The International Monetary Fund (IMF)’s Executive Board on Wednesday approved a 9-month $3 billion Stand-By Arrangement (SBA) for Pakistan, paving the way for the country to shore up its declining foreign exchange reserves.
“Today, the Executive Board of the International Monetary Fund (IMF) approved a 9-month Stand-By Arrangement (SBA) for Pakistan for an amount of SDR2,250 million (about $3 billion, or 111 percent of quota) to support the authorities’ economic stabilization program,” read a statement issued by the global lender, noting it came at a “challenging economic juncture.” It said a difficult external environment, devastating floods, and policy missteps had resulted in large fiscal and external deficits, rising inflation, and declining foreign exchange reserves.
The SBA, it said, was aimed at providing a policy anchor to address domestic and external imbalances and a framework for financial support from multilateral and bilateral partners. The nine-month program, it continued, would focus on implementation of the FY24 budget to facilitate fiscal adjustment and ensure debt sustainability, while protecting critical social spending. It would also seek a return to a market-determined exchange rate; an appropriately tight monetary policy aimed at reducing inflation; and further progress on structural reforms.
Following the Executive Board’s approval, read the statement, about $1.2 billion of the $3 billion program would be immediately disbursed, with the remainder to be provided subject to two quarterly reviews. “Pakistan’s economy was hit hard by significant shocks last year, notably the spillovers from the severe impacts of floods, the large volatility in commodity prices, and the tightening of external and domestic financing conditions,” said IMF Managing Director Kristalina Georgieva.
“These factors, together with uneven policy implementation under the EFF, combined to halt the post-pandemic recovery, sharply increase inflation, and significantly depleted internal and external buffers. The authorities’ new Stand-By Arrangement, implemented faithfully, offers Pakistan an opportunity to regain macroeconomic stability and address these imbalances through consistent policy implementation,” she said, hailing the FY24 budget as a “welcome step” toward fiscal stabilization.
“The anticipated improvement in tax revenues is critical to strengthen public finances, and to eventually create the fiscal space needed to bolster social and development spending. Maintaining discipline over non-critical primary expenditure will be essential to support budget execution within the envisaged envelope,” she said. “In parallel, the authorities urgently need to strengthen energy sector viability by aligning tariffs with costs, reforming the sectors cost base, and better-targeting power subsidies. Looking beyond this fiscal year, enhanced efforts to expand the tax base and improve public financial management, including in the delivery of quality infrastructure, are needed and increase progressivity and efficiency,” she added.
“The recent increase in the policy rate by the SBP [State Bank of Pakistan] is appropriate given the very high inflationary pressures, which disproportionately impact the most vulnerable. A continued tight, proactive, and data-driven monetary policy is warranted going forward. A market-determined exchange rate is also critical to absorbing external shocks, reducing external imbalances, and restoring growth, competitiveness, and buffers. Close oversight of the banking system and decisive action to address undercapitalized financial institutions would support financial stability,” she said. “Accelerating structural reforms to build climate resilience, enhance safety nets, strengthen governance, including of state-owned enterprises, and improve the business environment by creating a level-playing-field for investment and trade are necessary for job creation and raising inclusive growth,” she added.
The SBA has already unlocked additional financial support from “friendly” nations, with Finance Minister Ishaq Dar announcing that Pakistan had received $1 billion from the United Arab Emirates earlier in the day. A day earlier, he had announced that Saudi Arabia had deposited $2 billion in the SBP account to help the boost the country foreign reserves and fulfill the global lender’s condition to bridge the external financing gap.
Reacting to the approval of the SBA, Prime Minister Shehbaz Sharif said it was a “major step” in the government’s efforts to stabilize the economy and achieve macroeconomic stability. “It bolsters Pakistan’s economic position to overcome immediate- to medium-term economic challenges, giving the next government the fiscal space to chart the way forward,” he wrote in a statement on Twitter.
“This milestone, which was achieved against the heaviest of odds and against seemingly impossible deadline, could not have been possible without excellent team effort. I would commend Finance Minister Ishaq Dar and his team at the Ministry of Finance for their hard work. My special thanks are also due to [IMF Managing Director Kristalina Georgieva] and her team for their support and cooperation,” he added.