IMF Staff and Pakistan Reach Staff-Level Agreement on the Pending Reviews Under the Extended Fund Facility
IMF News, February 16, 2021
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- Published: February 16, 2021
Overview of the staff-level agreement and financing
- IMF staff and the Pakistani authorities reached agreement on a package of measures to complete second to fifth reviews of the authorities’ reform program supported by the IMF Extended Fund Facility (EFF).
- The EFF arrangement is for the amount of SDR 4,268 million (about US$6 billion).
- Pending approval of the IMF’s Executive Board, the reviews’ completion would release around US$500 million.
- The EFF arrangement duration referenced is a 39-month arrangement.
Economic impact of COVID-19, recent performance, and outlook
- The COVID-19 shock temporarily disrupted Pakistan’s progress under the EFF-supported program.
- Authorities shifted priorities to saving lives and supporting households and businesses, allowing higher-than-expected COVID-related social spending.
- As a result of authorities’ actions, the COVID-19 first wave started to abate over the 2020 summer and the impact on the economy was significantly reduced.
- The external current account improved due to stronger-than-expected remittances, import compression, and a mild export recovery.
- High-frequency economic data pointed to a recovery.
- The economy is projected to expand by 1.5 percent in FY2021 from the -0.4 percent in FY2020.
- The outlook is subject to a high level of uncertainty and downside risks due to the unfolding COVID-19 second wave.
Macroeconomic policy response and anchors
- Fiscal policy:
- Fiscal strategy remains anchored by the sustainable primary deficit of the FY2021 budget.
- The fiscal strategy allows for higher-than-expected COVID-related and social spending to minimize short-term impacts on growth and vulnerable populations.
- Targets are supported by careful spending management and revenue measures, including reforms of corporate taxation intended to make it fairer and more transparent.
- Power sector strategy aims at financial viability through management improvements, cost reductions, and adjustments in tariffs and subsidies calibrated to attenuate social and sectoral impacts.
- Monetary and exchange rate policy:
- The State Bank of Pakistan’s (SBP) monetary and exchange rate policies were critical in navigating the COVID-19 shock.
- The SBP proceeded to a large easing of monetary policy and a sizeable expansion of refinancing facilities, enabled by improved reserve positions and a market-based exchange rate.
- The banking system remains healthy; the SBP should remain vigilant to prevent possible financial stability stress as temporary support is phased out.
External reserves and financing
- Reserve developments since the start of the program:
- Gross reserves almost doubling to USD 13 billion until January 2021.
- Net international reserves (NIR) increasing by over USD 9 billion until December 2020.
- International reserves are set to improve further reflecting current account developments, the EFF resumption, and international partners’ support.
- Emergency financing from the international community, including from the Fund’s Rapid Financing Instrument (RFI), supported the authorities’ COVID-19 response.
Structural reforms, governance, and institutional actions
- Authorities are advancing multiple reforms to strengthen resilience and medium-term objectives:
- Strengthening regulatory agencies’ legal frameworks (NEPRA and OGRA Acts).
- Consolidating SBP’s autonomy (SBP Act).
- Improving state owned enterprises (SOE) management (SOE Law).
- Conducted a triage of SOEs and are moving forward with audits of contracts awarded for COVID-19 related spending.
- Enhancing the effectiveness of the anti-money laundering/counter financing of terrorism (AML/CFT) framework and progressing in completing the action plan with the Financial Action Task Force (FATF).
Key statement by IMF mission chief
- IMF mission chief Ernesto Ramirez Rigo summarized:
- Pre-COVID policies and reforms had started to reduce economic imbalances and set conditions for improved performance, with most program targets on track before the pandemic.
- The pandemic required recalibration of the macroeconomic policy mix, the reforms calendar, and the EFF review schedule.
- The agreed package balances supporting the economy, ensuring debt sustainability, and advancing structural reforms.
- The IMF team thanked the Pakistani authorities for constructive and candid discussions.
IMF Communications Department — Press Release No. 21/41, February 16, 2021