A “staff-level pact” on a $ 3 billion “stand-by arrangement” has been agreed between Pakistan and the International Monetary Fund (IMF), according to a report from Dawn on Friday, June 30.
The agreement, which must be approved by the IMF board by mid-July, provides Pakistan with a brief reprieve from its severe balance of payments crisis and declining foreign exchange reserves.
Prime Minister Shehbaz Sharif stated that the agreement will “put the country on the path of sustainable economic growth” and that the government has enthusiastically welcomed it.
The authorities’ urgent efforts to stabilise the economy would be supported by the new Stand-By Arrangement (SBA), The IMF stated in a press release (available on imf.org) dated June 29 that it “[and] will also create space for social and development spending through improved domestic revenue mobilisation and careful spending execution.”
The transaction is not covered by Pakistan’s Extended Fund Facility (EFF) programme, which was set to expire on Friday (June 30) and was entered into by the nation in 2019. The SBA “builds on” the EFF’s initiatives, according to a press release from the IMF.
Over the course of nine months, the SBA will provide Pakistan with $3 billion. A $2.5 billion stand-by arrangement was reportedly being considered by Pakistan and the IMF, according to a story in Dawn on June 28.
However, the agreement has certain significant conditions that had previously been a source of contention in the talks between the IMF and Pakistan. The IMF stressed the need for “the [Pakistani] authorities to] resist pressures for unbudgeted spending or tax exemptions in the period ahead” in a news release.
The IMF has made reference to Pakistan’s electricity industry. Pakistani consumers have previously received significant electricity subsidies, but these will expire with this agreement.
According to a Reuters article, the IMF has urged for a “timely” rebasing of tariffs to guarantee that costs are repaid, which will inevitably lead to price increases for consumers amid already extremely high inflation.
According to Reuters, Pakistan’s central bank will also need to lift import limitations that had been put in place to manage external payments as a result of rapidly declining foreign exchange reserves. According to Reuters, Pakistan’s foreign exchange reserves, which are currently only around $ 3.5 million, hardly cover a month’s worth of controlled imports.
The State Bank of Pakistan (SBP) has withdrawn its advice on prioritising imports and has pledged to support full market determination of the exchange rate, according to the IMF.
Various regulations and exchange rate procedures are now in place in Pakistan’s various marketplaces. Even though the Pakistani Rupee has fallen to historic lows in recent weeks, the IMF has ordered that these be scrapped in favour of an exchange rate that is entirely set by the market.
The agreement also calls for the central bank to be “proactive” in reducing inflation, which “particularly affects the most vulnerable,” and is therefore likely to result in additional rate increases.
The bank had suspended its rate hike process earlier this month, only to impose a 100 basis point off-cycle hike days later at the IMF’s request. According to Reuters, the policy rate is currently 22%.
Finally, the Pakistani government has promised that it will either privatise or implement “stronger governance” to deal with government entities that are operating at a loss.
The agreement highlighted that Pakistan will need to continue mobilising multilateral and bilateral financial support despite the larger than anticipated IMF bailout, according to Reuters.
In the financial year 2024, which begins on Saturday, July 1, and ends on June 30, 2024, Pakistan will need $22 billion to cover its external payment obligations, including servicing foreign debt.
Now that an IMF agreement has been achieved, Pakistan has received a $3 billion pledge of support from the UAE and Saudi Arabia. The biggest creditor of Pakistan, China, is also anticipated to assist it with debt rollovers.
IMF: “The authorities’ efforts have focused on obtaining new financing and securing the rollover of debt falling due, in addition to the generous climate-related pledges from the January 2023 Conference on Climate Resilient Pakistan held in Geneva,” adding that the new SBA will serve as a “policy anchor” to facilitate such financing.
Although Pakistani markets were closed on Friday, the Financial Times claimed that several analysts had welcomed the news.
According to Mohammad Sohail, chief executive of Topline Securities brokerage in Karachi, “this new programme is far better than our expectations,” adding that the money will “definitely help restore some investor confidence.”
According to Gareth Leather, senior economist for Asia at Capital Economics in London, “the agreement of a loan deal between Pakistan and the IMF should put the economy back on a more secure footing and limit the biggest downside risks.”
But he continued, “Past experience suggests that the government will struggle to stick to the tough spending promises it has agreed to.”
The biggest question mark surrounding the deal is this. The IMF has placed strict requirements on Pakistan, which will call for a level of budgetary restraint never before seen in the nation. The government will be subject to tremendous political pressure because a general election is imminent.
Even while Shehbaz Sharif is “committed to a deal,” Leather told Reuters, “he could be out of office by the end of the year and replaced by someone less committed to the agreement”.
A general election must be held within 60 days of the present National Assembly of Pakistan’s term ending on August 12 in accordance with the rules. Accordingly, if the law is upheld, Pakistan would have general elections by the middle of October, making Sharif’s position as prime minister questionable.
The compromise “should be seen as nothing more than a breather for a few weeks,” PTI leader Hammad Azhar wrote on Twitter, adding that “before the PDM propaganda team paints this as a solution to all problems, it needs to be examined carefully.”