including the State Bank of Pakistan (Amendment) Bill, withdrawal of tax exemptions, and an increase in energy tariff. The prior action related to tariff adjustment had already been met for now with a recent Rs1.39 per unit increase in power tariff, while the bills to end tax exemptions and give autonomy to the SBP had been prepared. The next tariff increase would be announced by February-March 2022 as the power regulator is still in the process of conducting public hearings on tariff adjustments.


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