After failing to accomplish the Ninth Review under the Extended Fund Facility (EFF), Pakistan and the IMF struck a fresh short-term bailout package of $3 billion for Stand-by Arrangement (SBA) with the commitment to hike electricity and gas tariff as well as securing external financing.
Nathan Porter, the IMF’s Mission Chief to Pakistan, however, made it clear in a statement that steadfast policy implementation was the key for Pakistan to overcome its current challenges. The statement stressed greater fiscal discipline, a market determined exchange rate to absorb external pressures, and further progress on reforms, particularly in the energy sector, to promote climate resilience and to help improve the business climate.
“I am pleased to announce that the IMF team has reached a staff-level agreement with the Pakistani authorities on a nine-month Stand-by Arrangement (SBA) in the amount of SDR2,250 million (about $3 billion or 111 per cent of Pakistan’s IMF quota),” IMF’s Mission Chief to Pakistan said while providing details.
“The new SBA builds on the authorities’ efforts under Pakistan’s 2019 EFF-supported programme which expires end-June. This agreement is subject to approval by the IMF’s Executive Board, which is expected to consider this request by mid-July,” the statement added.
The EFF programme ended with failure on June 30, 2023; however, both the IMF and Pakistan signed the Staff Level Agreement for SBA programme for which a Letter of Intent (LoI) was signed by the finance minister and State Bank of Pakistan (SBP) governor and dispatched to Washington, DC, for consideration by Fund’s Executive Board for granting approval to $1 billion front loaded tranche in its scheduled meeting to be held on July 12, 2023. The $3 billion funding, spread over nine months, is higher than expected for Pakistan. The country was awaiting the release of the remaining $2.5 billion from a $6.5 billion bailout package agreed in 2019, which expired on June 30.
In the statement issued here, the IMF said since the completion of the combined seventh and eight reviews under the 2019 EFF in August 2022, Pakistan’s economy faced several external shocks such as the catastrophic floods in 2022 that impacted the lives of millions of Pakistanis and an international commodity price spike in the wake of Russia’s war in Ukraine. As a result of these shocks as well as some policy missteps — including shortages from constraints on the functioning of the forex market — economic growth has stalled. “Inflation, including for essential items, is very high. Despite the authorities’ efforts to reduce imports and the trade deficit, reserves have declined to very low levels,” the IMF’s statement said.
Moreover, it said liquidity conditions in the power sector also remain acute, with further buildup of circular debt and frequent loadshedding. The global lender said the new SBA would support Pakistan’s immediate efforts to stabilise the economy from recent external shocks, preserve macroeconomic stability and provide a framework for financing from multilateral and bilateral partners. “The new SBA will also create space for social and development spending through improved domestic revenue mobilisation and careful spending execution to help address the needs of the Pakistani people,” the statement added. This short-term SBA programme would have to be implemented by three different governments, expected to rule the country in the next nine-month period, including the incumbent PDM-led government, then a caretaker government assuming reins of power after August 12, 2023, and then the upcoming elected government after winning the general election.
The IMF asked Islamabad to hike the power tariff by Rs8.25 per unit in base line tariff. The National Electric Power Regulatory Authority (NEPRA) had so far heard petitions of certain DISCOs, and three DISCOs’ petitions would be heard after the Eid holidays.
NEPRA’s determination would ascertain the exact hike in power tariff. About the gas sector, the Oil and Gas Regulatory Authority (OGRA) has given its determination of 45 to 50 per cent hike in tariff, but it is yet to seen to what extent the government would move ahead. This scribe sent a message to Minister of State for Petroleum Musadik Malik on hiking the gas tariff as determined by OGRA but got no response from him.
Meanwhile, Prime Minister Shehbaz Sharif hailed the agreement with the IMF, saying the deal would help Pakistan achieve economic stability.
“Alhamdulillah, I am pleased to announce that Pakistan has reached a staff-level agreement with the IMF on a nine-month US$3 billion stand-by arrangement. This arrangement will help strengthen Pakistan’s foreign exchange reserves, enable Pakistan to achieve economic stability and put the country on the path of sustainable economic growth, Insha’Allah,” he wrote on his official Twitter handle.
The PM appreciated the efforts and hard work of Finance Minister Ishaq Dar and his team at the Ministry of Finance for striking a deal with the IMF.
“I would also like to thank MD IMF Kristalina Georgieva and her team at the IMF for their cooperation and collaboration, especially during the course of last week,” he added.
Separately, addressing a press conference at the Governor’s House, Lahore, on Friday, Shehbaz admitted that the agreement with the IMF would not reduce inflation overnight and denying inflation would be self-deception. He said the IMF programme was sought to stabilise the national economy.
He said Pakistan was saved from default, as the meeting with the IMF managing distractor in Paris proved to be a turning point. There is a 9-month programme of $3 billion from the IMF and it would be approved by the Board’s meeting.
The PM said nations would not develop with loans, but the government was forced to take loans. People should pray that the current loan programme with the IMF proves to be the last one. “God willing, we don’t have to go to the IMF again. There will be hardships, but those hardships would be faced by the elite,” he said. The PM said had the country defaulted, he and Nawaz Sharif would never have been able to forgive themselves.
Shehbaz said China saved Pakistan from default during the last three months, while $2 billion was promised by Saudi Arabia and $1 billion by the UAE through collective efforts.
The PM said the Sri Lankan president also talked to the IMF MD and asked him to save Pakistan from default. He said the Sri Lankans did not want their country’s situation to be repeated here, but the ‘friendly’ enemies in Pakistan kept saying and praying that Pakistan should become another Sri Lanka.
Meanwhile, Finance Minister Ishaq Dar tweeted “Alhumdulillah” after the deal was announced early on Friday.
Speaking to the media after the PM, Ishaq Dar said that in the last 10 days, they worked on convincing the IMF, adding that Pakistan wanted the SBA to be of nine-months.
“The IMF agreement has been signed and PM took a lot of interest in it,” said Dar. He added that it was his belief that Pakistan was not a country that will ever default.
“Even if IMF was not there, we had a second plan. We have to recover from the destruction that took place, and crying will not help,” added the finance minister. He said maintaining the country’s integrity and respect in the comity of nations had been the top priority of the incumbent government. He vowed to make Pakistan the 24th economy of the world once again.
The minister said Pakistan must live within its means. “We spent more than our resources in the last five years. Like democracy, fiscal discipline is also necessary,” said Dar.
