ISLAMABAD: The International Monetary Fund (IMF) said on Thursday that it has reached staff-level agreement on the combined seventh and eight reviews for Pakistan’s Extended Fund Facility. The agreement is subject to approval by the IMF’s Executive Board following which about $1,177 million loan will become available for Pakistan, bringing total disbursements under the program to about $4.2 billion.

According to a statement issued by IMF, the staff will prepare a report that is subject to management approval and will be presented to the IMF’s Executive Board for discussion and decision. High international prices, and a delayed policy action worsened Pakistan’s fiscal and external positions in FY22, leading to a significant exchange rate depreciation, and eroded foreign reserves.

The immediate priority is to stabilize the economy through the steadfast implementation of the recently approved budget for FY23, continued adherence to a market-determined exchange rate, and a proactive and prudent monetary policy. It is important to expand social safety to protect the most vulnerable, and accelerate structural reforms including to improve the performance of state-owned enterprises (SOEs) and governance.

The IMF team, led by Nathan Porter, finalized discussions for the combined seventh and eight reviews of Pakistan’s economic program supported by an IMF Extended Fund Facility. Additionally, in order to support program implementation and meet the higher financing needs in FY23, as well as catalyze additional financing, the IMF Board will consider an extension of the Extended Fund Facility until end-June 2023 that that will bring the total access under the loan to about US$7 billion.

Pakistan is at a challenging economic juncture. A difficult external environment combined with procyclical domestic policies fueled domestic demand to unsustainable levels. The resultant economic overheating led to large fiscal and external deficits in FY22, contributed to rising inflation, and eroded reserve buffers.

To stabilize the economy and bring policy actions in line with the IMF-supported program, while protecting the vulnerable, policy priorities include:

Steadfast implementation of the FY2023 budget: The budget aims to reduce the government’s large borrowing needs by targeting an underlying primary surplus of 0.4 percent of GDP, underpinned by current spending restraint and broad revenue mobilization efforts focused particularly on higher income taxpayers.

Development spending will be protected, and fiscal space will be created for expanding social support schemes. The provinces have agreed to support the federal government’s efforts to reach the fiscal targets, and Memoranda of Understanding have been signed by each provincial government to this effect.

Catch-up in power sector reforms: On the back of weak implementation of the previously agreed plan, the power sector circular debt (CD) flow is expected to grow significantly to about PRs 850 billion in FY22, overshooting program targets, threatening the power sector’s viability, and leading to frequent power outages.

The authorities are committed to resuming reforms including, critically, the timely adjustment of power tariff including for the delayed annual rebasing and quarterly adjustments, to improve the situation in the power sector and limit load shedding.

Proactive monetary policy to guide inflation to more moderate levels: Headline inflation exceeded 20 percent in June, hurting particularly the most vulnerable. In this regard, the recent monetary policy increase was necessary and appropriate, and monetary policy will need to be geared towards ensuring that inflation is brought steadily down to the medium-term objective of 5–7 percent.

Reducing poverty and strengthen social safety: During FY22, the unconditional cash transfer (UCT) Kafalat scheme reached nearly 8 million households, with a permanent increase in the stipend to PRs 14,000 per family, while a one-off cash transfer of PRs 2,000 (Sasta Fuel Sasta Diesel, SFSD) was granted to about 8.6 million families to alleviate the impact of rampant inflation.

For FY23, the authorities have allocated PRs 364 billion to BISP (up from PRs 250 in FY22) to be able to bring 9 million families into the BISP safety net, and further extend the SFSD scheme to additional non-BISP, lower-middle class beneficiaries.

Strengthen governance: To improve governance and mitigate corruption, the authorities are establishing a robust electronic asset declaration system and plan to undertake a comprehensive review of the anticorruption institutions (including the National Accountability Bureau) to enhance their effectiveness in investigating and prosecuting corruption cases.