The Pakistani government and the International Monetary Fund (IMF) have finished talking about the policies needed to finish the 7th and 8th reviews combined under the Extended Fund Facility (EFF) programme. The IMF’s Executive Board has to agree to the deal before it can go into effect.
The IMF pointed out that Pakistan’s fiscal and external positions got worse in FY22 because of high international prices and slow policy action. This led to a big drop in the exchange rate and a decrease in foreign exchange reserves.
The top priority right now is to get the economy back on track by sticking to the recently approved budget for FY23, keeping the exchange rate set by the market, and having a proactive and smart monetary policy.
It is important to improve the performance of state-owned enterprises (SOEs) and governance and to speed up structural reforms. Increasing social safety nets will help protect the most vulnerable people.
In a statement, the IMF said that the seventh and eighth reviews of Pakistan’s economic programme under the Extended Fund Facility had been completed by a team led by Nathan Porter.
After the talks were over, Porter made the following statement:
“The IMF staff has reached a deal with the Pakistani government to finish the seventh and eighth reviews of the EFF-supported programme at the same time. The IMF’s Executive Board has to agree to the deal before it can go into effect. If the Board agrees, about $1.177 billion (SDR 894 million) will become available. This will bring the total amount paid out under the programme to about $4.2 billion.
“Also, to help implement the programme and meet the higher financing needs in FY23, as well as to encourage more financing, the IMF Board will consider extending the EFF until the end of June 2023 and increasing access by SDR 720 million, which will bring the total access under the EFF to around $7 billion,” it said.
“Pakistan is in a tough spot economically. A tough external environment and pro-cyclical domestic policies drove up domestic demand to levels that couldn’t be kept up for long. The economy got too hot, which led to big budget and trade deficits in FY22, pushed up inflation, and ate away at the forex reserves buffer.
To stabilise the economy and bring policy actions in line with the programme backed by the IMF while protecting the most vulnerable, one of the policy priorities is to stick to the FY2023 budget.
The budget aims to reduce the government’s large borrowing needs by aiming for an underlying primary surplus of 0.4% of GDP. This is supported by current spending restraint and broad efforts to bring in more money, especially from people with higher incomes.
The money spent on development will be safe, and there will be enough money to expand social support programmes. The provinces have agreed to help the federal government achieve its fiscal goals, and each provincial government has signed a memorandum of understanding to this effect.
Reforms in the power sector need to catch up. Due to poor implementation of a previously agreed-upon plan, the power sector’s circular debt flow is expected to grow significantly to around Rs850 billion in FY22. This will mean that the programme targets will not be met, putting the power sector’s future at risk and leading to frequent power outages.
The government is committed to resuming reforms, especially the important adjustments to the power tariff and the delayed annual rebasing and quarterly adjustments, to improve the power sector and cut down on power outages.
If monetary policy was more proactive, inflation would go down to more manageable levels. In June, the headline rate of inflation was over 20%, which hurt the poor the most. In this way, the recent increase in monetary policy was necessary and right, and monetary policy will need to be geared toward making sure inflation stays between 5% and 7% over the medium term.
Importantly, to improve the transmission of monetary policy, the rates of the two major refinancing schemes, EFS and LTFF, which have been raised by 700bps and 500bps, respectively, over the past few months, will continue to be linked to the policy rate.
More flexibility in the exchange rate will help smooth out the economy and build up reserves to more sensible levels.
During FY22, the unconditional cash transfer (UCT) Kafalat Scheme reached nearly eight million households and raised the stipend to Rs14,000 per family. Around 8.6 million families also received a one-time cash transfer of Rs2,000 (Sasta Fuel, Sasta Diesel) to help with the effects of high inflation.
For FY23, the government has given Rs364 billion to the Benazir Income Support Programme (BISP). This is up from Rs250 billion in FY22. With this money, nine million families will be able to join the BISP safety net, and the Sasta Fuel Sasta Diesel Scheme will be able to help more lower-middle class people who are not in the BISP.
To improve governance and reduce corruption, the government is setting up a strong electronic system for declaring assets. They also plan to do a full review of anti-corruption institutions, such as the National Accountability Bureau, to make them better at investigating and prosecuting corruption cases.
“Steady implementation of the policies outlined in the staff-level agreement for the combined seventh and eighth reviews will help set the stage for growth that is sustainable and benefits more people. Given the increased uncertainty in the global economy and financial markets, the government should still be ready to take any extra steps needed to achieve the program’s goals.
“The IMF team thanks the Pakistani government, the private sector, and the development partners for productive talks and working together during the talks.”
