IMF Finally Reaches Staff-level Agreement with Pakistan on a $3 billion Stand-By Arrangement

In a major development, the International Monetary Fund (IMF) announced reaching a staff-level agreement (SLA) with Pakistan on a $3 billion “stand-by arrangement”.

The IMF staff and the Pakistani authorities have reached a staff-level agreement on policies to be supported by a Stand-By Arrangement (SBA). The staff-level agreement is subject to approval by the IMF Executive Board, with its consideration expected by mid-July, said the statement issued by the IMF.

An International Monetary Fund (IMF) staff team led by Mr. Nathan Porter held in-person and virtual meetings with the Pakistani Authorities to discuss a new financing engagement for Pakistan under an IMF Stand-by Arrangement (SBA).

“I am pleased to announce that the IMF team has reached a staff-level agreement with the Pakistani authorities on a nine-month Stand-by Arrangement (SBA) in the amount of SDR 2,250 million (about $3 billion or 111 percent of Pakistan’s IMF quota). The new SBA builds on the authorities’ efforts under Pakistan’s 2019 EFF-supported program which expires end-June. This agreement is subject to approval by the IMF’s Executive Board, which is expected to consider this request by mid-July,” Nathan Porter, IMF’s Mission Chief to Pakistan, said in a statement.

Since the completion of the combined seventh and eight reviews under the 2019 Extended Fund Facility (EFF) in August 2022, the economy has faced several external shocks such as the catastrophic floods in 2022 that impacted the lives of millions of Pakistanis and an international commodity price spike in the wake of Russia’s war in Ukraine. As a result of these shocks as well as some policy missteps—including shortages from constraints on the functioning of the FX market—economic growth has stalled. Inflation, including for essential items, is very high. Despite the authorities’ efforts to reduce imports and the trade deficit, reserves have declined to very low levels. Liquidity conditions in the power sector also remain acute, with further buildup of arrears (circular debt) and frequent loadshedding.

“The new SBA will support the authorities’ immediate efforts to stabilize the economy from recent external shocks, preserve macroeconomic stability and provide a framework for financing from multilateral and bilateral partners,” added the statement.

Pakistan was anticipating the release of the remaining $2.5 billion from a $6.5 billion bailout package that was agreed upon in 2019. However, the package expired on Friday, as the ninth review could not be completed.

Muhammed Sohail, CEO Topline Securities told ProPakistani,

“This new program is far better than our expectations. There were a lot of uncertainties on what will happen after June 2023 as there will be a new government coming to power. Now, this funding of $3 billion and for 9 months will definitely help restore some investor confidence.”

After an eight-month delay, the agreement provides a much-needed respite to Pakistan’s economy, which has been grappling with depleting foreign exchange reserves and a severe balance of payments crisis.

Prime Minister Shehbaz Sharif praised the signing of the agreement with the IMF, expressing confidence that the deal would assist Pakistan in attaining economic stability.

“Alhamdulillah, I am pleased to announce that Pakistan has reached a Staff-Level Agreement with the IMF on a nine-month US$3 billion Stand-By Arrangement. This Arrangement will help strengthen Pakistan’s foreign exchange reserves, enable Pakistan to achieve economic stability, and put the country on the path of sustainable economic growth, Insha’Allah,” said PM Shehbaz Sharif in a tweet.

Alhamdulillah, I am pleased to announce that Pakistan has reached a Staff-Level Agreement with the IMF on a nine-month US$3 billion Stand-By Arrangement. This Arrangement will help strengthen Pakistan’s foreign exchange reserves, enable Pakistan to achieve economic stability, and…

— Shehbaz Sharif (@CMShehbaz) June 30, 2023

 

The new arrangement will also create space for social and development spending through improved domestic revenue mobilization and careful spending execution to help address the needs of the Pakistani people, said the IMF.

Steadfast policy implementation is key for Pakistan to overcome its current challenges, including through greater fiscal discipline, a market-determined exchange rate to absorb external pressures, and further progress on reforms, particularly in the energy sector, to promote climate resilience, and to help improve the business climate, it added.

Given these challenges, the new SBA would provide a policy anchor and a framework for financial support from multilateral and bilateral partners in the period ahead. The authorities have already taken a series of important actions ahead of the new program:

• Parliament has approved FY24 budget in line with the goals of supporting fiscal sustainability and mobilizing revenue, which will enable greater social and development spending. The FY24 budget advances a primary surplus of around 0.4 percent of GDP by taking some steps to broaden the tax base and increase tax collection from undertaxed sectors, as well as improving progressivity, while ensuring space to strengthen support for the vulnerable through the BISP program. It will be important that the budget is executed as planned, and the authorities resist pressures for unbudgeted spending or tax exemptions in the period ahead.
• The SBP has withdrawn the guidance on import prioritization and is committed to ensuring the full market determination of the exchange rate. Going forward, the SBP should remain proactive to reduce inflation, which particularly affects the most vulnerable, and maintain a foreign exchange framework free of restrictions on payments and transfers for current international transactions and multiple currency practices.
• Continued efforts to mobilize financial support from multilateral institutions and bilateral partners.

In addition to generous climate-related pledges from the January 2023 Conference on Climate Resilient Pakistan held in Geneva, the authorities’ efforts have focused on obtaining new financing and securing the rollover of debt falling due.

This will support near-term policy efforts and replenish gross reserves, with the aim of bringing them to more comfortable levels, added the IMF.

“The authorities’ program also includes ongoing efforts to strengthen the viability of the energy sector (including through a timely FY24 annual rebasing), improving SOE governance, and strengthening the public investment management framework, including for projects needed to build resilience to climate change,” said the statement.

The full and timely implementation of the program will be critical for its success in light of the difficult challenges.

“The IMF team would like to thank the authorities for the open and constructive dialogue and collaboration that have brought us to today’s successful conclusion,” said the IMF.