The International Monetary Fund (IMF) acknowledged on Tuesday the steps taken by Pakistan, and said its team is continuing discussions with the aim of quickly reaching an agreement on financial support from the Washington-based lender.
“Pakistan authorities have taken decisive measures to bring policies more in line with the economic reform programme supported by the IMF,” Nathan Porter, IMF Mission Chief to Pakistan, was quoted as saying in a statement to Business Recorder on Tuesday night.
This includes “the passage of a budget by the parliament that broadens the tax base while opening up space for higher social and development spending, as well as steps towards improving the functioning of the foreign exchange market and tightening monetary policy to reduce inflationary and balance of payment pressures that affect particularly the more vulnerable”.
“The IMF team continues discussions with Pakistani authorities with the aim of quickly reaching an agreement on financial support from the IMF.”
The statement falls short of a definitive plan of action on the programme’s future as it is scheduled to end on June 30.
Background
Earlier reports suggested Pakistan had to satisfy the IMF on three counts, which included restoring the proper functioning of the foreign exchange market, passing a fiscal year 2023-24 budget consistent with programme objectives, and securing firm and credible financing commitments to close the $6-billion financing gap ahead of the Board meeting.
After being unable to satisfy the IMF with its proposed budget, the government announced revised measures for FY24 that featured massive changes in the Finance Bill 2023.
The revised budget now aims for an additional Rs215 billion in tax revenue alongside a cutback of Rs85 billion in public spending for the upcoming fiscal year. While this does not affect the federal development budget or the salaries and pensions of government employees, it does see a higher income tax rate for the salaried group.
In addition to a number of changes in the Finance Bill, the government moved to bring down the spread between the inter-bank and open-market rates that stood at a little over Rs4 on Monday, highlighting the massive discrepancy in the two markets where the gap was once at Rs25.
On Monday, after an “emergency meeting”, the State Bank of Pakistan (SBP) raised the key policy rate by 100 basis points to 22%, citing a slightly deteriorated inflation outlook due to higher taxes in the revised budget and withdrawal of import restrictions.
Last week, Prime Minister Shehbaz Sharif also held a meeting with IMF’s managing director Kristalina Georgieva on the sidelines of the Summit for a New Global Financial Pact in Paris, and briefed the top official on Pakistan’s economic outlook, with hope that the critical funds would be released.
On Tuesday, PM Shehbaz held a telephonic conversation with the IMF official as well.
Programme seen as crucial to help battered economy
Experts have regularly stated that the resumption of the IMF bailout package is crucial for the cash-strapped South Asian economy facing a balance of payment crisis.
The expected funding from the international lender would pave the way for further inflows from Pakistan’s multilateral and bilateral partners reducing risks of a potential default, experts have said.
In addition, it lends stability to the currency market, and anchors expectations of economic growth, inflation and interest rates.
Previous reviews
In August 2022, the IMF Board completed the combined seventh and eighth reviews of the Extended Arrangement under the EFF, taking total disbursement for budget support to about $3.9 billion. The EFF had originally been approved in July 2019.