The International Monetary Fund (IMF) has agreed with Pakistan on measures crucial required to revive a halted funding programme of $6 Billion which was meant for South Asian countries facing severe economic challenges.
IMF and Pakistan have had talks for several months to seek a compromise in the terms and conditions for the funds. Pakistan’s government bonds rose between 1.3 and 2.8 cents on USD from the news of an agreement between the two.
The agreement is still subject to the approval of the Executive Board based on the implementation of prior action, particularly regarding institutional reforms.
The completion of this review, which has been pending since the start of 2021, would make available $750 Million in IMF special drawing rights, which would bring Pakistan’s disbursements to about $3 Billion according to the IMF.
Pakistan’s Finance Adviser Shaukat Tarin, who is equivalent to the country’s finance minister, has agreed with the IMF, that Pakistan’s administration will ensure legislation is passed on providing the central bank more autonomy. Shaukat Tarin said “We believe that the state bank . . . should be independent in monetary policy and exchange rate.”
Pakistan Tehreek-e-Insaf (PTI) currently has a simple majority in parliament to pass the law.
The Finance Advisor has also pledged to take four other actions as agreed with the IMF before the fund’s board meets to consider whether Pakistan’s case is qualifies for approval.
- Withdrawal of subsidies and tax exemptions
- Increase in petroleum levy
- Energy tariffs should be raised
- Audit for the $1.4 Billion lent to Pakistan in April 2020 for COVID-19 pandemic
Previously in July 2019 Pakistan had entered a $6 Billion funding programme for 39-months with the IMF. The funding however came to a halt earlier in 2021 due to issues over reforms required by the IMF.
According to the IMF despite there being a difficult environment, there continues to be some progress in implementing the programme. Except for the primary budget deficit all other quantitative performance criteria for June-end were met by Pakistan.
The Pakistani economy has been struggling with a historical currency devaluation, increasing inflation, current account deficit and shrinking foreign reserves. The finance ministry believes this agreement with the fund would remove most uncertainties for investors in Pakistan.
The State Bank of Pakistan (SBP) has warned that a higher-than-expected primary deficit would likely worsen Pakistan’s inflation outlook and therefore undermine the economic recovery. SBP has also raised the benchmark interest rate to 8.75% in response to inflationary pressures and to preserve growth. The bank has stated that inflation has reached 9.2% in October, up 8.4% from August. SBP in response has lifted the cash reserve requirements for commercial banks by one percentage, this was the first time such a move has been made in more than a decade.
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