What does the IMF country report say, and what does it mean?

After the board approval for the $3 billion Standby Arrangement between Pakistan and the International Monetary Fund (IMF), the fund has published its country report for Pakistan detailing the program’s woes, expectations and projections for the SBA. 

According to the statement by the IMF executive board, “The program will focus on (1) implementation of the FY24 budget to facilitate Pakistan’s needed fiscal adjustment and ensure debt sustainability, while protecting critical social spending; (2) a return to a market-determined exchange rate and proper FX market functioning to absorb external shocks and eliminate FX shortages; (3) an appropriately tight monetary policy aimed at disinflation; and (4) further progress on structural reforms, particularly with regard to energy sector viability, SOE governance, and climate resilience. “

To look deeper into what the next year is going to be like for an average Pakistani, under the IMFprogram, we delve into the details of the report itself.

Program Objectives and Policy:

The new program’s policies are designed to assist the authorities in their immediate endeavors to stabilize the economy and strengthen reserves. This is what the discussions with the fund were focused on. According to the report the IMF’s talks centered around 4 main policy pillars. 

(i) Developing a suitable FY24 budget to facilitate necessary fiscal adjustments;

(ii) Reestablishing a market-driven exchange rate and ensuring the smooth functioning of the foreign exchange market to address balance of payments issues and eliminate foreign exchange shortages;

(iii) Implementing appropriately stringent monetary policies to aid disinflation and maintain stable expectations;

(iv) Continuing structural initiatives to enhance the energy sector’s sustainability, improve governance in state-owned enterprises, and strengthen the banking sector, while also supporting climate resilience efforts in Pakistan.

Looking at the Macroeconomic Outlook and Risks, the report assumes that strong policy implementation and timely external financing would reduce near-term uncertainty and help the real economy to gradually stabilize and recover. The report predicts that the GDP growth will remain around 2.5% and inflation close to 20%, by the end of FY24. The fund is also cognizant of Pakistan specific risks in this regard. The report reads: “Amplified by the tense political environment, policy slippages could undermine program implementation, in turn jeopardizing macro-financial and external stability and already stretched debt sustainability”.

Another key objective of the IMF program is renewed Fiscal Policies. The fund believes that The FY24 budget aims to set in a gradual fiscal improvement. It strengthens the tax revenue by rationalizing new taxation and containing the expenditures. The program’s broad based reforms include strengthening revenue administration and enhancing public finance management. It also includes amplifying Pakistan’s spending transparency with the help of the world bank and improving debt management in the longer run. The fund is however, still adamant on Poverty Reduction and Social Protection for which it plans to “persevere with administrative efforts” and “boast structural reforms” because of the tight fiscal space.

Another very key area for the objectives has been Monetary and Exchange Rate Policies, in fact the last EFF, left Pakistan with a number of changes in the central bank’s autonomy. The fund has been quite vocal about its tighter monetary policy and market based exchange rate stance. No changes on objective has been seen on this front as the SBP has agreed to continue its tighter monetary policy cycle. The fund also believes that “Reducing external imbalances and rebuilding reserves requires permanently ending administrative controls and actions to manage the current account and returning to a market- determined exchange rate.” 

It is important to note here that the (Pakistani) authorities requested more time to eliminate some remaining restrictions when BOP conditions permitted by the end of the SBA in April 2024. These remaining restrictions include Multiple Currency Practice and administrative control over import through the Letter of Credits (LCs).

Similarly the fund also foresees a reformatory future for Pakistan’s Financial Sector, and energy Sector. These include sticking to Anti Money laundering protocols, timely alignment of power tariffs, and better targeting of power subsidies. 

Program Modalities, Associated Risks and Commitments:

The program’s progress will be assessed using quantitative performance criteria (QPCs), indicative targets (ITs), structural benchmarks (SBs) as outlined in Tables 1 and 2 in the Memorandum of Economic and Financial Policies (MEFP), and quarterly reviews. Additionally, regular evaluations of financing commitments will be conducted to ensure the program maintains full funding.

It is important to note here that according to the report, the fund staff supports the authorities’ request for temporary approval of an exchange restriction and a market-based exchange rate policy. The exchange restriction limits advance payments for imports through Letters of Credit (LCs) and advance payments without LCs for eligible items. The market-based exchange rate policy addresses potential deviations of more than 2 percent between the previous day’s weighted average customer exchange rates used by the State Bank of Pakistan (SBP) and the government, and the prevailing spot exchange rates in the FX market.

The proposed approval is for the duration of the program. Both the exchange restriction and market-based exchange rate policy are non-discriminatory and serve Balance of Payments (BOP) reasons. The authorities have committed to removing these measures before the program concludes.

As for the exchange rate, in the memorandum of agreed upon policies, it is ascertained that, “Once proper market functioning is restored, we (Pakistan) are committed to maintain the average premium between the interbank and open market rate at no more than 1.25 percent and no less than -1.25 percent during any consecutive 5 business day period.”

The IMF takes note of Pakistan’s inability to pay back, not just its own money but also its other creditors.

With respect to the SBP autonomy, an update safeguards assessment of the SBP will be completed before the first review. The last safeguards assessment was completed in 2019 after which requisite amendments to the State Bank Act were proposed.

As per the IMF report, Pakistan missed a critical chance of reforms by failing to act upon the objectives of the 2019-2023 EFF. Structural reforms remain essential to lay the foundation for strong, resilient, and inclusive growth to the benefit of all Pakistanis. It states that the risks would remain exceptionally high and tilted to the downside on both domestic and external fronts. And even after recognizing these risks, staff supports the authorities’ request for a 9-month SBA with access equivalent to SDR 2,250 million (about 111 percent of quota).

The report presents a bleak picture of tough economic circumstances not just for the next one year but at least 4 more years to come, before Pakistan can become self-sufficient provided it enacts long lasting reforms. According to the report’s projections, gross external financing requirements are $80+bn in the next three years.


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