The Executive Board of the International Monetary Fund (IMF) on Monday completed the combined seventh and eighth reviews of the Extended Arrangement under the Extended Fund Facility (EFF) for Pakistan.
The Board’s decision allows for an immediate disbursement of SDR 894 million (about $1.1 billion), bringing total purchases for budget support under the arrangement to about $3.9 billion.
The EFF was approved by the Executive Board on July 3, 2019, for SDR 4,268 million (about $6 billion at the time of approval, or 210 percent of quota).
In order to support program implementation and meet the higher financing needs in FY23, as well as catalyze additional financing, the IMF Board approved an extension of the EFF until end-June 2023, rephasing and augmentation of access by SDR 720 million that will bring the total access under the EFF to about $6.5 billion.
The Executive Board also approved Pakistan’s request for waivers of nonobservance of performance criteria.
In a statement the IMF said that Pakistan is at a challenging economic juncture. A difficult external environment combined with procyclical domestic policies fueled domestic demand to unsustainable levels.
The resultant economic overheating led to large fiscal and external deficits in FY22, contributed to rising inflation, and eroded reserve buffers. The program seeks to address domestic and external imbalances, and ensure fiscal discipline and debt sustainability while protecting social spending, safeguarding monetary and financial stability, and maintaining a market-determined exchange rate and rebuilding external buffers, it added.
Following the Board’s discussion, Antoinette Sayeh, Deputy Managing Director and Acting Chair, in statement said, “Pakistan’s economy has been buffeted by adverse external conditions, due to spillovers from the war in Ukraine, and domestic challenges, including from accommodative policies that resulted in uneven and unbalanced growth. Steadfast implementation of corrective policies and reforms remain essential to regain macroeconomic stability, address imbalances and lay the foundation for inclusive and sustainable growth.”
She said, “The authorities’ plan to achieve a small primary surplus in FY2023 is a welcome step to reduce fiscal and external pressures and build confidence. Containing current spending and mobilizing tax revenues are critical to create space for much-needed social protection and strengthen public debt sustainability. Efforts to strengthen the viability of the energy sector and reduce unsustainable losses, including by adhering to the scheduled increases in fuel levies and energy tariffs, are also essential. Further efforts to reduce poverty and protect the most vulnerable by enhancing targeted transfers are important, especially in the current high-inflation environment.”
“The tightening of monetary conditions through higher policy rates was a necessary step to contain inflation. Going forward, continued tight monetary policy would help to reduce inflation and help address external imbalances. Maintaining proactive and data-driven monetary policy would support these objectives. At the same time, close oversight of the banking system and decisive action to address undercapitalized financial institutions would help to support financial stability. Preserving a market-determined exchange rate remains crucial to absorb external shocks, maintain competitiveness, and rebuild international reserves,” she added.
Sayeh said “Accelerating structural reforms to strengthen governance, including of state-owned enterprises, and improve the business environment would support sustainable growth. Reforms that create a fair-and-level playing field for business, investment, and trade necessary for job creation and the development of a strong private sector are essential.”
The IMF had reached a staff-level agreement with Pakistan in July paving the way for the disbursement of $1.17 billion, subject to approval by the IMF’s Executive Board.