## 1pakea2020001

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### EXECUTIVE SUMMARY — Context and headline projections
- Pakistan faces unprecedented health and economic shocks from the rapid propagation of the Covid-19 outbreak.
- Real GDP growth: expected to contract by -1.5 percent in FY 2020.
- Exports and remittances: expected to decline sharply, creating an urgent balance of payments (BoP) need.
- Public finances: expected to come under significant pressure from increased health- and mitigation-related expenditures and a decline in tax revenues.

### Financial assistance under the Rapid Financing Instrument (RFI)
- Authorities’ request: 50 percent of quota (SDR 1,015.5 million) to address urgent fiscal and BoP needs and make these resources available to the budget to support the emergency policy response.
- Rationale: RFI appropriate because the severity of the shock and uncertainty about the outlook make it difficult to recalibrate the existing Extended Fund Facility (EFF).
- Expected catalytic effect: Fund support under the RFI is expected to catalyze additional donor financing.
- Staff recommendation: Approve Pakistan’s request for a disbursement under the RFI of 50 percent of quota (SDR 1,015.5 million).

### Authorities’ policy response and program commitments
- Fiscal:
  - Authorities adopted a comprehensive fiscal support package to accommodate spending needed to mitigate the Covid-19 shock.
  - Increasing public health spending and strengthening social safety net programs to provide immediate cash support to a wider segment of the vulnerable population.
- Monetary and financial:
  - State Bank of Pakistan (SBP) measures to support liquidity and credit conditions and safeguard financial stability.
- Program commitment:
  - Authorities reaffirm commitment to the existing EFF and, as the shock subsides, to implement key program policies to support recovery, build buffers, and reduce public debt.

### Debt sustainability and capacity to repay the Fund
- Staff assessment: Despite increased near-term risks, with strong policy implementation under the EFF and continued support by multilateral and official bilateral creditors, Pakistan’s debt remains sustainable over the medium-term and capacity to repay the Fund is adequate.

### Recent economic developments (pre-Covid-19 baseline)
- Pre-shock expectations (selected):
  - Growth: 2.4 percent in FY 2020, accelerating to 3 percent in FY 2021.
  - Current account deficit: expected to narrow to 2.2 percent of GDP from 4.9 percent of GDP the previous year.
  - Reserves: expected to top US$12.5 billion (2.5 months of imports).
  - Inflation: expected to return towards SBP’s forecast range of 11–12 percent and reach 5–7 percent by late FY 2021.
  - Fiscal: primary surplus of 0.7 percent of GDP and public debt at 84 percent of GDP (until December 2019).
  - Banking: system-wide capital adequacy ratio at 17 percent in December 2019; NPL ratio at 8.6 percent with 81.4 percent of NPLs provisioned.

### Impact of the shock — transmission channels and near-term projections
- Epidemiological context (as of April 9, 2020):
  - Confirmed cases and deaths: 4,474 confirmed cases and 65 deaths (up from 30 confirmed cases on March 13).
  - Testing expected to increase and cases likely to rise.
  - Response: closed borders with Iran and Afghanistan; halted domestic and international flights and rail transport; limits on economic and social activity; various degrees of lockdown.
- Economic channels:
  - External: downturn in China, the EU, and the U.S. likely to reduce demand for exports (especially textiles); remittances expected to decline sharply.
  - Domestic: containment measures, heightened uncertainty, and loss of confidence expected to cause concurrent demand and supply shocks, severely affecting investment and output.
- Sectoral impact: manufacturing (especially textiles), transportation, and services expected to be more severely impacted; private sector credit likely to weaken further.
- Growth outlook and revisions:
  - Real GDP projected to decline by –1.5 percent in FY 2020.
  - Growth expected to remain tepid in H1 FY 2021 and return gradually in the second half of the FY.
  - Cumulative revision: real GDP growth revised down by 5 percentage points over FY 2020–21.

### Public finances — near-term deterioration
- Primary deficit: now expected to deteriorate to 2.9 percent of GDP in FY 2020 (from 0.8 percent expected earlier).
- Revenue shock: 1.8 percentage point decline in tax revenue relative to the pre-virus baseline.
- Fiscal package announced: worth 1.2 percent of GDP (detailed below).

### Balance of payments and external financing needs
- Offsetting factors: lower oil prices and weaker import demand provide some support to the current account.
- Pressures:
  - Export growth likely to halt.
  - Remittances: expected to drop by over US$5 billion during FY 2020 and FY 2021.
  - Outflows from non-resident holdings of domestic treasuries could continue (US$2.0 billion in outflows so far).
- Urgent external financing needs:
  - New external financing needs of about US$2.0 billion (0.8 percent of GDP; SDR 1,400 million) in Q4 FY 2020.
  - Envisaged financing: Fund credit under the RFI and fresh resources of around US$250 million committed by multilateral partners.
  - Projected central bank reserves with these disbursements: US$12.0 billion (2.7 months of imports) by end-FY 2020.
  - Potential FY 2021 gap: around $1.6 billion to be filled through reserve assets, additional multilateral support, and, if needed, additional policy adjustments.

### Policy response (government and SBP actions) — fiscal and monetary measures
- Fiscal package (Prime Minister announcement on March 24):
  - Total fiscal package: Total1.2 (percent of GDP).
  - Breakdown (percent of GDP): Health and disaster response0.2; Support for low-income0.6; Support for exporters0.2; Other0.2.
  - Package components include:
    - (i) relief to vulnerable families through expansion of existing programs and higher disbursements;
    - (ii) support for daily wage earners by establishing a PRs 200 billion fund for the most affected workers;
    - (iii) strengthening the Utility Stores Corporation network and funding to increase food security;
    - (iv) temporary reduction in food prices to ensure essential items remain affordable;
    - (v) elimination of taxes on essential health machinery and equipment to provide affordable healthcare;
    - (vi) elimination of backlog on GST tax refunds to support exporters;
    - (vii) reduction in oil prices;
    - (viii) relief on electricity and gas bills by providing installment payment options;
    - (ix) increase funding for the National Disaster Management Authority of Pakistan;
    - (x) building a contingency fund.
  - Construction-sector program: special tax regime and no wealth declaration for projects launched during a short window until the end of 2020.
  - Procurement oversight: ex-post audit by the Auditor General of Pakistan with results published on the Ministry of Finance website.
  - Social assistance scaling: Ehsaas Emergency Cash Program to provide immediate financial support to over 10 million recipients (beneficiary breakdown: 4.5 million existing BISP beneficiaries; 3 million new recipients from NSER by relaxing eligibility threshold; and 2.5 million additional recipients not in NSER).
- SBP monetary and regulatory measures:
  - Policy rate: cut by a cumulative 225 basis points to 11 percent.
  - Exchange rate: allowed to act as shock absorber, accommodating an 8 percent depreciation versus the US$ from February 27 through April 9, 2020; limited intervention to prevent disorderly market conditions.
  - Refinancing and liquidity facilities: expanded schemes supporting employment, manufacturing, hospitals and medical centers; relaxed conditions for export refinancing and long-term financing.
  - Temporary regulatory measures:
    - reducing the capital conservation buffer by 100 basis points to 1.5 percent;
    - increasing regulatory limit on credit to SMEs by 44 percent to PRs 180 million;
    - debt burden ratio for consumer loans relaxed from 50 percent to 60 percent;
    - allowing banks to defer clients’ principal loan payments by one year;
    - relaxing regulatory criteria for restructured/rescheduled loans for borrowers needing relief beyond the one-year principal extension.
  - Staff cautions: preserve monetary and financial stability given double-digit inflation; foreign exchange intervention should remain limited; regulatory measures must be targeted and temporary and avoid moral hazard.

### Debt sustainability — projections and risks (Annex I summary)
- Main judgment: Public debt continues to be judged sustainable despite the Covid-19 shock given transitory nature of the shock and authorities’ commitment to EFF.
- Total public debt projections (selected):
  - 90 percent of GDP in FY 2020
  - 73 percent of GDP at end-FY 2025
- Gross financing needs (GFN):
  - Projected to decline to 19.5 percent of GDP by FY 2025.
  - Public gross financing needs (selected numbers): 28 (2018), 33.7 (2019), 40.0 (2020), 32.4 (2021), 29.2 (2022), 24.1 (2023), 24.0 (2024), 21.2 (2025), 19.5 (projection).
- Drivers of higher debt: higher fiscal deficit in FY 2020; smaller fiscal surpluses; weaker economic growth.
- Selected debt dynamics (nominal gross public debt, selected years): 64.4 (2018), 75.2 (2019), 87.5 (2020), 89.8 (2021), 87.8 (2022), 83.7 (2023), 80.8 (2024), 77.4 (2025), 73.1 (projection end).
- Stress-test scenarios:
  - Baseline real GDP growth: -1.5 (2020), 2.0 (2021), 4.0 (2022), 4.5 (2023), 5.0 (2024), 5.0 (2025).
  - Alternative scenarios include Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Macro-Fiscal Shock, Contingent Liability Shock.
  - Stress scenarios raise gross nominal public debt and gross financing needs relative to baseline.

### External debt and financing indicators (selected figures)
- External debt (percent of GDP): 37.6 (2019), 42.2 (2020), 43.6 (2021), 43.2 (2022), 43.2 (2023), 41.4 (2024), 39.3 (2025).
- External debt-to-exports ratio (percent): 360.6 (2019), 396.1 (2020), 409.7 (2021), 415.4 (2022), 420.9 (2023), 399.2 (2024), 371.3 (2025).
- Gross external financing need (in billions of US dollars): 26.6 (2019), 25.8 (2020), 29.3 (2021), 27.0 (2022), 29.2 (2023), 32.7 (2024), 30.1 (2025).
- Gross external financing need (percent of GDP): 9.4 (2019), 9.8 (2020), 10.5 (2021), 8.9 (2022), 8.8 (2023), 9.2 (2024), 7.8 (2025).

### Bilateral creditors, official financing, and catalytic support
- Recent bilateral creditor actions and official financing (selected):
  - China renewed US$2 billion bilateral deposits in March.
  - Saudi Arabia refinanced US$3 billion BoP support loans that matured in November–January.
  - UAE rolled over US$1 billion BoP support loans in March.
  - Oil facility with Saudi Arabia worth US$3.2 billion activated in August 2019.
  - ADB approved a Special Policy-Based Loan of US$1 billion in December 2019.
- Staff view: RFI support expected to catalyze additional donor support from World Bank, Asian Development Bank, and bilateral donors to fill remaining financing needs.

### Staff appraisal and policy recommendations — operational priorities
- Overall assessment:
  - Pakistan faces an unprecedented health and economic shock with urgent BoP needs; growth expected to significantly contract; public finances under pressure; capital markets access temporarily lost.
- Key policy guidance:
  - Fiscal response: focus on tackling the health emergency and preventing a humanitarian crisis while preserving long-term sustainability.
  - Enacted measures: targeted and temporary, focusing on health spending and utilizing existing social support schemes to provide quick support to the most vulnerable without permanently distorting the fiscal envelope.
  - Social assistance: staff welcomed the scaling up of social assistance and the Ehsaas Emergency Cash Program to provide immediate support to over 10 million recipients.
  - Monetary policy: SBP’s accommodation is adequate but vigilance required given double-digit inflation; FX intervention should remain limited.
  - Regulatory and refinancing schemes: must be targeted and temporary; avoid moral hazard and ensure supervisory procedures to preserve credit quality assessment.
  - Reform agenda: authorities must resume EFF reforms as crisis pressures subside to support growth, build buffers, reduce public debt, and strengthen governance.
- Staff position on Fund support:
  - Staff supports the proposed RFI purchase; Pakistan meets RFI eligibility; debt sustainable with continued strong policy implementation; capacity to repay remains adequate.
- Capacity to repay metrics:
  - Projected debt service payments to the Fund would peak at 9.3 percent of gross international reserves and 5.4 percent of exports.
  - Updated safeguards assessment: completed in December 2019; SBP has maintained a broadly strong safeguards framework; authorities committed to addressing remaining issues including amendments to the SBP act.

### Appendix I — Letter of Intent (summarized commitments and facts)
- Request details: RFI purchase of 50 percent of quota (SDR 1,015.5 million), full amount to be made available to the budget.
- Date and addressee: Islamabad, April 8, 2020; addressed to Ms. Kristalina Georgieva, Managing Director, IMF.
- Epidemiological snapshot (as of April 8): 4,194 confirmed cases and 60 deaths.
- Macroeconomic and financial statistics (selected):
  - IMF staff estimated contraction by 1.5 percent in FY2020 (first full-year contraction since 1952), a downward revision of about 4 percentage points relative to February projections.
  - Primary fiscal deficit: projected to widen by 2 percentage points of GDP (from 0.8 percent of GDP before crisis).
  - New external financing gap for Q4 FY2020: US$2 billion.
  - SBP reserves: increased to US$12.8 billion by end-February and fell below US$11 billion by end-March; staff estimate keeping SBP reserves at US$12 billion by end-June with external financing.
  - Rupee depreciation: 7.2 percent during March 2020.
  - Workers’ remittances: projected to drop by over US$5 billion in FY2020 and FY2021.
  - Main stock index: declined by about 25 percent since early February 2020.
  - Capital Conservation Buffer requirement: reduced from 2.5 percent to 1.5 percent.
  - Policy rate: cumulative cut of 225 basis points to 11 percent.
- Emergency fiscal measures (selected):
  - New Government PRs 1.2 trillion economic relief package.
  - Ehsaas Emergency Cash Program: immediate financial support to over 10 million of the most vulnerable families (about a third of the population); cash grants to 12 million low-income families under the Ehsaas program.
  - PRs 200 billion for daily wage earners in the formal industrial sector.
  - PRs 50 billion for strengthening the Utility Stores Corporation network and provision of essential food items at subsidized rates.
  - Establishment of a “COVID-19 Pandemic Relief Fund-2020”.
- SBP programs and timelines (selected):
  - Refinance Scheme for Payment of Wages & Salaries: covers April to June 2020.
  - Refinance Facility for Combating COVID-19: available through banks until end-September 2020.
  - Temporary Economic Refinance Facility: SBP refinance for new loans until end-March 2021.
  - Principal payment deferment: borrowers may defer principal payments for one year if they submit written request before end-June 2020.
  - Restructuring/rescheduling relaxation: temporary until March 31, 2021.
- Policy commitments:
  - Continue EFF reforms and resume fiscal consolidation once crisis abates.
  - Maintain market-determined exchange rate; limit interventions to disorderly market conditions.
  - Comply with Fund’s Articles of Agreement; avoid exchange restrictions or trade restrictions for BoP purposes.
  - Safeguards: implement amendments to SBP act and update Memorandum of Understanding between MOF and SBP on servicing obligations to the IMF.
- Publication: authorities authorize IMF to publish Letter of Intent and staff report for the RFI request.

*Source: Ministry of Finance and IMF staff estimates; International Monetary Fund staff report text provided in the source content.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- Pakistan is facing unprecedented health and economic shocks from the rapid propagation of the Covid-19 outbreak.
- Real GDP growth is expected to contract by -1.5 percent in FY 2020.
- Exports and remittances are expected to decline sharply, creating an urgent balance of payments (BoP) need.
- Public finances are expected to come under significant pressure from increased health- and mitigation-related expenditures and a decline in tax revenues.

### Financial assistance under the Rapid Financing Instrument (RFI)
- The authorities requested financial assistance under the RFI in the amount of 50 percent of quota (SDR 1,015.5 million) to help address urgent fiscal and BoP needs and make these resources available to the budget to support the emergency policy response.
- Rationale: The RFI is the appropriate instrument because the severity of the shock and uncertainty about the outlook make it difficult to recalibrate the existing Extended Fund Facility (EFF) to ensure it remains on track to meet its objectives.
- Expected catalytic effect: Fund support under the RFI is expected to catalyze additional donor financing.
- Staff recommendation: Approve Pakistan’s request for a disbursement under the RFI of 50 percent of quota (SDR 1,015.5 million).

### Policies (authorities’ response and program commitments)
- Fiscal:
  - Authorities adopted a comprehensive fiscal support package to accommodate spending needed to mitigate the Covid-19 shock.
  - Authorities are increasing public health spending and strengthening social safety net programs to provide immediate cash support to a wider segment of the vulnerable population affected by mitigation policies.
- Monetary and financial:
  - The State Bank of Pakistan has adopted measures to support liquidity and credit conditions and safeguard financial stability.
- Program commitment:
  - Authorities reaffirmed their commitment to the existing EFF and, as the impact of the shock subsides, to implement key program policies to support the recovery, build buffers, and reduce public debt.

### Debt sustainability and capacity to repay the Fund
- Staff assessment: Although the shock has increased near-term risks, with strong policy implementation under the EFF and continued support by multilateral and official bilateral creditors, Pakistan’s debt remains sustainable over the medium-term and capacity to repay the Fund is adequate.

### Recent economic developments (pre-Covid-19 baseline)
- Pre-shock expectations:
  - Growth projected at 2.4 percent in FY 2020, accelerating to 3 percent in FY 2021.
  - Current account deficit expected to narrow to 2.2 percent of GDP from 4.9 percent of GDP the previous year.
  - Reserves expected to top US$12.5 billion (2.5 months of imports).
  - Inflation expected to gradually return towards SBP’s forecast range of 11–12 percent and to reach the 5–7 percent inflation objective by late FY 2021.
  - Fiscal performance strong until December 2019, with a primary surplus of 0.7 percent of GDP and public debt at 84 percent of GDP.
  - Banking system indicators: system-wide capital adequacy ratio at 17 percent in December 2019 and NPL ratio at 8.6 percent, with 81.4 percent of NPLs provisioned.
- Policy achievements anchored in the EFF included adoption of a market-determined exchange rate, fiscal reforms to broaden the tax base, strengthened safety nets and increased health and social spending, and adjustment of power tariffs toward cost recovery.

### Impact of the shock (transmission channels and near-term projections)
- Epidemiological context (as of April 9, 2020):
  - 4,474 confirmed cases and 65 deaths, up from 30 confirmed cases on March 13.
  - Testing expected to increase and number of cases likely to rise.
  - Response actions: closed borders with Iran and Afghanistan; halted domestic and international flights and rail transport; limits on economic and social activity; various degrees of lockdown across the country.
  - Sindh and Punjab (85 percent of the population and economic activity) called the army to assist with lockdown logistics.
- Economic channels:
  - External: global downturn in Pakistan’s major export markets (China, the EU, and the U.S.) likely to reduce demand for exports (especially textiles) and limit financial flows; remittances expected to decline sharply.
  - Domestic: containment measures, heightened uncertainty, and loss of confidence by business and consumers expected to cause concurrent demand and supply shocks, severely affecting investment and output.
- Sectoral impact: manufacturing (especially textiles), transportation, and services expected to be more severely impacted; private sector credit likely to weaken further.
- Growth outlook and revisions:
  - Real GDP projected to decline by –1.5 percent in FY 2020 due to a severe contraction in the last quarter of the fiscal year.
  - Growth expected to remain tepid in H1 FY 2021 depending on containment success and return gradually to faster growth in the second half of the FY in line with expected global recovery.
  - Cumulatively, real GDP growth revised down by 5 percentage points over FY 2020–21.
- Public finances:
  - Primary deficit now expected to deteriorate to 2.9 percent of GDP in FY 2020 (from 0.8 percent expected earlier) due to a 1.8 percentage point decline in tax revenue relative to the pre-virus baseline and higher spending needs for health response, social safety nets, and employment support.

### Balance of payments and external financing needs
- While lower oil prices and weaker import demand provide some support to the current account, the Covid-19 shock will have a severe impact on the BoP.
- Specific pressures:
  - Export growth likely to halt due to fall in external demand.
  - Remittances expected to drop by over US$5 billion during FY 2020 and FY 2021 as activity in GCC countries declines.
  - Outflows from non-resident holdings of domestic treasuries could continue, despite $2.0 billion in outflows so far.
- Urgent external financing needs:
  - New external financing needs of about US$2.0 billion (0.8 percent of GDP; SDR 1,400 million) in Q4 FY 2020.
  - These urgent needs are envisaged to be met through the use of Fund credit under the RFI and fresh resources of around US$250 million committed by multilateral partners.
  - Projected central bank reserves with these disbursements: US$12.0 billion (2.7 months of imports) by end-FY 2020, a level similar to that prior to the shock.
  - A potential financing gap of around $1.6 billion could emerge in FY 2021, to be filled through the use of reserve assets, additional multilateral support, and, if needed, additional policy adjustments.

### Policy response (government and SBP actions)
- Fiscal package:
  - On March 24, the Prime Minister announced a comprehensive fiscal package to boost health and disaster response capabilities and reduce the impact on low-income households affected by containment measures.
- SBP measures:
  - State Bank of Pakistan implemented measures to alleviate liquidity and foreign exchange market pressures.

*April 10, 2020 — International Monetary Fund staff executive summary for Pakistan*

### 1.2 percent of GDP, includes (i) relief to vulnerable families

### 1.2 percent of GDP, includes (i) relief to vulnerable families

### Fiscal response: composition and targeted support
- Total fiscal package: Total1.2 (percent of GDP)
- Breakdown (percent of GDP):
  - Health and disaster response0.2
  - Support for low-income0.6
  - Support for exporters0.2
  - Other0.2
- Package components (textual list preserved):
  - (i) relief to vulnerable families through an expansion of existing programs and higher disbursements;
  - (ii) support for daily wage earners by establishing a PRs 200 billion fund for the most affected workers;
  - (iii) strengthening the utility stores corporation network and funding to increase food security;
  - (iv) temporary reduction in food prices to ensure essential items remain affordable;
  - (v) provision of affordable healthcare through the elimination of taxes on essential health machinery and equipment;
  - (vi) support for the export sector by eliminating the backlog on GST tax refunds, which will provide immediate cash flow relief;
  - (vii) reduction in oil prices;
  - (viii) relief on electricity and gas bills by providing options for installment payments;
  - (ix) increase funding for the National Disaster Management Authority of Pakistan for the purchase of additional equipment and operations;
  - (x) building a contingency fund.
- Construction-sector program: launch of a program for the construction sector to address acute employment needs, including a special tax regime and no wealth declaration for projects launched during a short window until the end of 2020.
- Procurement oversight: procurement of urgently needed medical supplies will be subject to an ex-post audit by the Auditor General of Pakistan; results will be published on the website of the Ministry of Finance to help limit vulnerabilities to corruption.
- Social assistance scaling and Ehsaas Emergency Cash Program:
  - Program aim: provide immediate financial support to over 10 million recipients identified with support of the provinces.
  - Beneficiary breakdown (footnote text preserved): 4.5 million from the existing BISP beneficiaries; 3 million new recipients identified from the NSER database by relaxing the eligibility threshold; and 2.5 million additional recipients not included in the NSER but that still have a very low-income level. The new 5.5 million beneficiaries will not be part of the regular BISP system.

### Monetary policy, liquidity, and regulatory measures by the SBP
- Policy rate action:
  - Cut the policy rate by a cumulative 225 basis points to 11 percent.
- Exchange rate and FX intervention:
  - Allowed the exchange rate to act as shock absorber, accommodating an 8 percent depreciation of the exchange rate versus the US$ over the period February 27 through April 9, 2020, and intervening in the foreign exchange market to prevent disorderly market conditions and excessive rupee volatility.
- Refinancing and liquidity facilities:
  - Expanded refinancing schemes, announcing new facilities to support employment, manufacturing, and hospitals and medical centers; relaxed conditions associated with export refinancing and long-term financing schemes.
- Temporary regulatory measures to maintain banking soundness and sustain activity:
  - (i) reducing the capital conservation buffer by 100 basis points to 1.5 percent;
  - (ii) increasing the regulatory limit on extension of credit to SMEs by 44 percent to PRs 180 million;
  - (iii) relaxation of the debt burden ratio for consumer loans from 50 percent to 60 percent;
  - (iv) allowing banks to defer clients’ payment of principal on loan obligations by one year;
  - (v) relaxation of regulatory criteria for restructured/rescheduled loans for borrowers who require relief beyond the extension of principal repayment for one year.
- Staff cautions and advice on monetary stance:
  - Staff welcomed the timely monetary policy response and exchange rate flexibility but cautioned on the need to preserve monetary and financial sector stability given inflation still in the double-digits and potential inflationary pressure from rupee depreciation and supply-side pressures.
  - Staff emphasized that foreign exchange intervention should remain limited to prevent disorderly market conditions.
  - Regulatory measures and expanded refinancing schemes must be targeted and temporary, and their design should not create moral hazard nor foster poor credit risk management practices. Staff encouraged adopting necessary supervisory procedures to ensure measures do not obscure future credit quality assessment.

### Debt sustainability, projections, and risks
- Debt trajectory and assessment:
  - Pakistan’s public debt is assessed to be sustainable, but risks have increased.
  - Debt is projected to increase to around 90 percent of GDP in FY 2020, against 85 percent prior to the shock, both due to the sharp decline in growth and the increase in the budget deficit.
- Conditions for sustainability:
  - The authorities’ commitment to the policies and reforms envisaged under the EFF is critical to place debt on a firm downward path.
  - Debt sustainability is supported by the agreed rollover of maturing obligations by key bilateral creditors (China, Saudi Arabia, and UAE), as demonstrated by the established track record over the last 9 months.
  - These rollovers are critical to reduce gross financing needs to 19.5 percent of GDP by FY 2025, supported also by the authorities’ efforts to improve the maturity structure of debt.
- Vulnerabilities and downside risks:
  - Downside risks to the outlook are high given uncertainty about the duration and magnitude of the outbreak and the persistence of containment measures.
  - A more severe impact of Covid-19 than projected or the authorities’ failure to return to the path of consolidation may put fiscal sustainability at risk.
  - With growth remaining below potential, risks associated with policy slippages and resistance to reforms, including from vested interest groups, and weak implementation capacity may jeopardize program objectives and availability of external financing.
  - While portfolio outflows have put some pressure on the foreign exchange market, Pakistan’s exposure to capital markets is relatively limited, minimizing risks.

### External financing needs, staff support, and Fund modalities
- Urgent BoP and financing needs:
  - Urgent BoP needs of about US$2.0 billion (0.8 percent of GDP) in Q4 FY 2020 that, if not addressed, could result in severe economic disruptions.
  - A potential financing gap of around $1.6 billion could emerge in FY 2021.
- Staff recommendation and RFI support:
  - Staff supports the authorities’ request for financial assistance of 50 percent of quota (SDR 1,015.5 million) under the RFI to help Pakistan meet its urgent BoP needs.
  - The RFI disbursement will be made available to the budget to support the emergency policy response.
  - The Ministry of Finance and the SBP have committed to update the existing Memorandum of Understanding that clarifies responsibilities for timely servicing of obligations to the Fund.
  - Based on discussions with donors (World Bank and Asian Development Bank), Fund support under the RFI will catalyze additional donor support to fill all financing needs.
- Capacity to repay:
  - Projected debt service payments to the Fund would peak at 9.3 percent of gross international reserves and 5.4 percent of exports.
  - An updated safeguards assessment was completed in December 2019 in the context of the current EFF, assessing that the SBP has maintained a broadly strong safeguards framework. Authorities are committed to addressing remaining issues, including through submission of amendments to the SBP act to the national assembly.

### Staff appraisal and policy recommendations
- Overall assessment:
  - Pakistan is facing an unprecedented health and economic shock, creating an urgent balance of payments need.
  - Growth is expected to significantly contract; public finances are expected to come under significant pressure; access to capital markets is temporarily lost.
- Key policy guidance:
  - Fiscal response should focus on tackling the health emergency and preventing it from becoming a humanitarian crisis, while preserving long-term sustainability.
  - Enacted measures should be targeted and temporary, focusing in particular on health spending and utilizing existing social support schemes to provide quick and targeted support to the most vulnerable, but not result in permanent distortions of the overall fiscal envelope.
  - Staff welcomed the scaling up of social assistance and the Ehsaas Emergency Cash Program to provide immediate support to over 10 million recipients.
  - SBP’s monetary accommodation is an adequate response to the Covid-19 shock, but vigilance is required given double-digit inflation; intervention in the foreign exchange market should remain limited.
  - Regulatory measures and expanded refinancing schemes must be targeted and temporary and should not create moral hazard or obscure credit quality assessment; necessary supervisory procedures should be adopted.
  - The authorities must decisively press ahead with the reforms included in the EFF as soon as immediate crisis pressures subside to support growth, build buffers, reduce public debt, and strengthen governance.
- Staff position on Fund support:
  - Staff supports the proposed purchase under the RFI. Pakistan meets the eligibility requirements for the RFI, its debt is sustainable with continued strong policy implementation, and its capacity to repay the Fund remains adequate.

*Source: Ministry of Finance and IMF staff estimates; International Monetary Fund staff report text provided in the source content.*

### Annex I. Public and External Debt Sustainability

### Annex I. Public and External Debt Sustainability

### Overview and main judgment
- Public debt continues to be judged as sustainable despite the Covid-19 shock because the shock is considered transitory and the authorities remain committed to the fiscal consolidation path embedded in the EFF.
- Major bilateral creditors’ firm commitment to maintain their exposure, as demonstrated by recent rollovers, strengthens underlying debt sustainability and mitigates risks from high gross financing needs.
- Debt level is projected to be somewhat higher than at the first review of the EFF, but public debt to GDP is projected to continue to decline in the medium term, assisted by fiscal consolidation, the flexible exchange rate, and a reduction in precautionary government cash deposits.
- Gross financing needs (GFN) are projected to steadily decline on account of better cash and debt management.

### Public debt projections and key fiscal dynamics
- Total debt projected path:
  - 90 percent of GDP in FY 2020
  - 73 percent of GDP at end-FY 2025
- Gross financing needs projection:
  - Decline to 19.5 percent of GDP by FY 2025
- Drivers of higher-than-previously-projected debt:
  - Higher fiscal deficit in FY 2020
  - Smaller fiscal surpluses going forward
  - Weaker economic growth
- Debt change decomposition (selected figures from DSA table):
  - Nominal gross public debt: 64.4 (2018), 75.2 (2019), 87.5 (2020), 89.8 (2021), 87.8 (2022), 83.7 (2023), 80.8 (2024), 77.4 (2025), 73.1 (projection end)
  - Public gross financing needs: 28 (2018), 33.7 (2019), 40.0 (2020), 32.4 (2021), 29.2 (2022), 24.1 (2023), 24.0 (2024), 21.2 (2025), 19.5 (projection)
  - Real GDP growth (in percent): 3.6 (2018), 5.5 (2019), 3.3 (2020), -1.5 (2021), 2.0 (2022), 4.0 (2023), 4.5 (2024), 5.0 (2025), 5.0 (projection)
  - Inflation (GDP deflator, in percent): 9.3 (2018), 2.8 (2019), 7.8 (2020), 10.5 (2021), 9.0 (2022), 8.0 (2023), 6.1 (2024), 4.9 (2025), 4.8 (projection)
  - Effective interest rate (in percent): 8.2 (2018), 7.0 (2019), 8.4 (2020), 7.8 (2021), 7.5 (2022), 7.5 (2023), 8.3 (2024), 7.1 (2025), 6.9 (projection)
  - Change in gross public sector debt: 1.4 (2009-2017 actual), 5.2 (2018), 12.3 (2019), 2.3 (2020), -2.0 (2021), -4.0 (2022), -2.9 (2023), -3.4 (2024), -4.4 (2025), cumulative -14.4
  - Identified debt-creating flows (cumulative): 0.9 (2009-2017), 4.4 (2018), 11.7 (2019), 1.4 (2020), -2.6 (2021), -4.6 (2022), -3.5 (2023), -3.8 (2024), -3.8 (2025), cumulative -16.9
  - Primary deficit: 1.7 (2009-2017), 2.1 (2018), 3.4 (2019), 2.7 (2020), 0.3 (2021), -0.8 (2022), -1.5 (2023), -1.5 (2024), -1.6 (2025), cumulative -2.3
  - Primary (noninterest) revenue and grants: 14.3 (2009-2017), 15.2 (2018), 12.8 (2019), 14.3 (2020), 15.8 (2021), 16.8 (2022), 17.4 (2023), 17.5 (2024), 17.4 (2025), cumulative 99.3
  - Primary (noninterest) expenditure: 16.0 (2009-2017), 17.3 (2018), 16.2 (2019), 17.0 (2020), 16.2 (2021), 16.1 (2022), 15.9 (2023), 15.9 (2024), 15.9 (2025), cumulative 96.9

### Debt structure, maturity, and financing risks
- Maturity structure and financing:
  - The maturity structure of debt is expected to improve, lowering gross financing needs.
  - Successful reprofiling of government debt held by the SBP in June 2019 supported debt sustainability.
  - With SBP financing no longer available, the government secured ample bank financing, including at longer maturities and with some foreign participation.
- Measures to lower gross financing needs and improve debt profile (staff-identified actions):
  - Better cash flow management through a treasury single account.
  - Integration of the three borrowing units in the MOF by having domestic, private sector external, and multilateral borrowing units under one single operation.
  - Lengthening maturities in the domestic market by accepting market rates while keeping an eye on overall cost of financing.
  - Developing Islamic-based lending given growing Islamic banking but few Islamic-compliant government instruments.
- Gross financing needs benchmark and risk assessment:
  - Gross financing needs benchmark of 15 percent used in heat-map assessment (cells colored green/yellow/red per benchmarking rules described).

### Contingent liabilities and fiscal risks
- Contingent liabilities from loss-making SOEs continue to represent additional fiscal risks:
  - Estimated at about 2 percent of GDP to the extent not covered by government guarantees.
- Staff aims to strengthen transparency related to other types of contingent liabilities, such as in the context of power generation projects.

### Bilateral creditors and external support
- Bilateral creditor actions and official financing:
  - China renewed US$2 billion bilateral deposits in March.
  - Saudi Arabia refinanced US$3 billion BoP support loans that matured in November–January (US$3 billion).
  - UAE rolled over US$1 billion BoP support loans in March.
  - The oil facility with Saudi Arabia (worth US$3.2 billion) was activated in August 2019 and has provided BoP support.
  - ADB approved in December 2019 a new Special Policy-Based Loan of US$1 billion.
- External financing requirement definition:
  - External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.

### External debt dynamics and key external indicators (selected figures)
- External debt and related indicators (Table 1 highlights):
  - External debt (percent of GDP): 24.1 (2015), 26.5 (2016), 27.4 (2017), 30.3 (2018), 37.6 (2019), 42.2 (2020), 43.6 (2021), 43.2 (2022), 43.2 (2023), 41.4 (2024), 39.3 (2025)
  - External debt-to-exports ratio (in percent): 217.4 (2015), 269.8 (2016), 303.2 (2017), 317.6 (2018), 360.6 (2019), 396.1 (2020), 409.7 (2021), 415.4 (2022), 420.9 (2023), 399.2 (2024), 371.3 (2025)
  - Gross external financing need (in billions of US dollars): 9.1 (2015), 11.4 (2016), 21.7 (2017), 28.8 (2018), 26.6 (2019), 25.8 (2020), 29.3 (2021), 27.0 (2022), 29.2 (2023), 32.7 (2024), 30.1 (2025)
  - Gross external financing need (in percent of GDP): 3.4 (2015), 4.1 (2016), 7.1 (2017), 9.2 (2018), 9.4 (2019), 9.8 (2020), 10.5 (2021), 8.9 (2022), 8.8 (2023), 9.2 (2024), 7.8 (2025)

### Stress tests, alternative scenarios, and realism checks
- Baseline and alternative scenario assumptions (selected):
  - Baseline real GDP growth: -1.5 (2020), 2.0 (2021), 4.0 (2022), 4.5 (2023), 5.0 (2024), 5.0 (2025)
  - Baseline inflation: 10.5 (2020), 9.0 (2021), 8.0 (2022), 6.1 (2023), 4.9 (2024), 4.8 (2025)
  - Baseline primary balance (in percent of GDP): -2.7 (2020), -0.3 (2021), 0.8 (2022), 1.5 (2023), 1.5 (2024), 1.6 (2025)
  - Historical scenario primary balance: -2.7 (2020), -2.1 (2021), -2.1 (2022), -2.1 (2023), -2.1 (2024), -2.1 (2025)
  - Constant Primary Balance Scenario: primary balance -2.7 for 2020–2025
- Stress-test types presented:
  - Primary Balance Shock
  - Real GDP Growth Shock
  - Real Interest Rate Shock
  - Real Exchange Rate Shock
  - Combined Macro-Fiscal Shock
  - Contingent Liability Shock
  - Additional stress tests and bound tests for external debt (interest rate shock, CA shock, combined shocks, real depreciation shock)
- Stress-test outcomes (qualitative summary from figures):
  - Under the baseline, gross nominal public debt declines from peak levels toward lower levels by 2025.
  - Stress scenarios raise gross nominal public debt and gross financing needs relative to baseline; various charts and bound tests quantify these increases across 2020–2025.

### Policy recommendations and operational priorities (staff-identified)
- Continue fiscal consolidation consistent with EFF program commitments to place public debt on a clear downward path.
- Pursue debt management and cash management reforms to reduce gross financing needs:
  - Implement a treasury single account to improve cash flow management.
  - Integrate MOF borrowing units (domestic, private sector external, multilateral) into a single operation for coordinated borrowing.
  - Lengthen domestic maturities by accepting market rates while monitoring overall cost of financing.
  - Develop Islamic-compliant government instruments to tap growing Islamic banking resources.
- Enhance transparency and monitoring of contingent liabilities, particularly related to power generation projects and loss-making SOEs.

*Source: IMF staff.*

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### Context and request
- Pakistan requests financial support from the IMF for an amount of 50 percent of quota (SDR 1,015.5 million) under the Rapid Financing Instrument (RFI) to help address urgent fiscal and balance of payments needs.
- The authorities request that the full amount of this disbursement be made available to the budget to support the emergency policy response.
- Date and correspondence: Islamabad, April 8, 2020; addressed to Ms. Kristalina Georgieva, Managing Director, International Monetary Fund.

### Health and economic shock: scale and timing
- Confirmed Covid-19 cases and fatalities: as of April 8 there were 4,194 confirmed cases and 60 deaths (up from 30 confirmed cases on March 13).
- Rapid propagation and containment measures: various degrees of lockdown; borders with Iran and Afghanistan closed; international flights and rail transport halted.
- Near-term macroeconomic outlook: expected severe social and economic impact, especially in the coming two quarters.

### Macroeconomic deterioration and key statistics
- IMF staff estimate the economy could contract by 1.5 percent in FY2020 (the first full-year contraction since 1952), a downward revision of about 4 percentage points relative to February projections.
- Primary fiscal deficit: projected to widen by 2 percentage points of GDP (from 0.8 percent of GDP before crisis).
- New external financing gap for Q4 FY2020: estimated by IMF staff at US$2 billion.
- SBP reserves: had increased to US$12.8 billion by end-February (from US$7.3 billion at end-June 2019) and fell below US$11 billion by end-March; staff estimate keeping SBP reserves at US$12 billion by end-June given the external financing gap.
- Rupee depreciation: the rupee has depreciated by 7.2 percent during March 2020.
- Workers’ remittances: IMF staff project workers’ remittances to drop by over US$5 billion in FY2020 and FY2021.
- Financial markets: main stock index declined by about 25 percent since early February 2020.
- Risk-weighted capital adequacy ratio for banks: stood at 17 percent for December 2019.
- Capital Conservation Buffer requirement: temporarily reduced from 2.5 percent to 1.5 percent.
- Policy rate change: cumulative cut in the policy rate of 225 basis points; SBP reduced the policy rate by 225 basis points to 11 percent.

### Emergency fiscal measures and social support
- Prime Minister’s fiscal package: worth 1.2 percent of GDP; new Government PRs 1.2 trillion economic relief package.
- Key components of the fiscal package and social measures:
  - Sizeable increases in health- and mitigation-related spending.
  - Significant allocations to support daily wage earners and exporters.
  - Funding for free shelter rations.
  - Allocations for subsidized food items.
  - Support for SMEs and agriculture.
  - Ehsaas Emergency Cash Program aimed at providing immediate financial support to over 10 million of the most vulnerable families (about a third of the population).
  - Cash grants to 12 million low-income families under the “Ehsaas program”.
  - PRs 200 billion of cash assistance for daily wage earners working in the formal industrial sector.
  - PRs 50 billion earmarked for strengthening the Utility Stores Corporation network and provision of essential food items at subsidized rates.
  - Establishment of a “COVID-19 Pandemic Relief Fund-2020”.
- Procurement transparency commitment: procurement of urgently needed medical supplies will be subject to an ex-post audit by the Auditor General of Pakistan, with results published on the website of the Ministry of Finance.
- Fiscal stance: authorities believe a temporary widening of the budget deficit needs to be accommodated; any additional fiscal measures will be strictly temporary and directly related to the crisis response. Once crisis abates, authorities will resume fiscal consolidation envisioned under the EFF.

### Monetary, financial stability, and SBP measures
- SBP liquidity and credit measures:
  - Expanded refinancing facilities to support manufacturing and hospitals and medical centers; relaxing conditions associated with export refinancing and long-term financing schemes.
  - Temporary regulatory measures to maintain banking system soundness and sustain economic activity.
- Specific SBP programs and regulatory adjustments:
  - Refinance Scheme for Payment of Wages & Salaries to the Workers and Employees of Business Concerns: low-cost financing for wage expenses for three months from April to June 2020 for businesses that do not lay off employees.
  - Refinance Facility for Combating COVID-19: supports hospitals and medical centers to purchase medical equipment; available through banks until end-September 2020.
  - Increase in regulatory limit on credit to SMEs from PRs 125 million per SME to PRs 180 million.
  - Debt Burden Ratio for consumer loans relaxed from 50 to 60 percent.
  - Principal payment deferment: payment of principal on loan obligations will be deferred for one year by banks, provided borrowers submit a written request before end-June 2020.
  - Restructuring/rescheduling: regulatory criteria temporarily relaxed until March 31, 2021 for borrowers needing relief beyond principal extension (voluntary operation by banks).
  - Temporary Economic Refinance Facility launched to facilitate new investment across manufacturing sectors; SBP will refinance banks for new loans until end-March 2021.
  - Capital Conservation Buffer reduced from 2.5 percent to 1.5 percent to facilitate additional bank lending.

### Impact channels and sectoral effects
- Capital outflows and market volatility: early impact began with capital outflows; main stock index down about 25 percent.
- External accounts: decline in exports (container traffic at major ports shows sharp decline since mid-March); weakening remittances; SBP foreign exchange reserves decline.
- Production indicators: high-frequency indicators for March 2020 show notable reductions in cement, automobiles and petroleum products’ sales.
- Public debt outlook: COVID-19 shock likely to reverse the recent decline in public debt achieved through fiscal consolidation; debt assessed to be sustainable although risks have increased.

### Financing request, rationale, and expected catalytic role
- RFI request: purchase equivalent to 50 percent of the quota (SDR 1,015.5 million) to be channeled to the budget to meet emergency needs.
- Rationale: severity of shock, uncertainty of outlook, and emergency demands make it difficult to recalibrate the existing EFF on a timely basis; RFI considered appropriate to support immediate needs.
- Catalytic expectations: IMF emergency financing expected to catalyze additional support from World Bank, Asian Development Bank, and bilateral donors to close remaining financing gap and ease adjustment burden.
- Authorities stand ready to mount additional fiscal effort should donor funding fall short.

### Policy commitments and safeguards
- Continued commitment to EFF reforms: authorities remain committed to reforms included in the EFF and aim to resume decisive implementation once immediate pressures subside, including fiscal consolidation to put debt on a downward path and strengthening governance, anti-corruption, and AML/CFT frameworks.
- Exchange rate and balance of payments policy: authorities will not introduce measures that exacerbate BoP difficulties; will comply with Fund’s Articles of Agreement prohibitions on imposition/intensification of exchange restrictions or multiple currency practices and avoid additional trade restrictions for BoP purposes.
- Exchange rate regime: maintain market-determined exchange rate as the economy’s main shock absorber; interventions limited to addressing disorderly market conditions.
- Safeguards: updated safeguards assessment completed in December 2019; authorities committed to addressing remaining issues including submission of amendments to the SBP act to the National Assembly; will update the memorandum of understanding between the Ministry of Finance and the State Bank of Pakistan on responsibilities for servicing related financial obligations to the IMF.
- Publication authorization: authorities authorize the IMF to publish this Letter of Intent and the staff report for the request for disbursement under the RFI.

### Outlook and next steps
- Once global conditions normalize, improved fundamentals under the EFF and commitment to its objectives should enable economic recovery.
- Authorities intend to resume the fiscal consolidation effort and program reviews (second and third reviews of the EFF) as soon as pressures subside.
- Continued policy priorities: implement growth-friendly and inclusive policies, structural reforms to boost potential growth and resilience, and strengthen social safety nets.

*Appendix I. Letter of Intent — Pakistan (Islamabad, April 8, 2020).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1pakea2020001.pdf_