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Pakistan

A new stand-by arrangement with the IMF: here are some key points

  • After a massive delay, govt succeeds in convincing IMF to allot it more money than expected
Published June 30, 2023

The wait is finally over for Pakistan, literally on the day the Extended Fund Facility (EFF) was scheduled to expire. Early morning on Friday, it was announced that Pakistan and the International Monetary Fund (IMF) reached a staff-level agreement on a fresh nine-month, $3 billion stand-by arrangement (SBA) with an Executive Board meeting expected by mid-July.

The news comes as a major breakthrough for Islamabad that ran from pillar to post to meet conditions of the Washington-based lender only to see an incessant delay on a successful completion of the ninth review. During this time, the public was alienated, heavy taxes were imposed, and questions were raised on Pakistan’s debt obligations.

With a new SBA, which runs through July-March of fiscal year 2023-24, here are some key points to keep in mind as Pakistan navigates the coming months.

  • The IMF Executive Board is likely to meet by mid-July to formally approve the new arrangement with Pakistan

  • This is not good news for short sellers. Majority of investors are likely to see this as a major positive and the KSE-100, a benchmark for market performance, is likely to get an upward push when the holidays are over

  • Pakistan’s dollar-denominated bonds are likely to see their rally continue as well

  • A ratings upgrade could be on the horizon after several downgrades announced by Moody’s, Fitch Ratings, and S&P

  • The new facility also unlocks access to capital markets for Pakistan, opening up avenues for lending as it looks to finance its external funding gap. Pakistan has budgeted $1.5 billion as a Eurobond/International Sukuk for fiscal year 2023-24. This amount is likely to be dependent on the rates it is offered in the international market

  • Pakistan’s foreign exchange reserves, currently under $4 billion according to latest available data, are likely to get a boost as Saudi Arabia, UAE, and other bilateral partners also come through

  • This is a fresh nine-month programme, implying that to move forward, there will be a new set of conditions to keep the SBA going

  • It gives some room to the government ahead of elections, and takes the onus off the ‘caretaker setup’ to take measures for the economy

  • The IMF will keep a close eye for the next nine months to ensure Pakistan does not sway from its economic measures. The key things it will look at will be the imposition of the petroleum development levy (the new ceiling is Rs60)

  • The IMF acknowledged that Pakistan’s economy faced several external shocks, but was quick to point out that there were “some policy missteps” including “shortages from constraints on the functioning of the FX market”. The exchange rate and gap between inter-bank and open markets will be closely followed

  • The IMF highlighted that “liquidity conditions in the power sector also remain acute”. This could imply that a power tariff hike is likely. Another scenario could be settlement of circular debt through dividend payouts. We will have to wait and watch

  • The lender wants that the revised budget be executed as planned, and that “authorities resist pressures for unbudgeted spending or tax exemptions in the period ahead”. Scrutiny on tax exemptions/subsidies will be high, and the new SBA could be derailed if measures that benefit the government’s vote-bank are announced ahead of elections

  • A watchful eye will also be on the State Bank of Pakistan (SBP), and how it handles its monetary policy as well as import prioritisation/exchange rate. The rupee could appreciate in the short-term, but the IMF wants “full determination of the exchange rate”. In other words, the rupee should appreciate and depreciate depending on Pakistan’s dollar liquidity. With import restrictions now removed, there will be pressure on the rupee as well

  • The IMF said the SBP should remain proactive to reduce inflation, and maintain a foreign exchange framework free of restrictions on payments and transfers for current international transactions and multiple currency practices. This could mean that the key policy rate is likely to remain high in the short-term, and anchored inflation will remain a priority

  • Pakistan will need to mobilise financial support from multilateral institutions and bilateral partners, and convert them into tangible inflows. So far, inflows that have been pledged/committed have not landed in Pakistan’s official accounts

  • In addition, viability of the energy sector (including through a timely FY24 annual rebasing), improving governance of state-owned entities, and strengthening the public investment management framework, including for projects needed to build resilience to climate change, are to remain focus areas

Bilal Memon

Bilal Memon is the Head of Digital Content at Business Recorder. His Twitter handle is @bilalahmadmemon

Comments

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Johnny Walker Jun 30, 2023 02:13pm
It is a shame that the IMF did not insist on firing of Dar & Co as they will soon revert to unbudgeted spending to win next elections, if they happen.
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Tulukan Mairandi Jun 30, 2023 02:23pm
One infraction to IMF's dictation and IMF will pull Pakistan into the abyss of collapse
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Azeem Hakro Jun 30, 2023 06:21pm
The agreement with the IMF is a big win for the government and the country, but it's only the beginning of a long process. Although the agreement with the IMF doesn't fix all of Pakistan's money problems, it's a significant step in the right direction. The government will need to do more things to deal with the country's economic difficulties and make sure it stays on a good financial path. In short, the agreement with the IMF is a good step.
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Maqbool Jun 30, 2023 07:43pm
caretaker setup’ to take measures for the economy‘ Caretaker are not allowed to take such measures by Law. But both KP and Punjab have announced Budgets without having an elected assembly to pass them. Illegality’s rein in todays Pakistan
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KU Jul 01, 2023 11:48am
Yes, the wait is finally over and it is now apparent that in the coming days, the demystified revised budget will only haunt the people and their uncertain future. The key points translate only macroeconomic indicators for sensibility while there is no discussion on how the battered economy and its various sectors will be revived. The press conference by PM & Co., was a new low for journalism and the much-touted fourth pillar of state, because short of congratulating the officials for their role in the struggle for the independence of Pakistan, the journalists praised every fictional and fairy tale achievement of the government.
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Muhammad Rizwan Jul 01, 2023 04:15pm
Key points Two billion dollars electric theift per year should be checked so that we don't need 1.1 billion dollar from IMF Instead of additional 2.5 percent additional tax on salaried class ,those who are not paying taxes be checked For example ,a consultant surgeon or physician hiding daily patient turn over by even fifty percent Milkman,car mechanic ect earning two lacs per month but not paying any income tax
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Ulgen Jul 02, 2023 03:06am
What's the guarantee that any money provided by IMF will not be laundered by the Pakistani Generals , the Sharif family or the Zardari/ Bhutto families?
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zh Jul 03, 2023 12:34am
@Muhammad Rizwan, Do the sugar mills, hospitals, etc. owners,MPs, MPPs minister CMs and the PM pay due taxes on their legal and illegal incomes?
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Mohammed Mohsin Jul 07, 2023 07:01am
I love my Pakistan
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