IMF Executive Board Approves US$6 billion 39-Month EFF Arrangement for Pakistan
July 3, 2019
- The authorities’ economic reform program aims to put Pakistan’s economy on the path of sustainable and balanced growth and increase per capita income.
- A decisive fiscal consolidation will help to reduce public debt and build resilience while social spending will be expanded and the most vulnerable supported.
- A flexible, market-determined exchange rate will help to restore competitiveness, rebuild official reserves, and provide a buffer against external shocks.
- The Fund’s immediate disbursement will be SDR716 million (or about US$1 billion).
- The approval will unlock from Pakistan’s international partners around USD38 billion over the program period.
On July 3, 2019, the Executive Board of the International Monetary Fund (IMF) approved a 39-month extended arrangement under the Extended Fund Facility (EFF) for Pakistan for an amount of SDR 4,268 million (about US$6 billion or 210 percent of quota) to support the authorities’ economic reform program.
The EFF-supported program will help Pakistan to reduce economic vulnerabilities and generate sustainable and balanced growth focusing on: a decisive fiscal consolidation to reduce public debt and build resilience while expanding social spending; a flexible, market-determined exchange rate to restore competitiveness and rebuild official reserves; to eliminate quasi-fiscal losses in the energy sector; and to strengthen institutions and enhance transparency.
The Executive Board’s approval allows for an immediate disbursement of SDR716 million (or about US$1 billion). The remaining amount will be phased over the duration of the program, subject to four quarterly reviews and four semi-annual reviews.
Following the Executive Board discussion, Mr. David Lipton, First Deputy Managing Director and Acting Chair, said:
“Pakistan is facing significant economic challenges on the back of large fiscal and financial needs and weak and unbalanced growth. In this context, the authorities’ program aims to tackle long-standing policy and structural weaknesses, restore macroeconomic stability, catalyze significant international financial support, and promote strong and sustainable growth.
“A decisive fiscal consolidation is key to reducing the large public debt and building resilience, and the adoption of the FY 2020 budget is an important initial step. Achieving the fiscal objectives will require a multi-year revenue mobilization strategy to broaden the tax base and raise tax revenue in a well-balanced and equitable manner. It will also require a strong commitment by the provinces to support the consolidation effort, and effective public financial management to improve the quality and efficiency of public spending.
“Protecting the most vulnerable from the impact of adjustment policies will be an important priority. This will be achieved by a significant increase in resources allocated to key social assistance programs, supporting measures for the economic empowerment of women, and investment in areas where poverty is high.
“A flexible market-determined exchange rate and an adequately tight monetary policy will be key to correcting imbalances, rebuilding reserves, and keeping inflation low. In this regard, measures to strengthen the State Bank of Pakistan’s (SBP) autonomy and eliminate central bank financing of the budget deficit will enable the SBP to deliver on its mandate of price and financial stability.
“An ambitious agenda to strengthen institutions and remove impediments to growth will allow Pakistan to reach its full economic potential. Addressing structural weaknesses in the energy sector and improving the governance of state-owned enterprises will ensure efficiency and better services, thus boosting economic activity. Moreover, improving the business climate, strengthening efforts to fight corruption, and enhancing the AML/CFT framework will create an enabling environment for private investment and job creation.
“The strong financial support to the authorities’ policy efforts by Pakistan’s international partners is essential to meet the large external financing needs in the coming years and allow the program to achieve its objectives.”
ANNEX
Recent Economic Developments and Outlook
Pakistan’s economy is at a critical juncture. The legacy of misaligned economic policies, including large fiscal deficits, loose monetary policy, and defense of an overvalued exchange rate, fueled consumption and short-term growth in recent years, but steadily eroded macroeconomic buffers, increased external and public debt, and depleted international reserves. Structural weaknesses remained largely unaddressed, including a chronically weak tax administration, a difficult business environment, inefficient and loss making SOEs, amid a large informal economy. Without urgent policy action, economic and financial stability could be at risk, and growth prospects will be insufficient to meet the needs of a rapidly growing population.
Program Summary
The authorities’ comprehensive economic reform program, supported by the EFF, aims to stabilize the economy and lay the foundation for robust and balanced growth. Key elements include:
A decisive fiscal consolidation to reduce public debt and build resilience , starting with the adoption of an ambitious FY 2020 budget. The adjustment will be supported by comprehensive efforts to drastically increase revenue mobilization by 4 to 5 percent of GDP at the federal and the provincial level over the program period;
Expanding social spending , including through the strengthening and broadening of safety nets to support the most vulnerable;
A flexible, market-determined exchange rate to restore competitiveness, rebuild official reserves, and provide a buffer against external shocks. This will be supported by an appropriate monetary policy to shore up confidence and contain inflation, conducted by an independent central bank;
Energy sector reforms to eliminate quasi-fiscal losses and encourage investment , including by depoliticizing gas and power tariff setting and over the program period, gradually bringing the sector to cost recovery; and
Structural reforms through strengthening institutions , increasing governance and transparency, and promoting an investment-friendly environment necessary to improve productivity, entrench lasting reforms, and ensure sustainable growth.
Strong financial assistance by Pakistan’s international partners will support the EFF. The Fund-supported program is expected to coalesce broader support from multilateral and bilateral creditors in excess of US$38 billion, which is crucial for Pakistan to meet its large financing needs in the coming years.
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Pakistan: Selected Economic Indicators, 2014/15–2919/20 1/ |
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Population: 207.8 million (2016/17; provisional) Per capita GDP: US$1,463 (2016/17) Poverty rate: 29.5 percent (2012/13) Main exports: Textiles ($12.8 billion, 2015/16) Unemployment: 5.9 percent (2014/15) |
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2014/15 |
2015/16 |
2016/17 |
2017/18 |
2018/19 |
2019/20 |
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|
Est. |
Est. |
Proj. |
Proj. |
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|
Output and prices |
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|
Real GDP at factor cost |
4.1 |
4.6 |
5.2 |
5.5 |
3.3 |
2.4 |
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|
GDP deflator at factor cost |
4.3 |
0.4 |
4.0 |
2.4 |
7.5 |
11.8 |
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|
Consumer prices (period average) |
4.5 |
2.9 |
4.1 |
3.9 |
7.3 |
13.0 |
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|
Consumer prices (end of period) |
3.2 |
3.2 |
3.9 |
5.2 |
8.4 |
11.8 |
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|
Pakistani rupees per U.S. dollar (period average) |
-1.5 |
2.9 |
0.4 |
5.0 |
… |
… |
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|
Pakistani rupees per U.S. dollar (end of period) |
3.3 |
2.8 |
0.2 |
13.9 |
… |
… |
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|
(In percent of GDP) |
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|
Saving and investment |
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|
Gross saving |
14.7 |
13.9 |
12.0 |
10.4 |
10.8 |
12.1 |
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Government |
-1.6 |
-0.7 |
-0.8 |
-2.2 |
-3.6 |
-3.8 |
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Nongovernment (including public sector enterprises) |
16.3 |
14.6 |
12.8 |
12.6 |
14.5 |
15.9 |
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Gross capital formation 2/ |
15.7 |
15.7 |
16.2 |
16.7 |
15.4 |
14.7 |
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|
Government |
3.7 |
3.7 |
4.9 |
4.2 |
3.1 |
3.3 |
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|
Nongovernment (including public sector enterprises) |
12.0 |
11.9 |
11.2 |
12.5 |
12.3 |
11.4 |
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|
Public finances |
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|
Revenue and grants |
14.5 |
15.5 |
15.5 |
15.2 |
15.0 |
16.3 |
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|
Expenditure (including statistical discrepancy) |
19.1 |
19.2 |
21.1 |
21.7 |
21.7 |
23.4 |
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|
Budget balance (including grants) |
-5.3 |
-4.4 |
-5.8 |
-6.4 |
-6.8 |
-7.1 |
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|
Budget balance (excluding grants) |
-5.4 |
-4.6 |
-5.8 |
-6.5 |
-7.0 |
-7.3 |
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|
Primary balance (excluding grants) |
-0.7 |
-0.3 |
-1.6 |
-2.2 |
-1.8 |
-0.6 |
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|
General government debt incl. IMF obligations |
63.3 |
67.6 |
67.0 |
71.7 |
74.9 |
76.9 |
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|
External general government debt |
18.9 |
20.8 |
20.5 |
24.3 |
26.5 |
32.0 |
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|
Domestic general government debt |
44.4 |
46.8 |
46.5 |
47.4 |
48.4 |
44.9 |
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(Annual changes in percent of initial stock of broad money, unless otherwise indicated) |
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|
Monetary sector |
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|
Net foreign assets |
2.2 |
1.7 |
-3.2 |
-5.6 |
-6.3 |
8.9 |
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Net domestic assets |
11.0 |
11.9 |
16.9 |
15.3 |
17.1 |
3.2 |
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|
Broad money (percent change) |
13.2 |
13.7 |
13.7 |
9.7 |
10.8 |
12.1 |
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Reserve money (percent change) |
9.9 |
26.5 |
22.5 |
12.7 |
15.7 |
13.5 |
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|
Private credit (percent change) |
5.9 |
11.1 |
16.6 |
14.9 |
17.1 |
13.3 |
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|
Six-month treasury bill rate (period average, in percent) |
8.8 |
6.3 |
5.9 |
6.0 |
… |
… |
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External sector |
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|
Merchandise exports, U.S. dollars (percentage change) |
-3.9 |
-8.8 |
0.1 |
12.6 |
0.2 |
8.2 |
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|
Merchandise imports, U.S. dollars (percentage change) |
-1.0 |
0.0 |
17.9 |
16.2 |
-4.2 |
-4.7 |
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|
Current account balance (in percent of GDP) |
-1.0 |
-1.7 |
-4.1 |
-6.3 |
-4.6 |
-2.6 |
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Financial account (billions of U.S. dollars) |
5.0 |
6.8 |
10.2 |
14.3 |
10.7 |
8.7 |
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(In percent of exports of goods and services, unless otherwise indicated) |
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|
External public and publicly guaranteed debt |
159.8 |
193.3 |
209.4 |
218.3 |
225.2 |
234.0 |
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|
Debt service |
20.7 |
22.2 |
30.1 |
26.3 |
37.9 |
45.7 |
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Gross reserves (in millions of U.S. dollars) 3/ |
13,534 |
18,143 |
16,141 |
9,789 |
6,824 |
11,187 |
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In months of next year's imports of goods and services |
3.2 |
3.7 |
2.9 |
1.9 |
1.4 |
2.2 |
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Memorandum items: |
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Underlying fiscal balance (excl. grants; percent of GDP) 4/ |
… |
… |
-6.3 |
-6.5 |
-7.3 |
-7.3 |
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|
General government and government guaranteed debt (incl. IMF; % GDP) |
65.7 |
70.1 |
70.0 |
75.3 |
79.1 |
80.5 |
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|
Net general government debt (incl. IMF; % GDP) |
58.2 |
61.3 |
61.5 |
66.8 |
70.7 |
73.5 |
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|
Real effective exchange rate (end of period percentage change) |
6.5 |
2.1 |
3.4 |
-11.2 |
… |
… |
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|
Terms of trade (percentage change) |
6.8 |
11.1 |
0.1 |
-3.2 |
-1.3 |
-0.1 |
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|
Real per capita GDP (percentage change) |
2.0 |
2.6 |
3.2 |
3.6 |
1.4 |
0.5 |
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GDP at market prices (in billions of Pakistani rupees) |
27,443 |
29,076 |
31,922 |
34,619 |
38,559 |
44,446 |
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Sources: Pakistani authorities; World Bank; and IMF staff estimates and projections. 1/ Fiscal year ends June 30. 2/ Including changes in inventories. 3/ Excluding gold and foreign currency deposits of commercial banks held with the State Bank of Pakistan. 4/ Excludes one-off transactions, including asset sales. |
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