Pakistan, IMF reach staff-level agreement to pave way for release of $500mn tranche

ISLAMABAD: Pakistan and the International Monetary Fund (IMF) have reached a staff-level agreement on second to fifth reviews of the country’s reform program under the IMF Extended Fund Facility (EFF), ARY News reported on Tuesday.

“IMF staff and the Pakistani authorities have reached an 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),” said an IMF press statement issued Tuesday.

The statement was issued after the IMF team, led by Ernesto Ramirez Rigo, concluded virtual discussions with the Pakistani authorities and reached a staff-level agreement supported by the IMF 39-month Extended Fund Facility (EFF) arrangement for the amount of SDR 4,268 million (about US$6 billion).

The agreement is subject to the approval of the IMF’s Executive Board, the statement said adding the reviews’ completion would release around US$500 million.

(2/2) I would like to thank the Prime Minister for his guidance, and all my colleagues and the IMF staff for their support. This is a good development for Pakistan. https://t.co/UAF7nhn4O1

— Dr. Abdul Hafeez Shaikh (@a_hafeezshaikh) February 16, 2021

Covid-19 impact

According to a press release, Ramirez Rigo in the statement said that the “Policies and reforms implemented by the Pakistani authorities prior to the COVID-19 shock had started to reduce economic imbalances and set the conditions for improving economic performance.”

“Most of the targets under the EFF-supported program were on track to be met. However, the pandemic disrupted these improvements and required a shift in authorities’ priorities towards saving lives and supporting households and businesses,” the press release reads.

“Aside from health containment measures, this included a temporary fiscal stimulus, a large expansion of the social safety net, monetary policy support and targeted financial initiatives,” the statement added.

These were supported by sizeable emergency financing from the international community, including from the Fund’s Rapid Financing Instrument (RFI).

“As a result of the 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,” the statement added.

It said that the high-frequency economic data also started to point to recovery and added that considering these improvements, the economy was projected to expand by 1.5 percent in FY2021 from the -0.4 percent in FY2020. Still, with the COVID-19 second wave still unfolding around the world, the outlook is subject to a high level of uncertainty and downside risks.

The power sector’s strategy aims at financial viability, through management improvements, cost reductions, and adjustments in tariffs and subsidies calibrated to attenuate social and sectoral impacts.

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“The State Bank of Pakistan (SBP)’s monetary and exchange rate policies have served Pakistan well and were critical in helping to navigate the COVID-19 shock. The strengthened international reserves’ position since the start of the program—with gross reserves almost doubling to USD 13 billion until January 2021 and net international reserves (NIR) increasing by over USD 9 billion until December 2020—and the shock absorption displayed by the market-based exchange rate, allowed the SBP’s to pre-emptively proceed to a large easing of monetary policy, and a sizeable expansion of refinancing facilities,” it added.

According to the statement, the banking system remained healthy, but it would be important for the SBP to continue to remain vigilant and prevent possible financial stability stress as the temporary support is phased out.

“The IMF team would like to thank the Pakistani authorities for the constructive and candid discussions,” the statement concluded.