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First review of IMF extended fund facility: key to meet financial needs

The Executive Board of the International Monetary Fund (IMF) on 19th December 2019 completed the first review of Pakistan’s economic performance under the Extended Fund Facility (EFF). The completion of the review allowed Pakistan to draw SDR 328 million or US$ 452.4 million, taking total disbursements to SDR 1,044 million or US$ 1,440 million. The Executive Board approved the 39-month, SDR 4,268 million or US$6 billion at the time of approval of the arrangement, EFF for Pakistan on July 3, 2019.

Following the Executive Board’s decision, David Lipton, First Deputy Managing Director and Acting Chair, issued a statement stating, “Pakistan’s program is on track and has started to bear fruit. However, risks remain elevated. Strong ownership and steadfast reform implementation are critical to entrench macroeconomic stability and support robust and balanced growth.

“The authorities are committed to sustaining the progress on fiscal adjustment to place debt on a downward path. The planned reforms include strengthening tax revenue mobilization, including the elimination of tax exemptions and loopholes, and prudent expenditure policies. Preparations for a comprehensive tax policy reform should start early to ensure timely implementation. Enhanced social safety nets will help alleviate social costs and build support for reforms.

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“The flexible, market-determined exchange rate remains essential to cushion the economy against external shocks and rebuild reserve buffers. The current monetary stance is appropriately tight and should only be eased once disinflation is firmly entrenched. Strengthening the State Bank of Pakistan’s autonomy and governance will support these efforts.

“Faster progress is needed to improve the AML/CFT framework, supported by technical assistance from the IMF and other capacity development providers. Swift adoption of all the necessary measures is needed to exit the FATF’s list of jurisdictions with AML/CFT deficiencies.

“The authorities have adopted a comprehensive plan to address the accumulation of arrears in the power sector. Its full implementation is the key to improve collection, reduce losses, and enhance governance. Timely and regular adjustment of energy tariffs will bring the sector in line with cost recovery.

“Efforts are ongoing to further improve the business environment, strengthen governance, and foster private sector investment. Reform of the state-owned enterprise sector will help put Pakistan’s public finances on a sustainable path and have positive spillovers by leveling the playing field and improving the provision of services.”

 

According to IMF, Pakistan’s economy is at a critical juncture. The legacy of misaligned economic policies, including large fiscal deficits, loose monetary policy, and defense of an overvalued exchange rate, fueled consumption and short-term growth in recent years, but steadily eroded macroeconomic buffers, increased external and public debt, and depleted international reserves. Structural weaknesses remained largely unaddressed, including a chronically weak tax administration, a difficult business environment, inefficient and loss making SOEs, amid a large informal economy. Without urgent policy action, economic and financial stability could be at risk, and growth prospects will be insufficient to meet the needs of a rapidly growing population.

The comprehensive economic reform program, supported by the EFF, aims at stabilizing the economy and laying the foundation for robust and balanced growth. Key elements include:

  1. A decisive fiscal consolidation aims at reducing public debt and building resilience, starting with the adoption of an ambitious FY20 budget. The adjustment will be supported by comprehensive efforts to drastically increase revenue mobilization by 4 to 5 percent of GDP at the federal and the provincial level over the program period.
  2. Expanding social spending through strengthening and broadening of safety nets to support the most vulnerable.
  3. A flexible, market-determined exchange rate for restoring competitiveness, rebuilding official reserves, and providing a buffer against external shocks. This will be supported by an appropriate monetary policy to shore up confidence and contain inflation, conducted by an independent central bank.
  4. Energy sector reforms to eliminate quasi-fiscal losses and encourage investment, including by depoliticizing gas and power tariff setting and over the program period, gradually bringing the sector to cost recovery; and
  5. Structural reforms will be undertaken through strengthening institutions, increasing governance and transparency, and promoting an investment-friendly environment necessary to improve productivity, entrench lasting reforms, and ensure sustainable growth.

Strong financial assistance by Pakistan’s international partners will support the EFF. The Fund-supported program is expected to usher broader support from multilateral and bilateral creditors in excess of US$38 billion, which is crucial for Pakistan to meet its large financing needs in the coming years.

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