Pakistan has reached a staff-level agreement with the International Monetary Fund to resume its loan programme, which will help pave the way for the country to secure more than $1.17 billion and help 'stabilise' its battered economy.
The agreement is subject to the approval of the IMF’s executive board and will take the total amount of assistance extended by the fund to the country to $4.2bn, the Washington-based lender said in a statement late on Wednesday.
In order to support the implementation of the programme and help Pakistan meet its financing needs for its fiscal 2023 year, the IMF said its board will consider an extension of the funding facility until the end of June 2023 that could boost total funding to about $7bn.
“Pakistan is at a challenging economic juncture. A difficult external environment combined with procyclical domestic policies fuelled domestic demand to unsustainable levels," said Nathan Porter, who led the IMF team's discussions with the country.
"The resultant economic overheating led to large fiscal and external deficits ... contributed to rising inflation, and eroded reserve buffers.
The new agreement comes after inflation hit a 13-year high in Pakistan, which forced it to raise fuel prices by 20 per cent in May, with the government of Prime Minister Shehbaz Sharif continuing to receive aid from a $6bn package agreed by his predecessor Imran Khan with the IMF in 2019.
The 2019 accord had stalled under Mr Khan's government, which backtracked on subsidy agreements and failed to improve tax collection.
Soaring prices globally and a delayed policy action by Pakistan's government worsened the country’s finances, which led to significant exchange rate depreciation and an erosion of its foreign currency reserves.
Inflation in the country reached an annual 20 per cent in June, after hitting 13.8 per cent in May and 13.4 per cent in April. That increased pressure on Pakistan's declining foreign currency reserves and exacerbated unemployment, which had reached more than 7 per cent.
Faced with a large current account deficit, the government pressed forward with tightening its monetary policy, carrying out measures to consolidate its finances, to reduce the budget deficit, broaden the tax base and secure new IMF backing.
Under the IMF staff-level agreement Pakistan will need to introduce various measures to stabilise its economy, which is an "immediate priority", the fund said.
The country will need to ensure its policies are in line with the fund's supported programme to reduce poverty and strengthen social safety measures to protect the vulnerable segment of society.
Pakistan's government will have to cut spending, reduce its borrowing and aim for a primary surplus of 0.4 per cent of gross domestic product. The fund said this will necessitate the "broad revenue mobilisation efforts focused particularly on higher income taxpayers".
Pakistan's current account deficit stood at more than $12 billion between July 2021 and February 2022, in stark contrast to a $1bn surplus in the same period a year earlier.
Spending on development will need to be protected, and fiscal space will be created for expanding social support schemes. The government will need to accelerate structural reforms and improve the performance of state-owned enterprises.
The IMF said Pakistan's government has committed to resuming power sector reforms while also ensuring its monetary policy cuts inflation to more moderate levels of 5 to 7 per cent.
Pakistan will need greater exchange rate flexibility to help rebuild its reserves and also take steps to strengthen governance and mitigate corruption, the fund said.
The IMF said Pakistan's authorities are establishing a new "robust electronic asset declaration system and plan to undertake a comprehensive review of the anticorruption institutions" to improve governance and fight corruption.
“Steadfast implementation of the outlined policies ... will help create the conditions for sustainable and more inclusive growth," the IMF said.
"The authorities should nonetheless stand ready to take any additional measures necessary to meet programme objectives, given the elevated uncertainty in the global economy and financial markets."
Pakistan's economy is projected to expand by about 4 per cent this year, IMF estimates released in April before the deterioration in the country show. The economy grew 5.6 per cent in 2021.