The Executive Board of the International Monetary Fund (IMF) on Monday relaunched Pakistan’s bailout program after a six-month hiatus, approving the $1.1 billion tranche and ending growing uncertainty over the past three days due to maneuvers by Pakistan Tehreek-e-Insaf (PTI).
The IMF said Pakistan’s economy will grow by around 3.5% but the average inflation rate is estimated at 19.9% - projections that were made before the floods destroyed large swathes of from the country.
The global lender also approved an increase in the size of the loan to $6.5 billion and extended its expiry date to June 2023. The original $6 billion program was set to end next month with the half of the undisbursed amount due to the PTI government’s failure to meet its commitments.
With this increase, the size of the program was increased to SDR 4.988 billion, equivalent to 245.6 percent of Pakistan’s quota.
“The Board’s decision allows for an immediate disbursement of SDR 894 million (about US$1.1 billion), bringing total purchases for budget support under the arrangement to SDR 3.9 billion. dollars,” according to a statement released by the IMF after the meeting.
Read: IMF shares letter of intent with government to seal loan deal
In its document, the IMF stressed the need to increase electricity prices and increase taxes on petroleum products, in accordance with the timetable agreed between Pakistan and the IMF.
“Efforts to strengthen the viability of the energy sector and reduce unsustainable losses, including meeting planned increases in fuel taxes and energy tariffs, are also critical,” the CEO said. IMF Deputy, Antoinette Sayeh.
She said containing current expenditures and mobilizing tax revenues are key to creating space for much-needed social protection and strengthening public debt sustainability.
The IMF also stressed that Pakistan should continue to follow the policy of high interest rates and market-determined exchange rates.
“Tightening monetary conditions through higher policy rates was a necessary step to contain inflation. Going forward, continued tight monetary policy would help reduce inflation and address external imbalances,” the Deputy Managing Director said.
She added that maintaining a proactive and data-driven monetary policy would support these goals. Preserving a market-determined exchange rate remains crucial to absorb external shocks, maintain competitiveness and replenish the international reserve, Antoinette said.
“Accelerating structural reforms to strengthen governance, including that of public enterprises, and improve the business environment would promote sustainable growth. Reforms that create fair and equitable conditions for business, investment and trade necessary for job creation and the development of a strong private sector are essential.
Some of the IMF’s board directors have expressed concern over political slippages and reversal of commitments that former finance minister Shaukat Tarin made on behalf of the Pakistani government, the sources said.
All the executive directors, except India which abstained in the vote, backed Pakistan’s request for the program to be revived and the loan approved, the sources added.
In February this year, the previous government assured the IMF board of its determination to stay the course, but barely a month later, the then government was laying the landmines by providing grants and introducing another tax amnesty program, which led to the breakdown of the Pakistan-IMF talks. in March.
The council also waived conditions that Pakistan could not meet during the period of January to June 2022. The PTI had tried to spoil the deal by maneuvering the governments of Punjab and Khyber-Pakhtunkhwa to renege on their commitments to the IMF program in retaliation for the case against Imran Khan under the Anti-Terrorism Act.
With the new approval, disbursement would increase to $3.9 billion, leaving a balance of $2.6 billion to be disbursed through June next year. The next IMF review will now take place in November to take stock of the performance of the Pakistani economy for the period July-September 2022.
The formal resumption of an IMF program is a big step forward in our efforts to get Pakistan’s economy back on track. This is the result of great teamwork, Prime Minister Shehbaz Sharif tweeted. He praised Miftah Ismail, the Ministry of Finance and other stakeholders for pulling the country out of the brink of default.
The PTI had left Pakistan’s economy in tatters, jeopardized its relations with international financial institutions and also severed ties with friendly countries and as a result Pakistan’s funding was almost snuffed out.
Read more: Pakistan eagerly awaits relief ahead of IMF meeting
The IMF’s Deputy Managing Director said Pakistan was in difficult economic times. “A challenging external environment combined with procyclical domestic policies has propelled domestic demand to unsustainable levels.”
The resulting economic overheating led to large fiscal and external deficits in FY22, contributed to rising inflation and eroded buffer reserves, she added.
“The program aims to address internal and external imbalances and ensure fiscal discipline and debt sustainability while protecting social spending, preserving monetary and financial stability, maintaining a market-determined exchange rate, and rebuilding external reserves,” the IMF said.
“Pakistan’s economy has been rocked by adverse external conditions due to fallout from the war in Ukraine and domestic challenges, including accommodative policies that have led to uneven and unbalanced growth, according to the IMF.
“The steady implementation of corrective policies and reforms remains essential to regain macroeconomic stability, address imbalances and lay the foundations for inclusive and sustainable growth.”
However, in another turn of events, the program targets, agreed in June, had once again become moot due to the devastating floods that inundated large swathes of Pakistan, necessitating major relief and rehabilitation efforts.
As per the pledge, Pakistan was to post a primary fiscal surplus of 153 billion rupees or 0.2% of GDP, but it now seemed impossible to achieve this due to huge possible fiscal slippages.
But in its paper, the IMF said the Pakistani “authorities” plan to achieve a small primary surplus in FY2023 was a welcome step to reduce fiscal and external pressures as well as boost confidence. Further efforts to reduce poverty and protect the most vulnerable by improving targeted transfers are important, especially in the current context of high inflation, he added.
The IMF statement was silent on the issue of flood disasters.
Finance Minister Miftah Ismail said the cost of relief was estimated at $1 billion, while the total damage exceeded $10 billion.
The sources said that the executive directors representing the UAE, Saudi Arabia and Qatar have also given assurances to provide additional financing to Pakistan as agreed between Islamabad and IMF staff.
The previous PTI government signed the 39-month Extended Funding Facility (EFF) in July 2019 aimed at avoiding foreign bond default. However, the country remained in turmoil and although it remained in the IMF program, its foreign exchange reserves remained low amid heightened external debt vulnerabilities.
Reserves were below $7.8 billion, which was not enough for policymakers to relax despite the bailout revival.
Due to a flawed design of the EFF program, unrealistic goals and a lack of political commitment to implement what former Prime Minister and PTI leader Imran Khan himself agreed to, the program is remained suspended for almost two out of three years.
Pakistan assured the IMF that it remained committed to resuming reforms and had already raised electricity tariffs and removed fuel subsidies in addition to reinstating taxes.
The Pakistani authorities informed board members of an 8% monetary tightening and setting the policy rate at 15%, which they said would help ease inflationary pressures. However, recent floods have severed food supply chains, which will cause inflation to rise sharply.
Under the condition of the IMF to improve the transmission of monetary policy, the rates of the two main refinancing programs – the export financing program and the long-term financing facility – were raised to 10%.