The International Monetary Fund (IMF) said on Monday it had agreed with Pakistan on measures needed to revive a stalled $6bn funding programme for the South Asian country, which faces growing economic challenges.
“The Pakistani authorities and IMF staff have reached a staff-level agreement on policies and reforms needed to complete the sixth review,” the IMF said in a statement.
Pakistan had been in talks with the IMF for several months to seek a relaxation in the terms and conditions of the package. Its government bonds jumped between 1.3 and 2.8 cents on the United States dollar on the news of an agreement, and were on course for their best day in over a year.
“The agreement is subject to approval by the Executive Board, following the implementation of prior actions, notably on fiscal and institutional reforms,” the IMF said.
The completion of the review, pending since earlier this year, would make available 750 million in IMF special drawing rights, or around $1bn, bringing total disbursements so far to about $3bn, the statement said.
Pakistan will ensure legislation is passed on central bank autonomy as agreed with the IMF, said Finance Adviser Shaukat Tarin, who is equivalent to the country’s finance minister.
“God willing, we will get it passed,” he said. “We believe that the state bank … should be independent in monetary policy and exchange rate.”
Pakistan’s government has a simple majority in parliament to pass the law.
Tarin also pledged the take another four actions as agreed before the fund’s board meets to consider whether to approve the issue of the latest tranche.
Those actions are: withdrawal of tax exemptions and subsidies, an increase in the petroleum levy, higher energy tariffs and an audit of some $1.4bn in extra funds lent to Pakistan in April 2020 to help it weather the COVID-19 pandemic.
“They have asked for it, and we have to do it,” Tarin told a news conference, referring to the audit.
Pakistan entered the $6bn, 39-month funding programme with the IMF in July 2019, but the funding stalled earlier this year due to issues over the required reforms.
Despite a difficult environment, progress continues to be made in implementing the programme, the IMF said.
“All quantitative performance criteria (PCs) for end-June were met with wide margins, except for that on the primary budget deficit,” it said.
Pakistan has been grappling with a historical currency devaluation, high inflation, a current account deficit and dwindling foreign reserves – and the talks between the government and the IMF had added to investor nerves.
“This will remove [a] lot of uncertainties,” a finance ministry spokesman said of the agreement with the fund.
The central bank last week warned that a higher-than-expected primary deficit would likely worsen the inflation outlook and undermine economic recovery. It also raised its benchmark interest rate by 150 basis points to 8.75 percent to counter inflationary pressures and preserve stability with growth.
Headline inflation had reached 9.2 percent in October, up from 8.4 percent two months earlier, the bank said.
The bank has also lifted the cash reserve requirement for commercial banks by one percentage point, the first such move in more than a decade, in another move to deal with accelerating inflation.