The International Monetary Fund (IMF) confirmed on Thursday that it had reached a staff-level agreement with Pakistan on the combined seventh and eighth reviews for a $6 billion loan facility, a development that paves the way for the release of the much-awaited $1.17 billion tranche.
In a statement on its website, the IMF said the agreement was subject to approval by its Executive Board.
It added: “Subject to Board approval, about $1,177 million (SDR 894 million) will become available, bringing total disbursements under the programme to about $4.2 billion.”
The IMF statement revealed that as against the primary budget surplus target of Rs153 billion or 0.2% of the GDP set in the revised budget, the global lender has in fact given the 0.4% target. To achieve this target, the government may either require more revenue measures or will have to slash the expenditure, excluding on development.
The review of Pakistan’s “anti-corruption institutions including the National Accountability Bureau” has also been made part of the programme conditions, according to the IMF statement.
The international money lender said a team led by IMF mission chief to Pakistan Nathan Porter finalised the discussions with Pakistan and that it had also agreed to consider extending its Extended Funded Facility (EFF), currently worth $6bn, till the end of June 2023, as well as augmenting it by $720m to expand its size to $7bn.
This decision, it explained, was taken to support the programme’s implementation, meet Pakistan’s higher financing needs in fiscal year 2022-23 and catalyse additional financing.
The announcement by the IMF comes after Finance Minister Miftah Ismail told Dawn on Wednesday that talks with the money lender had concluded and “they (IMF) are now going through their internal approval process”.
He said an announcement from the IMF on the successful completion of the seventh and eighth quarterly reviews of the stalled loan programme was expected soon.
Soon after the IMF confirmed the development, Miftah shared the news on Twitter and thanked Prime Minister Shehbaz Sharif, “my fellow ministers, secretaries, and especially the finance division, for their help and efforts in obtaining this agreement”.
Miftah had earlier hoped to receive $2 billion but it did not happen.
This agreement was reached only after the nation paid a heavy price in the shape of Rs249 per litre petrol and Rs277 per litre high-speed diesel. The taxes on the salaried class were also significantly increased to convince the global lender to agree on the staff-level agreement.
In its statement, the IMF noted that “Pakistan is at a challenging economic juncture”.
“A difficult external environment combined with procyclical domestic policies fuelled domestic demand to unsustainable levels,” it said, adding that the resultant economic overheating led to large fiscal and external deficits in fiscal year 2021-22, contributed to rising inflation, and eroded reserve buffers.
In light of this, the money lender outlined “policy priorities” for Pakistan to “stabilise the economy and bring [its] policy actions in line with the IMF-supported programme”’.
These priorities include the steadfast implementation of budget for the current fiscal year, reforms in the power sector, working out a monetary policy to bring down inflation to “moderate levels”, reducing poverty and strengthening governance.
With regards to the budget for fiscal year 2022-23, the IMF noted that it aimed to “reduce the government’s large borrowing needs by targeting an underlying primary surplus of 0.4 percent of GDP (gross domestic product), underpinned by current spending restraint and broad revenue mobilisation efforts focused particularly on higher income taxpayers”.
“Development spending will be protected, and fiscal space will be created for expanding social support schemes” under the new budget, it said, adding that the provinces had agreed to support the federal government’s efforts to reach the fiscal targets, and memoranda of understanding had been signed by each provincial government to this effect.
The IMF said that 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 Rs850 billion in the just-ended fiscal year, overshooting the programme targets, threatening the power sector’s viability and leading to frequent power outages.
It added Pakistan was committed to resuming reforms, including, critically, the timely adjustment of power tariffs including for the delayed annual rebasing and quarterly adjustments, to improve the situation in the power sector and limit load-shedding.
Similarly, the Fund added that 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 to 7%. “Importantly, to enhance monetary policy transmission, the rates of the two major refinancing schemes Export Financing Scheme and Long Term Financing Facility will continue to be linked to the policy rate.
“Greater exchange rate flexibility will help cushion activity and rebuild reserves to more prudent levels,” according to the IMF.
For reducing poverty and strengthening social safety, the IMF said that during the current fiscal year Pakistan has allocated Rs364 billion to BISP to bring nine million families into the BISP safety net, and further extend the cheaper fuel scheme to additional non-BISP, lower-middle class beneficiaries.
The IMF said that in order to ”improve governance and mitigate corruption, the [Pakistani] authorities are establishing a robust electronic asset declaration system and plan to undertake a comprehensive review of the anti-corruption institutions [including the National Accountability Bureau] to enhance their effectiveness in investigating and prosecuting corruption cases.”