Pakistan and the International Monetary Fund (IMF) on Friday signed a long-awaited Staff Level Agreement (SLA) on a $3 billion “Standby Arrangement” (SBA), the global lender announced. .
“I am pleased to announce that the IMF team has signed a nine-month Standby Arrangement (SBA) with the Pakistani authorities in the amount of SDR 2,250 million (about $3 billion or 111 percent) at the staff level. agreement. IMF quota),” Nathan Porter, the IMF mission chief in Pakistan, said in a statement.
“The new SBA builds on the authorities’ efforts under Pakistan’s 2019 EFF-supported program that ends at the end of June. The agreement is subject to approval by the IMF’s Executive Board, which is expected in July. This request will be considered by the middle.
Funding of $3 billion over nine months is more than expected for Pakistan. The country was awaiting the release of the remaining $2.5 billion of the $6.5 billion bailout package scheduled for 2019, which expires on Friday (today).
“Alhamdulillah,” Finance Minister Ishaq Dar tweeted after the deal was announced early Friday morning. Dar had said on Thursday that the deal was expected any time soon.
AlhamdoLilah!https://t.co/Mv8N4bqZit
— Ishaq Dar (@MIshaqDar50) June 30, 2023
With sky-high inflation and foreign exchange reserves barely enough to cover a month of controlled imports, Pakistan is facing its worst economic crisis in decades, which analysts say is due to the absence of an IMF deal. I can default to default.
The deal comes after an eight-month delay and offers some respite to Pakistan, which is grappling with a severe balance of payments crisis and dwindling foreign exchange reserves.
In a statement issued today, the IMF said that since the completion of the combined seventh and eighth reviews under the 2019 EFF in August 2022, Pakistan’s economy has faced several external shocks such as the devastating floods in 2022 that cost millions of lives. The impact on the lives of Pakistanis and the rise in international commodity prices as a result of Russia’s war in Ukraine.
As a result of these shocks, as well as some policy mistakes—including disruptions in the functioning of the forex market—economic growth has stalled. Inflation, including essential items, is high. Despite the authorities’ efforts to reduce imports and trade deficits, reserves have fallen to very low levels, the IMF statement said.
Additionally, he said liquidity conditions in the power sector are also acute, further increasing revolving credit and frequent load shedding.
The global lender said the new SBA will support Pakistan’s urgent efforts to stabilize the economy from recent external shocks, maintain macroeconomic stability and provide a framework for financing from multilateral and bilateral partners. will do
“The new SBA will also create space for social and development spending by implementing prudent spending and improving domestic revenue to help meet the needs of the Pakistani people.”
The IMF added that a stable policy implementation is key for Pakistan to overcome the current challenges, including greater fiscal discipline, a market-based exchange rate to absorb external pressures, and Further progress on reforms, particularly in the energy sector, to promote environmental resilience. , and to help improve the business environment.
Painful reforms
Since the IMF team visited Pakistan earlier this year, the federal government has taken several policy steps, including last week’s revised budget for 2023-24 to meet lender demands.
Other adjustments called for by the IMF before the agreement was reached include replacing subsidies in the power and export sectors, increasing energy and fuel prices, raising the key policy rate to 22 percent, a market-based currency. Includes exchange rate and external financing arrangements.
It also allowed Pakistan to raise more than 385 billion rupees ($1.34 billion) in new taxes through the 2022-23 supplementary budget and the 2023-24 revised budget.
The painful adjustment has already fueled inflation to an all-time high of 38 percent year-on-year in May.
“The FY24 budget projects a primary surplus of around 0.4 percent of GDP by taking steps to broaden the tax base and increase tax collection from low-tax sectors,” Porter said. That said, it also ensured space for strengthening support for the vulnerable. Cash Handout Program.
He said it will be important that the budget is executed as planned, and that the authorities resist the pressure of unbudgeted spending or tax breaks in the coming period.
“This new program is much better than our expectations,” said Mohammad Sohail of Topline Securities, adding that there was a lot of uncertainty over what would happen after June 2023 as there was a new government coming in.
“This $3 billion and nine months of funding will certainly help restore some investor confidence,” he said.
‘Rupee expected to appreciate against dollar’
Renowned businessman Arif Habib termed the IMF agreement as a positive development and said that it will definitely increase business confidence in the country.
Talking to JEE News, he said that bilateral and multilateral donors will also start deals with Pakistan after the IMF agreement.
He added that the confidence [in the economy] of international investors, trade markets and non-resident Pakistanis will also improve.
Moreover, Habib said that the reforms set by the IMF would ensure stability in the country and bring down inflation.
He also expected that the value of the rupee against the US dollar is also expected to increase.
He added that a 5 to 7 percent appreciation of the rupee against the dollar (i.e. 15 to 20 rupees) is expected.
($1 = 286.1500 Pakistani Rupees)
