IMF resumes $6bn loan programme

The IMF and Pakistan have announced the resumption of a delayed $6bn loan programme, raising expectations that the south Asian country will return to world bond markets as it struggles to revitalize its Covid-hit economy. The agreement had been expected in October last year but was postponed, mainly over Prime Minister Imran Khan’s refusal to accept tightening measures at the height of the coronavirus pandemic. Pakistan received $1.4billion from the IMF in April 2020 to help it answer to the pandemic. This agreement is subject to the approval of the IMF’s Executive Board. The reviews’ completion would release about $500 million. The Fund package sets a fitting balance between supporting the economy, guaranteeing debt sustainability, and moving structural reform.COVID-19 shock temporarily disturbed Pakistan’s progress under the EFF-supported program. The Pakistani authorities remain faithful to policy actions and structural reforms to advance economic courage, forward maintainable growth, and accomplish the EFF’s medium-term objectives. The policies and reforms executed by the Pakistani authorities prior to the COVID-19 shock had started to reduce economic discrepancies and set the conditions for improving economic performance. Most of the targets under the EFF-supported program were on way to be met. However, the pandemic disturbed these improvements and required a shift in authorities’ precedence towards saving lives and supporting households and businesses. To a large extent, the authorities’ response was allowed by the fiscal and monetary policy gains attained in the first nine months of fiscal year 2020. Aside from health control measures, this included a provisional fiscal growth, a large expansion of the social safety net, monetary policy support and planned financial initiatives. These were supported by large emergency financing from the international community, including from the Fund’s Rapid Financing Instrument.
The COVID-19 first wave started to diminish over the 2020 summer and the impact on the economy was significantly reduced. The external current account improved, owing to stronger-than-expected remittances, import narrowing, and a mild export recovery. Economic data also started to point to a recovery. Considering these improvements, the economy is projected to accelerate by 1.5 percent in fiscal year 2021 from the -0.4 percent in fiscal year 2020. With the present COVID-19 second wave, the outlook is subject to a high level of doubtful and downside danger. The Covid-19 suffer has required a careful EFF review schedule. Against this background, the authorities have prepared package of measures that strikes a correct balance between supporting the economy, guaranteeing debt sustainability, and advancing constructional reforms. The fiscal remains harbored by the sustainable primary deficit of fiscal year 2021 budget and permit for higher-than-expected COVID-related and social spending to lessen the short-term impact on growth and the most exposed. The targets are supported by careful spending management and revenue measures, including reforms of corporate taxation to make it fairer and more honest. The power sector’s policy aims at financial feasibility, through management improvements, cost reductions, and change in tariffs. The State Bank of Pakistan monetary and exchange rate policies have served Pakistan well and were condemning in helping to drive the COVID-19 distress. The advanced international reserves’ position since the start of the program with gross reserves almost multiplying to USD 13 billion until January 2021 and net international reserves increasing by over USD 9 billion until December 2020.The banking system remains well, but it will be significant for the SBP to continue to remain watchful and prevent possible financial stability worries as the temporary support is eliminated. International reserves are showing further current account developments.
The IMF projected an economic growth rate of 1.5 percent for the current financial year against last year’s negative growth rate of 0.4 percent. The staff-level agreement is expected to be approved by the IMF executive board before March 31 to enable instant disbursement of $500 million. The two sides have reached an agreement on a package of measures to complete second to fifth reviews of the authorities’ reform programme supported by the IMF Extended Fund Facility. The government would within days place before parliament a bill jointly drafted by the authorities and the IMF on independence of State Bank of Pakistan. The authorities are moving steadfastly on a number of other important reforms, including on strengthening regulatory agencies’ legal frameworks (Nepra and Ogra Acts), consolidating SBP’s autonomy (SBP Act), and improving state-owned enterprises (SOE) management (SOE Law).
Pakistan is moving foremost with the audits of contracts awarded for Covid-related spending. The authorities also continue to accelerate the effectiveness of their anti-monetary laundering/counter financing of terrorism. The IMF said the Covid-19 shock provisionally disrupted Pakistan’s progress under its programme and appreciated that the authorities’ policies and allowing higher than expected Covid-related social spending had been critical in supporting the economy and saving lives and households. The banking system remains healthy, but it will be important for the SBP to continue to remain watchful and prevent possible financial stability worrisome as the temporary support is gone out. International reserves are set to improve further demonstrating current account developments, the EFF resumption and international partners’ support. The IMF loan programme, has been revived at a cost that the people of Pakistan have already started paying in terms of a higher power tariff and costlier petroleum products. These measures are likely to make life difficult for the common man as well as the business community. It is only hoped that the severe reform measures would not affect the execution capacity for the reforms themselves. Finance Minister Dr Hafeez Sheikh has stated that an agreement reached with the International Monetary Fund will help increase investment, export, and gross domestic product of the country.

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