© Reuters. FILE PHOTO: Prime Minister of Pakistan Shehbaz Sharif meets managing director of the International Monetary Fund (IMF), Kristalina Georgieva, in Paris, France June 22, 2023. Press Information Bureau (PID)/Via Release REUTERS/File Photo
By Asif Shahzad
LAHORE, Pakistan (Reuters) – The International Monetary Fund (IMF) has reached a staff-level agreement with Pakistan for $3 billion in short-term financial assistance, the lender said, a decision internationally approved. The long-awaited South Asian country. the brink of default.
The deal, subject to approval by the IMF board in July, comes hours before the current agreement with the IMF expires later on Friday. While it is essentially a bridging loan, it offers plenty of respite for Pakistan, which is facing a severe balance of payments crisis and dwindling foreign exchange reserves.
Prime Minister Shehbaz Sharif said the so-called Contingency Agreement (SBA) would allow Pakistan to achieve economic stability and put the country “on the path of sustainable economic growth, God willing”.
Pakistan will receive the official documents on the deal by the end of Friday from the IMF, Finance Minister Ishaq Dar told Reuters, which he said he would “sign, seal and send back tonight.”
He said on Thursday that the deal is expected to happen soon.
According to Tradeweb data, Pakistani sovereign dollar bonds traded higher after the announcement, with the 2024 issue posting the biggest gain, up more than 8 cents from over 70 cents in dollars.
The gains were most pronounced for short-term bonds, reflecting lingering skepticism over the country’s long-term financial outlook.
The country’s domestic currency and stock markets were closed on Friday due to the Eid holiday.
With sky-high inflation and foreign exchange reserves barely enough to cover a month of controlled imports, analysts say Pakistan’s economic crisis could lead to default if there is no deal. agreement of the IMF.
$3 billion in funding, spread over nine months, was higher than expected as it looks to replace the remaining $2.5 billion from a $6.5 billion long-term bailout la of the Expanded Fund Organization agreed in 2019, which expires on Friday.
The IMF funding will also unlock other bilateral and multilateral external financing and debt reversals, particularly from friendly countries like Saudi Arabia and the United Arab Emirates, which has committed about 3 billion USD.
“This will support short-term policy efforts and replenish reserves, with the aim of bringing them to a more comfortable level,” the IMF said.
ELECTRICITY PRICE UP
IMF official Nathan Porter said on Thursday that the new contingency agreement builds on the 2019 program, adding that Pakistan’s economy has faced a number of challenges in recent times. , including devastating flooding last year and soaring commodity prices following the war in Ukraine.
“Despite the administration’s efforts to reduce imports and the trade deficit, inventories have fallen to very low levels. Liquidity in the power sector remains severe,” Porter said in a statement.
“In light of these challenges, the new agreement will provide a policy anchor and a framework for financial support from multilateral and bilateral partners in the coming period.”
Porter also pointed to the arrears and frequent blackouts of the power sector.
Reforms in the energy sector, which have accumulated debt of nearly 3.6 trillion Pakistani rupees ($12.58 billion), are the cornerstone of discussions with the IMF.
The IMF wants Pakistan to adopt a steadfast policy to overcome challenges, “especially in the energy sector”, the statement said.
“The administration’s program also includes ongoing efforts to enhance the viability of the energy sector (including the adoption of timely annual price reductions for fiscal year 24),” the lender said. said, means an increase in electricity prices in the financial year.
Government sources told Reuters the rate hike would come before the IMF board considers the bailout in mid-July.
“Reform does not — must not — mean continuously raising taxes,” Pakistan’s Power Minister Khurram Dastgir told Reuters in a text message after the deal.
With the current government’s term ending in August, Dastgir said the Sharif government has put in place an “aggressive medium and long-term plan” to significantly increase renewable energy production in order to reduce expense.
He says this is only possible if there is long-term support to carry out that plan. He did not confirm whether a base tax increase on the card was imminent.
Islamabad has implemented a series of policy measures since an IMF team arrived in Pakistan earlier this year, including a revised 2023-2024 budget last week to accommodate lenders’ needs.
Other adjustments the IMF required before the deal was reached include reversing subsidies in the energy and export sectors, increasing energy and fuel prices, increasing the base policy rate to 22%, and the exchange rate. market-based exchange and external financing arrangements.
It also caused Pakistan to raise more than 385 billion rupees ($1.34 billion) in new taxes through the supplementary budget for the fiscal year 2022-2023 and the revised budget for 2023-24.
Going forward, the IMF said, the central bank should continue to be proactive to reduce inflation and maintain the foreign exchange framework.
Painful adjustments drove inflation to an all-time high of 38% year-on-year in May.
“The 2024 budget advances a basic surplus of about 0.4 percent of GDP by taking a number of steps to expand the tax base and increase tax revenue from low-tax sectors,” Porter said. The budget also ensures space to increase support for vulnerable people through the cash handout program, adds the budget.
He said it is important that the budget goes according to plan and that the administration resists pressure for extra-budget or tax-free spending in the coming period.
“This new program is much better than we expected,” said Mohammed Sohail of Topline Securities in Karachi, adding that there is a lot of uncertainty about what will happen after a government came to power at the end of this year.
“This funding of $3 billion and over nine months will certainly help restore some investor confidence,” he said.
($1 = 286.1500 Pakistani rupees)