IMF Reaches Staff-Level Agreement on Economic Policies with Pakistan for a Three-Year Extended Fund Facility

IMF News, May 12, 2019

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A staff level agreement was reached on economic policies that could be supported by a 39-month Extended Fund Arrangement (EFF) for about US$6 billion.
The agreement is subject to IMF management approval and to approval by the Executive Board, subject to the timely implementation of prior actions and confirmation of international partners’ financial commitments.
IMF mission led by Mr. Ernesto Ramirez Rigo visited Islamabad from April 29 to May 11 to discuss IMF support for the authorities’ economic reform program.
Press Release No. 19/157 dated May 12, 2019.

Pakistan is described as facing:
- lackluster growth,
- elevated inflation,
- high indebtedness,
- a weak external position.
These outcomes reflect “the legacy of uneven and procyclical economic policies in recent years” and lingering structural and institutional weaknesses.
Specific structural concerns highlighted include:
- large informality in the economy,
- low spending in human capital,
- poverty.

The EFF aims to support the authorities’ strategy for stronger and more inclusive growth by:
- reducing domestic and external imbalances,
- removing impediments to growth,
- increasing transparency,
- strengthening social spending.
The program’s timeframe is three years and is intended to:
- rekindle economic growth,
- improve living standards,
- increase confidence,
- put the economy on a sustainable growth path with stronger private sector activity and job creation.
Financing support from Pakistan’s international partners is stated as critical to support adjustment efforts and ensure medium-term program objectives can be achieved.

The forthcoming budget for FY2019/20 is described as “a first critical step” in the fiscal strategy.
The budget will aim for a primary deficit of 0.6 percent of GDP.
Fiscal measures to achieve this include:
- tax policy and administrative reforms to strengthen revenue mobilization,
- measures to eliminate exemptions, curtail special treatments, and improve tax administration,
- prudent spending growth to preserve essential development spending,
- scaling up the Benazir Income Support Program and improving targeted subsidies to protect the most vulnerable.
A comprehensive plan for cost-recovery in the energy sectors and state-owned enterprises is planned to reduce quasi-fiscal deficits.
Modernization of the public finance management framework is intended to increase transparency and spending efficiency.
Provinces are committed to contribute by better aligning their fiscal objectives with those of the federal government.
Authorities will engage provincial governments to explore options to rebalance current arrangements in the context of the forthcoming National Financial Commission.

The State Bank of Pakistan will focus on reducing inflation and safeguarding financial stability.
A market-determined exchange rate is endorsed to help the functioning of the financial sector and contribute to better resource allocation.
Authorities are committed to strengthening the State Bank of Pakistan’s operational independence and mandate.

An “ambitious structural reform agenda” will supplement macroeconomic policies, with priority areas including:
- improving the management of public enterprises,
- strengthening institutions and governance,
- continuing anti-money laundering and combating the financing of terrorism efforts,
- creating a more favorable business environment,
- facilitating trade.
These reforms are intended to create fiscal space for a substantial increase in social spending as well as infrastructure and human capital development.

The staff-level agreement is conditional on:
- timely implementation of prior actions,
- confirmation of international partners’ financial commitments.
Decisive policies, reforms, and significant external financing are stated as necessary to reduce vulnerabilities faster and increase confidence.

Mr. Ernesto Ramirez Rigo summarized the agreement and noted the government has already initiated a difficult but necessary adjustment to stabilize the economy, including through support from the State Bank of Pakistan.
The IMF team expressed gratitude to the Pakistani authorities for open and constructive discussions and their hospitality.

Source: IMF Press Release No. 19/157, May 12, 2019.