IMF says Pakistan has made 'considerable progress' but key priorities remain

Washington lender says discussions to continue in the coming days to finalise implementation details of policies

People buy rice at a market in Karachi on February 3, 2023. - Pakistan's Prime Minister Shehbaz Sharif said February 3 the government would have to agree to IMF bailout conditions that are "beyond imagination", as it battles a spiralling economic crisis. (Photo by Asif HASSAN / AFP)Show less

The International Monetary Fund has welcomed the commitment of Pakistan's government to enforce policies needed to buttress the stability of the country's economy but the cash-strapped country needs to press ahead with key reforms to strengthen its finances and reduce debt.

Officials from the Washington-based lender held “constructive discussions” with authorities during a visit to Islamabad from January 31 to February 9 as part of the fund's financial assistance programme to Pakistan.

“The IMF team welcomes the Prime Minister’s commitment to implement policies needed to safeguard macroeconomic stability,” Nathan Porter, who led the IMF mission to Pakistan, said on Friday.

“Considerable progress was made during the mission on policy measures to address domestic and external imbalances,” Mr Porter said.

In October, Moody's Investors Service downgraded Pakistan's sovereign rating deeper into junk territory and maintained a negative outlook on the country owing to the sharp deterioration of its economy as a result of the effects of recent floods.

Rising prices worldwide and delayed policy action by Pakistan's government hit the country’s finances, leading to significant exchange-rate depreciation, a surge in inflation and an erosion of its foreign currency reserves.

Torrential rain and flooding in June, which left a third of the country partially submerged and killed more than 1,000 people, piled pressure on its faltering economy.

Before the flooding, a weakening economy forced the government to raise fuel prices by more than 20 per cent this year and the country has struggled to recover from floods.

The economic outlook in the near and medium term has deteriorated sharply as a result of the floods.

The government's preliminary estimates put the economic cost of the floods at about $30 billion, or 10 per cent of gross domestic product.

In August, the International Monetary Fund released about $1.1 billion to Pakistan as part of its seventh and eighth reviews of the country's bailout programme, helping it avoid a default crisis similar to Sri Lanka's.

The fund also agreed to extend the programme by a year to the end of June 2023 and increase the total amount of funding by about $940 million.

Last week, Pakistan's Prime Minister Shehbaz Sharif said the government would have to agree to IMF bailout conditions that are “beyond imagination”.

Moody's has forecast GDP growth of zero per cent to 1 per cent for Pakistan's 2023 fiscal year that ends in June 2023. That compares with an earlier forecast before the floods of 3 per cent to 4 per cent.

The country's IMF loan programme, which was agreed upon in 2019, had stalled under the government of former prime minister Imran Khan, which backtracked on subsidy agreements and failed to improve tax collection.

However, Pakistan and the fund resumed a staff-level agreement in July to resume the funding facility.

Pakistan's key priorities include strengthening its fiscal position with permanent revenue measures and reducing untargeted subsidies, while scaling up its social protection measures to help the most vulnerable and those affected by the floods, Mr Porter said.

Other priorities include allowing the exchange rate to be determined by market forces to gradually eliminate the foreign currency shortage.

It should also boost its energy provisions by preventing further accumulation of circular debt and ensure the viability of the energy sector.

“The timely and decisive implementation of these policies, along with resolute financial support from official partners, are critical for Pakistan to successfully regain macroeconomic stability and advance its sustainable development,” Mr Porter said.

“Virtual discussions will continue in the coming days to finalise the implementation details of these policies.”