In a significant economic development, Pakistan and the International Monetary Fund (IMF) have achieved a staff-level agreement on the first review under Pakistan’s Stand-By Arrangement (SBA). This pivotal step, pending approval by the IMF’s Executive Board, is poised to grant Pakistan access to a substantial $700 million.
Economic Landscape and Fiscal Strategies
Fiscal Consolidation for Debt Reduction
Under the SBA, a critical focus lies on continued fiscal consolidation to diminish public debt. The authorities aim for a primary surplus of at least 0.4 percent of GDP in FY24. This commitment involves prudent spending practices at both federal and provincial levels and an enhanced revenue performance. Efforts to expand the tax base and improve the quality of public investment are underway.
Safeguarding the Vulnerable through Social Safety Nets
Recognizing the importance of social protection, the authorities are prioritizing the strengthening of the social safety net. Disbursements for social protection, particularly under the BISP’s budget allocation, will see a significant increase. The Unconditional Cash Transfers (UCT) Kafaalat program is set to expand, benefiting 9.3 million families, with a focus on annual inflation adjustments.
Energy Sector Reforms for Viability
Addressing the challenges in the energy sector, the authorities are implementing substantial reforms. The circular debt across power and gas sectors, exceeding 4 percent of GDP, necessitated immediate action. Tariff adjustments and increased gas prices are part of this strategy, aiming to ensure the viability of these sectors and the provision of critical energy supplies.
Exchange Rate Dynamics and FX Reserves
A key element of the SBA involves returning to a market-determined exchange rate and rebuilding foreign exchange reserves. The authorities emphasize transparency and efficiency in the foreign exchange market, refraining from administrative interventions. This approach aligns with sustaining external pressures and rebuilding reserves.
Monetary Policy and Financial Sector Resilience
Proactive Monetary Policy for Inflation Control
The SBA outlines a proactive monetary policy to lower inflation toward its target. The authorities commit to tight monetary measures, ready to respond resolutely to any near-term price pressures, including potential second-round effects on core inflation or renewed exchange rate depreciation.
Strengthening Financial Sector Vigilance
Continued vigilance is warranted to ensure the soundness of the banking system. Priorities include addressing undercapitalized financial institutions, maintaining foreign exchange exposures within regulatory limits, and aligning bank resolution and crisis management frameworks with international best practices.
State-Owned Enterprises and Governance Reforms
Enhancing Business Environment and Transparency
The SBA emphasizes ongoing reforms in state-owned enterprises (SOEs) and governance to boost the business environment, investment, and job creation. Passage of the SOE law marks a crucial step, and the authorities are actively pursuing the privatization of select SOEs. High governance and transparency standards are set for the newly created Sovereign Wealth Fund (SWF) and the operations of the SIFC.
International Collaboration for Economic Support
Accelerated Engagement with International Partners
Recognizing the importance of external support, the authorities are intensifying engagement with multilateral and official bilateral partners. Timely disbursement of committed external support is crucial to sustaining policy and reform efforts.