Following extensive deliberations, the International Monetary Fund and Pakistan have agreed on a 39-month Extended Fund Arrangement (EFF) under which the Fund will loan Pakistan $6 billion.
The bailout package is subject to IMF management approval. It will also need approval by the Executive Board, subject to the timely implementation of prior actions and confirmation of international partners’ financial commitments, the financial institution said in a statement released in Washington D.C.
Islamabad is facing a huge balance of payment crisis – a lingering embarrassment for a resource-rich but mismanaged economy, which faces both challenges and prospects at the same time.
On the one hand is a massive China Pakistan Economic Corridor with over $ 50 billion projects that open up new routes of trade between the Gulf, China, South and Central Asia. On the other hand, structural flaws and corruption retard sustainable growth and mire the country back into familiar crisis after every few years of growth upsurge.
Besides, geopolitical games, super power rivalries, longstanding Kashmir dispute with India and perennial instability in Afghanistan hold back the country from benefiting from regional commerce.
“The program aims to support the authorities’ strategy for stronger and more balanced growth by reducing domestic and external imbalances, improving the business environment, strengthening institutions, increasing transparency, and protecting social spending,” an IMF statement said.
In Pakistan, top finance official Dr. Hafeez Sheikh, confirmed the bailout package, which is likely to test Prime Minister Imran Khan’s popularity as the Fund has made it clear that reforms – partly meaning price hike – are necessary to fix macroeconomic troubles.
Here is how the IMF has characterized issues facing Pakistan and the imperative for reforms in the statement.
“Pakistan is facing a challenging economic environment, with lackluster growth, elevated inflation, high indebtedness, and a weak external position. This reflects the legacy of uneven and procyclical economic policies in recent years aiming to boost growth, but at the expense of rising vulnerabilities and lingering structural and institutional weaknesses. The authorities recognize the need to address these challenges, as well as to tackle the large informality in the economy, the low spending in human capital, and poverty. In this regard, the government has already initiated a difficult, but necessary, adjustment to stabilize the economy, including thorough support from the State Bank of Pakistan. These efforts need to be strengthened. Decisive policies and reforms, together with significant external financing are necessary to reduce vulnerabilities faster, increase confidence, and put the economy back on a sustainable growth path, with stronger private sector activity and job creation.”
“The EFF aims to support the authorities’ ambitious macroeconomic and structural reform agenda during the next three years. This includes improving public finances and reducing public debt through tax policy and administrative reforms to strengthen revenue mobilization and ensure a more equal and transparent distribution of the tax burden. At the same time, a comprehensive plan for cost-recovery in the energy sectors and state-owned enterprises will help eliminate or reduce the quasi-fiscal deficit that drains scarce government resources. These efforts will create fiscal space for a substantial increase in social spending to strengthen social protection as well as in infrastructure and human capital development. The modernization of the public finance management framework will increase transparency and spending efficiency. Provinces are committed to contribute to these efforts by better aligning their fiscal objectives with those of the federal government.”
The statement says the forthcoming budget for FY2019/20 is a first critical step in the authorities’ fiscal strategy.
“The budget will aim for a primary deficit of 0.6 percent of GDP supported by tax policy revenue mobilization measures to eliminate exemptions, curtail special treatments, and improve tax administration. This will be accompanied by prudent spending growth aimed at preserving essential development spending, scaling up the Benazir Income Support Program and improve targeted subsidies, with the goal of protecting the most vulnerable segments of society.
“The State Bank of Pakistan will focus on reducing inflation, which disproportionately affects the poor, and safeguarding financial stability. A market-determined exchange rate will help the functioning of the financial sector and contribute to a better resource allocation in the economy. The authorities are committed to strengthening the State Bank of Pakistan’s operational independence and mandate.
“An ambitious structural reform agenda will supplement economic policies to rekindle economic growth and improve living standards. Priority areas include improving the management of public enterprises, strengthening institutions and governance, continuing anti-money laundering and combating the financing of terrorism efforts, creating a more favorable business environment, and facilitating trade. To improve fiscal management the authorities will engage provincial governments on exploring options to rebalance current arrangements in the context of the forthcoming National Financial Commission.”
