IMF Board approves $1 billion tranche for Pakistan

ISLAMABAD: The Executive Board of the International Monetary Fund (IMF) has approved around $1 billion tranche for Pakistan after concluding the 2021 Article IV consultation and the sixth review of the arrangement under the Extended Fund Facility.

The review allows the authorities to draw the equivalent of SDR 750 million (around $1 billion), bringing the total purchases for the budget support under the programme to SDR 2,144 million (around $3 billion, or 106 per cent of the quota).

The Executive Board also approved the authorities’ request for waivers of applicability and nonobservance of performance criteria.

The EFF was approved by the Executive Board on July 3, 2019 for SDR 4,268 million (around $6 billion at the time of approval, or 210 per cent of quota). The programme aims at supporting Pakistan’s policies to help the economic recovery from the Covid-19 pandemic, ensure macroeconomic and debt sustainability and advance structural reforms to lay the foundations for strong, job-rich, and long-lasting growth that benefits all Pakistanis.

Pakistan entered the Covid-19 pandemic with strengthened buffers; following the approved EFF programme.

A strong economic recovery has gained hold since summer 2020, benefiting from the authorities’ multifaceted policy response to the unprecedented shock. At the same time, external pressures also started to emerge in 2021, including a widening current account deficit and depreciation pressures on the exchange rate, which also reinforced domestic price pressures.

The recent policy adjustment was appropriate to address these challenges and maintain economic stability. The economy is set to continue recovering in FY22, with real GDP growth projected at 4 per cent, while inflation is expected to pick up this year before gradually slowing down.

Continued commitment to a market-determined exchange rate and a prudent macroeconomic policy mix will help reduce the current account deficit, and ease the external pressures over the medium-term.

However, Pakistan remains vulnerable to possible flare-ups of the pandemic, tighter international financial conditions, a rise in geopolitical tensions, as well as delayed implementation of structural reforms. Strengthening the medium-term outlook hinges on ambitious efforts to remove structural impediments and facilitate the structural transformation of the economy.

To this end, increased focus is needed on measures to strengthen economic productivity, investment, and private sector development, as well as to address the challenges posed by climate change.

Following the Executive Board’s discussion on Pakistan, Antoinette Sayeh, deputy managing director and acting chair, issued the following statement:

“The Pakistani economy has continued to recover, despite the challenges from the Covid-19 pandemic, but imbalances have widened and risks remain elevated. The authorities’ recent policy efforts to strengthen economic resilience are welcomed. Timely and consistent implementation of policies and reforms remain essential to lay the ground for stronger and more sustainable growth.”

“The authorities have taken important measures to strengthen fiscal policy and put public finances on a sound footing. Along with careful spending management, the revenue mobilisation will help create space for the much-needed spending on infrastructure and social protection, while improving debt sustainability. Maintaining the momentum on the reform of personal income taxation and harmonisation of general sales tax is essential.”

The statement said: “Broader reforms in tax administration and public financial and debt management are expected to further improve the fiscal framework. The adoption of amendments to the central bank act is a welcome step towards strengthening its independence to pursue its mandates of price and financial stability. The recent monetary policy tightening was necessary and continued proactive, data-driven monetary policy would help anchor inflation,” it added.

“Closer oversight of financial institutions to ensure they remain well capitalised would help maintain the financial stability. Preserving a market-determined exchange rate is crucial to absorb external shocks, maintain competitiveness, and rebuild reserves. The authorities are committed to removing the existing exchange restrictions and multiple currency practices when BOP [balance of payment] conditions stabilise.”

“Strong efforts to advance electricity sector reforms are needed to restore the sector’s financial viability and address adverse spillovers on the budget, financial sector, and real economy. The IFI-supported Circular Debt Management Plan (CDMP) will help guide the planned management improvements, cost reductions, alignment of tariffs with cost recovery levels, and better targeting of subsidies to the most vulnerable,” the statement said.

It also said: “Ambitious steps to remove structural impediments and facilitate structural transformation remain essential to boost growth and job creation and improve social outcomes. The authorities are focused on state-owned enterprises reform, fostering the business environment and reducing corruption, promoting financial inclusion and addressing the challenges being posed by climate change.”