IMF Says Pakistan Would Receive a $1.17 Billion Tranche

By IndraStra Global News Team

On July 14, 2022, Gerry Rice of the International Monetary Fund (IMF)'s Communication Department stated that the financial watchdog had finally reached a staff-level agreement with Pakistan on a combined 7th and 8th reviews of Pakistan's Extended Fund Facility (EFF). 

In his own words, " ...it's an agreement on a combined seventh and eighth review of the program that we do have with Pakistan that will translate into about 1.17 million being disbursed to Pakistan. Pretty much, straight away, and a reminder that this brings total disbursements from the IMF to Pakistan under the ongoing program to well over $4 billion, about $4.2 billion. And we're hoping this will help to stabilize the economy and amongst other things help expand the social safety net to protect the most vulnerable; accelerate structural reforms; and stabilize the macroeconomic, help stabilize the macroeconomic situation in Pakistan."

After the IMF announced on July 14 that its staff had agreed to extend the rescue package and boost its amount to $7 billion, Pakistan was able to avert the persistent risk of defaulting on its debts. In elaborated words, it means — In order to support the implementation of the program and meet the increased demands for funding in FY23, the IMF Board will consider extending the EFF until June 2023 instead of September 2022. In addition, the board will deliberate whether or not to increase the size of the EFF program to US$7 billion via augmentation of access by SDR 720 million, an increase from the US$6 billion that was previously suggested. 

To recall, the 7th and 8th reviews of Pakistan's EFF program were originally planned to take place in March and June of 2022, respectively. However, Pakistan was unable to reach a staff-level agreement with the IMF due to a delay in proposed policy actions such as the removal of petroleum subsidies, the imposition of Petroleum Levy (PDL), energy tariff rationalization, and increased tax measures. Despite this, the international community maintained its pressure on Islamabad, urging the country to stick to its original plan.

In a press release, the IMF outlined five key policy priorities to stabilize Pakistan's economy and align policy actions with the IMF-supported program: 

1) Steadfast implementation of FY23 budget;

The goal of the newly enacted budget is to reduce the large amount of money the government needs to borrow by aiming for an underlying primary surplus of 0.4 percent of GDP. Current spending restraints support this goal, and broad revenue mobilization efforts mainly focused on higher-income taxpayers. "Development Spending" will be protected, and the "Fiscal Space" will be provided to allow for the expansion of social support programs. In addition, each provincial government has signed a Memorandum of Understanding pledging its assistance with the federal government's efforts to meet the fiscal targets. As a result of this agreement, the federal government will receive much-required support from the provinces.

 

2) Catch up in power sector reforms; 

As a result of poor implementation of the plan that had been previously agreed upon, it is anticipated that the flow of circular debt (CD) in the power sector will significantly increase to approximately PRs 850 billion in FY22. This will result in an overshoot of program targets, threatening the power sector's viability and causing frequent power outages. Therefore, the authorities have stated that they are dedicated to resuming reforms, the most important of which is the timely adjustment of power tariff, which will account for the delayed annual rebasing and the quarterly adjustments. This will allow them to improve the power sector situation and reduce the load shedding that occurs.

3) Proactive monetary policy to guide inflation to more moderate levels; 

In June, headline inflation was over 20 percent, which was particularly detrimental to those already struggling. In this light, the most recent tightening of monetary policy was not only warranted but also essential. From now on, monetary policy will need to ensure that inflation is steadily down to the target range of 5–7 percent for the medium term. It is important to note that to improve the transmission of monetary policy, the interest rates of the two most essential refinancing schemes, EFS and LTFF, will continue to be linked to the policy rate. These rates have increased over the past few months by 700 bps and 500 bps, respectively. A greater exchange rate flexibility will assist in dampening activity and rebuilding reserves to more reasonable levels.

4) Reducing poverty and strengthening social safety; and 

During FY22, the unconditional cash transfer (UCT) Kafalat scheme reached nearly 8 million households, with a permanent increase in the stipend to PRs 14,000 per family. At the same time, a one-time cash transfer of PRs 2,000 (Sasta Fuel Sasta Diesel, SFSD) was granted to approximately 8.6 million families to mitigate the effects of rampant inflation. To bring 9 million families into the Benazir Income Support Programme (BISP) safety net and extend the SFSD scheme to additional non-BISP, lower-middle class beneficiaries, the authorities have allocated PRs 364 billion to BISP for FY23, which is an increase from the PRs 250 billion that was given in FY22. This number is up from the PRs 250 billion allocated in FY22.

5) Strengthening governance.

The authorities have plans to conduct a thorough review of the anti-corruption institutions, including the National Accountability Bureau (NBA), to improve the effectiveness of those institutions when investigating and prosecuting corruption. In addition, as part of their efforts to improve governance and reduce corrupt activities, the authorities are currently building a reliable electronic asset declaration system.

Kindly note, that Pakistan joined the IMF's EFF program in 2019, but to date, just half of the money has been disbursed because Islamabad has struggled to reach its goals.

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