Press Release No. 21/41

IMF Staff and Pakistan Reach Staff-Level Agreement on the Pending Reviews Under the Extended Fund Facility

February 16, 2021

• IMF staff and the Pakistani authorities have reached an agreement on a package of measures to complete second to fifth reviews of the authorities’ reform program supported by the IMF Extended Fund Facility (EFF). The package strikes an appropriate balance between supporting the economy, ensuring debt sustainability, and advancing structural reform. Pending approval of the Executive Board, the reviews’ completion would release around US$500 million.
• The COVID-19 shock temporarily disrupted Pakistan’s progress under the EFF-supported program. However, the authorities’ policies and allowing higher than expected COVID-related social spending, have been critical in supporting the economy and saving lives and households.
• The Pakistani authorities remain committed to ambitious policy actions and structural reforms to strengthen economic resilience, advance sustainable growth, and achieve the EFF’s medium-term objectives.

“The policies and reforms implemented by the Pakistani authorities prior to the COVID-19 shock had started to reduce economic imbalances and set the conditions for improving economic performance. Most of the targets under the EFF-supported program were on track to be met. However, the pandemic disrupted these improvements and required a shift in authorities’ priorities towards saving lives and supporting households and businesses. To a large extent, the authorities’ response was enabled by the fiscal and monetary policy gains attained in the first nine months of FY2020. Aside from health containment measures, this included a temporary fiscal stimulus, a large expansion of the social safety net, monetary policy support and targeted financial initiatives. These were supported by sizeable emergency financing from the international community, including from the Fund’s Rapid Financing Instrument (RFI). 

“As result of the authorities’ actions, the COVID-19 first wave started to abate over the 2020 summer and the impact on the economy was significantly reduced. The external current account improved, due to stronger-than-expected remittances, import compression, and a mild export recovery. High-frequency economic data also started to point to a recovery. Considering these improvements, the economy is projected to expand by 1.5 percent in FY2021 from the -0.4 percent in FY2020. Still, with the COVID-19 second wave still unfolding around the world, the outlook is subject to a high level of uncertainty and downside risks. 

“The Covid-19 shock has required a careful recalibration of the macroeconomic policy mix, the reforms calendar, and the EFF review schedule. Against this background, the authorities have formulated a package of measures that strikes an appropriate balance between supporting the economy, ensuring debt sustainability, and advancing structural reforms. The fiscal strategy remains anchored by the sustainable primary deficit of FY2021 budget and allows for higher-than-expected COVID-related and social spending to minimize the short-term impact on growth and the most vulnerable. The targets are supported by careful spending management and revenue measures, including reforms of corporate taxation to make it fairer and more transparent. The power sector’s strategy aims at financial viability, through management improvements, cost reductions, and adjustments in tariffs and subsidies calibrated to attenuate social and sectoral impacts.   

“The State Bank of Pakistan (SBP)’s monetary and exchange rate policies have served Pakistan well and were critical in helping to navigate the COVID-19 shock. The strengthened international reserves’ position since the start of the program—with gross reserves almost doubling to USD 13 billion until January 2021 and net international reserves (NIR) increasing by over USD 9 billion until December 2020—and the shock absorption displayed by the market-based exchange rate, allowed the SBP’s to pre-emptively proceed to a large easing of monetary policy, and a sizeable expansion of refinancing facilities. The banking system remains healthy, but it will be important for the SBP to continue to remain vigilant and prevent possible financial stability stress as the temporary support is phased out. International reserves are set to improve further reflecting current account developments, the EFF resumption, and international partners’ support.  

“The authorities are moving steadfastly on a number of other important reforms, including on strengthening regulatory agencies’ legal frameworks (NEPRA and OGRA Acts), consolidating SBP’s autonomy (SBP Act), and improving state owned enterprises (SOE) management (SOE Law). In addition, they have conducted a triage of SOE, and are moving forward with the audits of contracts awarded for COVID-19 related spending. They continue to enhance the effectiveness of their anti-monetary laundering/counter financing of terrorism (AML/CFT) framework and progress in completing their action plan with the Financial Action Task Force (FATF).

“The IMF team would like to thank the Pakistani authorities for the constructive and candid discussions.”