Pakistan, IMF reach staff-level agreement for revival of stalled programme

Agreement to be approved by Fund's Executive Board after govt implements all prior actions

The International Monetary Fund (IMF) and Pakistan reached a staff-level agreement on policies and reforms needed to complete the sixth review under the $6 billion Extended Fund Facility (EFF) which had been stalled since April, the Fund announced in a statement on Monday.

Ministry of Finance Spokesperson Muzzammil Aslam also confirmed the latest development, saying the staff-level agreement was reached between Pakistan and IMF after 45 days of discussions.

However, the statement suggests that the agreement is dependent on the Fund’s Executive Board’s approval, which requires Pakistan to ensure implementation of of pre-conditions, already spelt out by Finance Adviser Shaukat Tarin and also underscored by the IMF in the handout.

The agreement is subject to approval by the Executive Board, following the implementation of prior actions, notably on fiscal and institutional reforms, the statement reads, adding that the approval of the agreement will make available 750 million in Special Drawing Rights (SDR), equivalent to $,1059m.

In its statement following discussions with Pakistani officials, the IMF acknowledged the country’s progress in implementing the programme “despite a difficult environment”.

“All quantitative performance criteria (PCs) for end-June were met with wide margins, except for that on the primary budget deficit,” the Fund noted, adding that finalisation of the National Socio-economic Registlery (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 authorities have also made progress in improving the anti-money laundering and combating the financing of terrorism (AML/CFT) framework, although some additional time is needed to strengthen its effectiveness, it further added.

The Fund stated that although “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, and while the FBR’s tax collection has been strong, 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.”

The Fund also acknowledged that the State Bank of Pakistan (SBP) has also taken the right steps by starting to reverse the accommodative monetary policy stance, strengthening some macroprudential measures to contain consumer credit growth, and providing forward guidance.

The IMF emphasised that the monetary policy needs to remain focused on curbing inflation, preserving exchange rate flexibility, and strengthening international reserves.

As economic stability becomes entrenched and the independence of the SBP is strengthened with the approval of the SBP Act Amendments, the central bank should gradually advance the preparatory work to formally adopt an inflation targeting (IT) regime in the medium term, underpinned by a forward-looking and interest-rate-focused operational framework, the statement explained.

Regarding the current account deficit, the IMF said it was expected to widen in FY22.

The Fund also underscored the importance of reforms in the electricity sector to make it financially viable and tackle its adverse effects on the budget, financial sector and real economy.

“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,” it noted.

Pakistan and IMF originally signed the accord in 2019, but the release of a key installment had been on hold since earlier this year when the Fund expressed reservations about a delay in the government’s compliance with the conditions of the bailout.

In April 2020, the IMF released $1.4 billion to Pakistan, helping it handle an economic crisis amid a surge in fatalities from the coronavirus. At least 28,663 people nationwide have died from Covid-19 since last year, while about 1.2 million tested positive from the new virus.

The government in recent weeks complied with most of the conditions of IMF, including increasing tariffs on electricity and petrol, but doing so made Prime Minister Imran Khan highly unpopular among people as inflation and the price of essential food soared to record highs.

However, the IMF praised the measures, saying the new moves could result in 4 per cent growth this year and 4.5pc the fiscal year after (FY23).

Officials say the delay in the agreement between Pakistan and the IMF was due to uneasy relations between Pakistan and the United States. Khan earlier this year publicly refused to provide bases to Washington for operations in Afghanistan.

The US, which exerts major influence over the IMF, has said the Fund should not finance the tens of billions of dollars in loans that Pakistan has taken from China as part of Beijing’s worldwide Belt and Road Initiative (BRI).

Earlier last week, Finance Adviser Shaukat Tarin had said Pakistan was to complete five reforms before the IMF revived the funding, including legislation on State Bank of Pakistan (SBP) autonomy to ensure its independence over monetary policy and control of inflation, withdrawal of tax exemptions and increased energy tariffs.

It is pertinent to mention here that Pakistan has been grappling with a historical currency devaluation, high inflation, a current account deficit and dwindling foreign reserves. Investors have also become nervous about the outcome of the talks between the government and the IMF.

Ahead of the IMF’s announcement, the central bank last week warned that a higher than expected primary deficit would likely worsen the inflation outlook and undermine economic recovery.

The central bank also raised its benchmark interest rate by 150 basis points to 8.75 percent to counter inflationary pressures and preserve stability with growth.

Headline inflation reached 9.2pc in October, up from 8.4pc two months earlier, the bank had said.

Moreover, the SBP has also lifted the cash reserve requirement for commercial banks by 1 percentage point, the first such move in more than a decade, in another move to deal with accelerating inflation.

 

 

 

 

 

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