ISLAMABAD, Jul 12 (APP): The International Monetary Fund (IMF) Executive Board on Wednesday approved the Stand-by Agreement (SBA) for US$ 3 billion for Pakistan, according to press statement issued by the fund.
The staff level agreement on SBA amounting Special Drawing Rights (SDR) 2,250 million (about $3 billion or 111 percent of Pakistan’s IMF quota) was reached during the last week of June after IMF staff team led by Nathan Porter held in person and virtual meetings with the Pakistani authorities to discuss a new financing engagement for Pakistan under the arrangement.
The new SBA builds on the authorities’ efforts under Pakistan’s 2019 Extended Fund Facility supported program, which was due to expire in end-June.
Federal Minister for Finance and Revenue, Mohammad Ishaq Dar also shared the news about the development through his tweeter account.
With the approval of Stand-By Agreement by the IMF board, the country’s foreign exchange reserves would be more strengthened. Saudi Arabia and United Arab Emirates have already deposited $2 and $1 billion respectively with State Bank of Pakistan (SBP), boosting the total foreign exchange reserves upto over $12.7 billion so far.
According to statement issued by IMF, the arrangement comes at a challenging economic juncture for Pakistan. A difficult external environment, devastating floods, and policy missteps have led to large fiscal and external deficits, rising inflation, and eroded reserve buffers in FY23.
Pakistan’s new SBA-supported program will provide a policy anchor for addressing domestic and external imbalances and a framework for financial support from multilateral and bilateral partners.
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.
The Executive Board’s approval allows for an immediate disbursement of SDR894 million (or about US$1.2 billion). The remaining amount will be phased over the program’s duration, subject to two quarterly reviews.
Following the Executive Board discussion, Kristalina Georgieva, Managing Director and Chair said in a statement that Pakistan’s economy was hit hard by significant shocks last year, notably the spillovers from the severe impacts of floods, the large volatility in commodity prices, and the tightening of external and domestic financing conditions.
“These factors together with uneven policy implementation under the EFF combined to halt the post-pandemic recovery, sharply increase inflation, and significantly depleted internal and external buffers. The authorities’ new Stand-By Arrangement, implemented faithfully, offers Pakistan an opportunity to regain macroeconomic stability and address these imbalances through consistent policy implementation,” Georgieva said.
She said, the FY24 budget, which targets a modest primary surplus, was a welcome step toward fiscal stabilization. The anticipated improvement in tax revenues is critical to strengthen public finances, and to eventually create the fiscal space needed to bolster social and development spending.
Maintaining discipline over non-critical primary expenditure will be essential to support budget execution within the envisaged envelope.
In parallel, the authorities urgently need to strengthen energy sector viability by aligning tariffs with costs, reforming the sectors cost base, and better-targeting power subsidies.
Looking beyond this fiscal year, enhanced efforts to expand the tax base and improve public financial management, including in the delivery of quality infrastructure, are needed and increase progressivity and efficiency.”
The recent increase in the policy rate by the SBP is appropriate given the very high inflationary pressures, which disproportionately impact the most vulnerable, Georgieva said adding a continued tight, proactive, and data-driven monetary policy is warranted going forward.
A market-determined exchange rate is also critical to absorbing external shocks, reducing external imbalances, and restoring growth, competitiveness, and buffers. Close oversight of the banking system and decisive action to address undercapitalized financial institutions would support financial stability, she added.
She said, accelerating structural reforms to build climate resilience, enhance safety nets, strengthen governance, including of state-owned enterprises, and improve the business environment by creating a level-playing-field for investment and trade were necessary for job creation and raising inclusive growth.
Meanwhile, talking to a private media, finance minister said things were moving in right direction and towards economic stabilization. He said, the incumbent government had to take many measures to bridge the trust deficit with IMF that was created due to wrong policies of the previous regime. He said, it would be our utmost preference to complete this programme for the second time in history.