Govt, IMF conclude staff-level negotiations on 7th, 8th reviews

Govt, IMF conclude staff-level negotiations on 7th, 8th reviews

Govt, IMF conclude staff-level negotiations on 7th, 8th reviews

Govt faces $4b financing gap despite IMF deal (credits:google)

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The Pakistani authorities and the International Monetary Fund (IMF) have concluded the staff-level negotiations on the policies to complete the combined 7th and 8th reviews under the Extended Fund Facility (EFF) programme. The agreement is subject to the approval by the IMF’s Executive Board.

The IMF highlighted that the high international prices, and a delayed policy action worsened Pakistan’s fiscal and external positions in FY22, which led to a significant exchange rate depreciation and eroded foreign exchange reserves.

The immediate priority is to stabilise the economy through the steadfast implementation of the recently approved budget for FY23, continued adherence to a market-determined exchange rate and a proactive and prudent monetary policy.

It is important to expand social safety to protect the most vulnerable and accelerate the structural reforms, including improvement in the performance of the state-owned enterprises (SOEs) and governance.

A statement issued by the IMF read its team led by Nathan Porter has finalised discussions for the combined seventh and eight reviews of Pakistan’s economic programme under the Extended Fund Facility.

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After concluding the discussions, Porter issued the following statement:

“The IMF team has reached a staff-level agreement with the Pakistani authorities for the conclusion of the combined seventh and eight reviews of the EFF-supported programme. The agreement is subject to the approval by the IMF’s Executive Board. Subject to Board approval, around $1.177 billion (SDR 894 million) will become available, bringing the total disbursements under the programme to around $4.2 billion.”

“Additionally, to support the programme implementation and meet the higher financing needs in FY23, as well as catalyse additional financing, the IMF Board will consider an extension of the EFF until the end of June 2023 and an augmentation of access by SDR 720 million that will bring the total access under the EFF to around $7 billion,” it said.

“Pakistan is at a challenging economic juncture. A difficult external environment combined with pro-cyclical domestic policies fuelled domestic demand to unsustainable levels. The resultant economic overheating led to large fiscal and external deficits in FY22, contributed to rising inflation and eroded forex reserves buffer.

To stabilise the economy and bring policy actions in line with the IMF-supported programme, while protecting the vulnerable, the policy priorities include steadfast implementation of the FY2023 budget.

The budget aims at reducing the government’s large borrowing needs by targeting an underlying primary surplus of 0.4 per cent of GDP, underpinned by the current spending restraint and broad revenue mobilisation efforts focused particularly on the higher income taxpayers.

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The development spending will be protected and the fiscal space will be created to expand the social support schemes. The provinces have agreed to support the federal government’s efforts to reach the fiscal targets, and the memoranda of understanding have been signed by each provincial government to this effect.

Catch-up in the power sector reforms. On the back of weak implementation of the previously agreed plan, the power sector circular debt flow is expected to grow significantly to around Rs850 billion in FY22, overshooting the programme targets, threatening the power sector’s viability and leading to frequent power outages.

The authorities are committed to resuming reforms, including critically the timely adjustment of the power tariff coupled with the delayed annual rebasing and quarterly adjustments, to improve the situation in the power sector and limit power outages.

Proactive monetary policy would guide inflation to more moderate levels. The headline inflation exceeded 20 per cent in June, hurting particularly the most vulnerable. In this regard, the recent monetary policy increase was necessary and appropriate and the monetary policy will need to be geared towards ensuring that inflation is brought steadily down to the medium-term objective of 5 to 7 per cent.

Importantly, to enhance the monetary policy transmission, the rates of the two major refinancing schemes EFS and LTFF, which have over recent months been raised by 700bps and 500bps, respectively, will continue to be linked to the policy rate.

Greater exchange rate flexibility will help cushion activity and rebuild reserves to more prudent levels.

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During FY22, the unconditional cash transfer (UCT) Kafalat Scheme reached nearly eight million households, with a permanent increase in the stipend to Rs14,000/family, while a one-off cash transfer of Rs2,000 (Sasta Fuel Sasta Diesel) was granted to around 8.6 million families to alleviate the impact of rampant inflation.

For FY23, the authorities have allocated Rs364 billion to the Benazir Income Support Programme (BISP) (up from Rs250 in FY22) to be able to bring nine million families into the BISP safety net and further extend the Sasta Fuel Sasta Diesel Scheme to additional non-BISP, lower-middle class beneficiaries.

To improve governance and mitigate corruption, the authorities are establishing a robust electronic asset declaration system and plan to undertake a comprehensive review of the anticorruption institutions, including the National Accountability Bureau to enhance their effectiveness in investigating and prosecuting corruption cases.

“Steadfast implementation of the outlined policies, underpinning the staff-level agreement for the combined seventh and eighth reviews, will help create the conditions for sustainable and more inclusive growth. The authorities should nonetheless stand ready to take any additional measures necessary to meet the programme objectives, given the elevated uncertainty in the global economy and financial markets.

“The IMF team thanks the Pakistani authorities, private sector and the development partners for fruitful discussions and cooperation during the discussions.”

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