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IMF reaches SLA on first review for 9-month SBA

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November 15, 2023 (MLN): The International Monetary Fund (IMF) staff and the Pakistani authorities have reached a staff-level agreement on the first review under Pakistan’s Stand-By Arrangement (SBA), subject to approval by the IMF’s Executive Board, said a press release issued by the global lender.

Upon approval, Pakistan will have access to SDR 528 million, which is around $700 million.

This will bring the total disbursements under the program to almost $1.9 billion.

The agreement supports the authorities’ commitment to advance the planned fiscal consolidation, accelerate cost-reducing reforms in the energy sector, complete the return to a market-determined exchange rate, and pursue state-owned enterprise and governance reforms to attract investment and support job creation, while continuing to strengthen social assistance.

An IMF team, led by Nathan Porter, visited Islamabad from November 02-15, 2023, to hold discussions on the first review of Pakistan’s economic program supported by an IMF SBA.

Nathan Porter stated, "Anchored by the stabilization policies under the SBA, a nascent recovery is underway, buoyed by international partners’ support and signs of improved confidence."

The steadfast execution of the FY24 budget, continued adjustment of energy prices, and renewed flows into the foreign exchange (FX) market have lessened fiscal and external pressures, he added.

He noted that the inflation is expected to decline over the coming months amid receding supply constraints and modest demand.

However, Pakistan remains susceptible to significant external risks, including the intensification of geopolitical tensions, resurgent commodity prices, and the further tightening in global financial conditions.

Efforts to build resilience need to continue.

Exchange rate and rebuilding FX reserves

In this regard, strengthening macroeconomic sustainability and laying the conditions for balanced growth are key priorities under the SBA.

The authorities’ policy priorities include returning to a market-determined exchange rate and rebuilding FX reserves.

While inflows following increased regulatory and law enforcement helped normalize import and FX payments and rebuild reserves, the authorities recognize that the rupee must remain market-determined to sustainably alleviate external pressures and rebuild reserves.

To support this, they plan to strengthen the transparency and efficiency of the FX market and to refrain from administrative actions to influence the rupee.

Proactive Monetary Policy

IMF has once again stressed on a proactive monetary policy to lower inflation toward its target.

With appropriately tight monetary policy, inflation should steadily decline and the authorities stand ready to respond resolutely if near-term price pressures reemerge, including due to second-round effects on core inflation or renewed exchange rate depreciation.

Fiscal Consolidation

Furthermore , a continued fiscal consolidation is required to reduce public debt, while protecting development needs.

The authorities are determined to achieve a primary surplus of at least 0.4% of GDP in FY24, underpinned by federal and provincial government spending restraint and improved revenue performance supported, if necessary, by contingent measures.

The authorities are building capacity to expand the tax base and raise revenue mobilization and are committed to improving the quality of public investment and spending.

Restoring energy sectors' viability

Further reforms are needed to reduce costs in the energy sector and restore its viability.

With the combined circular debt (CD) across power and gas sectors exceeding 4% of GDP, immediate action was critical.

While protecting vulnerable consumers, the authorities implemented power tariff adjustments that were pending since July 2023 and increased gas prices after a long time, effective November 01, 2023.

While these increases were substantial, they were necessary to avoid further arrears that threatened the viability of these sectors and the provision of critical energy supplies.

The authorities are also moving to tackle cost-side pressures, including bringing private sector participation to DISCOs, institutionalizing recovery and anti-theft actions, improving PPA terms, and reducing the incentives for captive power.

Building financial sector resilience

Continued vigilance is warranted to safeguard the soundness of the banking system.

Priorities include addressing undercapitalized financial institutions, ensuring foreign exchange exposures within regulatory limits, and aligning bank resolution and crisis management frameworks with best practice.

SOE Reforms: Enhancing business environment

Following passage of the State-Owned Enterprises (SOE) law, the authorities are moving forward with their SOE policy and implementation of their triage plan, including the privatization of select SOEs.

High governance and transparency standards will apply to the management of assets under the ownership of the newly created Sovereign Wealth Fund (SWF) and the operations of the SIFC.

To further strengthen governance, the authorities will ensure public access to asset declarations from Cabinet members and a task force, with participation from independent experts, will complete a comprehensive review of the anticorruption framework.

Deepening cooperation with international partners

The authorities have accelerated the engagement with multilateral and official bilateral partners.

Timely disbursement of committed external support remains critical to support the authorities’ policy and reform efforts.

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Posted on: 2023-11-15T21:18:51+05:00