The International Monetary Fund team has reached a staff-level agreement and the Pakistani authorities on policies to complete the combined 7th and 8th reviews of Pakistan’s Extended Fund Facility (EFF).

“The agreement is subject to approval by the IMF’s Executive Board,” it said in a statement. “About $1,177 million (SDR 894 million) will become available, bringing total disbursements under the program to about $4.2 billion.”

Earlier, Aaj News through its sources had reported that Pakistan had reached a staff-level agreement with the global lender. They said that the IMF would release the first tranche of $1.2 billion shortly.

Pakistan received the draft of a memorandum of economic and financial policies (MEFP) – a document which contains details regarding the revival of the loan programme – from the IMF on June 28. Prime Minister Shehbaz Sharif had said that would get around $2 billion from the IMF, not $1 billion, under the bailout package.

Nathan Porter, who led the team, said the IMF board would consider an extension of the EFF until end-June 2023 and augmentation of access by SDR (special drawing rights is an international reserve asset) 720 million which will bring the total access under the EFF to about $7 billion. It would do this in order to support the program implementation and meet the higher financing needs in FY23, as well as catalyse additional financing.

“Pakistan is at a challenging economic juncture. A difficult external environment combined with procyclical domestic policies fueled domestic demand to unsustainable levels,” it read, “the resultant economic overheating led to large fiscal and external deficits in FY22, contributed to rising inflation, and eroded reserve buffers.”

The global lender suggested some policy priorities for stabilising Pakistan’s economy and bringing policy actions in line with the programme.

Steadfast implementation of budget

The budget aims to reduce the government’s large borrowing needs by targeting an underlying primary surplus of 0.4% of GDP, underpinned by current spending restraint and broad revenue mobilization efforts focused particularly on higher-income taxpayers.

“Development spending will be protected, and fiscal space will be created for expanding social support schemes.

The provinces have agreed to support the federal government’s efforts to reach the fiscal targets, and Memoranda of Understanding have been signed by each provincial government to this effect.“

Catch-up in power sector reforms

The IMF was of the view that the power sector circular debt flow was expected to grow significantly to about Rs850 billion in FY22, overshooting the programme targets, threatening the power sector’s viability, and leading to frequent power outages.

“The authorities are committed to resuming reforms including, critically, the timely adjustment of power tariff including for the delayed annual rebasing and quarterly adjustments, to improve the situation in the power sector and limit load shedding.”

Proactive monetary policy to guide inflation to more moderate levels

It said that the headline inflation exceeded 20% in June, hurting particularly the most vulnerable. It described the increase in monetary policy as “necessary and appropriate.”

“The monetary policy will need to be geared towards ensuring that inflation is brought steadily down to the medium-term objective of 5 to 7%.”

The rates of the two major refinancing schemes EFS and LTFF (which have over recent months been raised by 700 bps and 500 bps respectively) will continue to be linked to the policy rate for enhancing the monetary policy transmission, the IMF said. “Greater exchange rate flexibility will help cushion activity and rebuild reserves to more prudent levels.”

Reducing poverty and strengthen social safety

The IMF said that during FY22, the unconditional cash transfer Kafalat scheme reached nearly eight million households, with a permanent increase in the stipend to Rs14,000 per family, while a one-off cash transfer of Rs2,000 (Sasta Fuel Sasta Diesel) was granted to about 8.6 million families to alleviate the impact of rampant inflation.

“For FY23, the authorities have allocated Rs364 billion to BISP (up from Rs250 in FY22) to be able to bring nine million families into the BISP safety net, and further extend the SFSD scheme to additional non-BISP, lower-middle class beneficiaries.”

Strengthen governance

“To improve governance and mitigate corruption, the authorities are establishing a robust electronic asset declaration system and plan to undertake a comprehensive review of the anti-corruption institutions (including the National Accountability Bureau) to enhance their effectiveness in investigating and prosecuting corruption cases.”

It stressed the need for steadfast implementation of the outlined policies, underpinning the SLA for the combined seventh and eighth reviews, in order to help create the conditions for sustainable and more inclusive growth.

The authorities should nonetheless “stand ready to take any additional measures” necessary to meet programme objectives, given the elevated uncertainty in the global economy and financial markets.