© Reuters. FILE PHOTO: Pakistan’s Prime Minister Shehbaz Sharif meets with Managing Director of the International Monetary Fund Kristalina Georgieva in Paris, France on June 22, 2023. Press Information Service (PID) / Released via Reuters / File photo
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Written by Asif Shahzad
LAHORE, Pakistan (Reuters) – The International Monetary Fund has reached a staff-level agreement with Pakistan for $3 billion in short-term financial assistance, the bank said, a long-awaited decision by the teetering South Asian country. On the brink of default.
The deal, which is subject to IMF board approval in July, came hours before the current agreement with the IMF expires later on Friday. Although it is mainly a bridging loan, it provides a major respite for Pakistan, which is grappling with a severe balance of payments crisis and declining foreign exchange reserves.
Prime Minister Shahbaz Sharif said the so-called Standby Arrangement (SBA) would enable Pakistan to achieve economic stability, and put the country “on the path of sustainable economic growth, God willing.”
Pakistan’s finance minister, Ishaq Dar, told Reuters that Pakistan would receive official documents on the deal later on Friday from the IMF, which he said would “sign, stamp and be back by tonight.”
On Thursday, he said a deal is expected anytime soon.
Pakistan dollar sovereign bonds traded higher after the announcement, with the 2024 issue enjoying the largest gains, up more than 8 cents to just over 70 cents on the dollar, according to Tradeweb data.
The gains were most pronounced in short-term bonds, reflecting lingering doubts about the country’s long-term fiscal outlook.
The country’s stock and local currency markets were closed on Friday due to the Eid holiday.
With inflation soaring and foreign exchange reserves barely enough to cover one month of controlled imports, analysts say Pakistan’s economic crisis could escalate into a debt default in the absence of an IMF deal.
The $3 billion in financing, spread over nine months, is higher than expected as it appears it will replace the remaining $2.5 billion of the $6.5 billion long-term rescue package agreed in 2019, which expires on Friday. .
The financing of the International Monetary Fund will also open the door to external bilateral and multilateral financing and debt renewal, especially from friendly countries such as Saudi Arabia and the United Arab Emirates, which have already pledged about $3 billion.
“This will support near-term policy efforts and replenishment of aggregate reserves with a view to bringing them to more comfortable levels,” the IMF said.
High energy prices
The new standby arrangement is based on the 2019 programme, International Monetary Fund official Nathan Porter said Thursday, adding that Pakistan’s economy has faced several challenges recently, including devastating floods last year and soaring commodity prices in the wake of the war in Ukraine.
“Despite the authorities’ efforts to reduce imports and the trade deficit, reserves have fallen to extremely low levels. Liquidity conditions in the electricity sector also remain acute,” Porter said in a statement.
“Given these challenges, the new arrangement will provide a political backbone and framework for financial support from multilateral and bilateral partners in the period ahead.”
Porter also pointed to the accumulation of arrears in the electricity sector and frequent power outages.
Reforms in the energy sector, which has accumulated debts of about 3.6 trillion Pakistani rupees ($12.58 billion), have been a cornerstone of discussions with the International Monetary Fund.
The statement said the IMF wants to implement a consistent policy by Pakistan to overcome challenges “especially in the energy sector”.
“The authorities’ program also includes ongoing efforts to enhance the viability of the energy sector (including through a timely FY24 annual re-establishment),” the lender said, meaning an electricity tariff increase in the fiscal year.
Government sources told Reuters the increase would come before the International Monetary Fund’s board reviews the rescue plan in mid-July.
“Reform does not – should not mean – endlessly raising tariffs,” Pakistani Energy Minister Khurram Dasgir told Reuters in a text message after the deal.
With the current government’s term ending in August, Dastgir said the Sharif administration has put in place a “strong mid-to-long-term plan” to dramatically increase renewable power generation in order to bring cost down.
He said this is only possible if there is long-term help to put that plan into action. He did not confirm whether there was an imminent increase in basic fees on the cards.
Painful repairs
Islamabad has taken a slew of policy measures since the IMF team arrived in Pakistan earlier this year, including a revised budget for 2023-24 last week to meet the lender’s demands.
Other adjustments demanded by the IMF before concluding the deal included reversing subsidies in the energy and export sectors, raising energy and fuel prices, raising the main policy rate to 22%, the market currency exchange rate, and arranging external financing.
It also prompted Pakistan to collect more than 385 billion rupees ($1.34 billion) in new taxes through a supplementary budget for fiscal year 2022-23 and revised budget for 2023-24.
Going forward, the IMF said the central bank must remain active to bring down inflation and maintain the foreign exchange framework.
The already painful adjustments have fueled a skyrocketing inflation rate of 38% year-on-year in May.
“The FY24 budget delivers a primary surplus of about 0.4 percent of GDP by taking some steps to broaden the tax base and increase tax collection from low-tax sectors,” Porter said, adding that it also secured space to boost support for vulnerable groups through the charity programme. cash.
It will be important, he said, that the budget is implemented as planned, and that the authorities resist pressure for off-budget spending or tax breaks in the coming period.
“This new program is much better than our expectations,” said Muhammad Sohail of Topline Securities in Karachi, adding that there is a lot of skepticism about what will happen after a new government comes to power later in the year.
“This financing of $3 billion for a period of 9 months will certainly help restore some investor confidence,” he said.
($1 = 286.1500 Pakistani rupees)
