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IMF sees ‘tentative signs’ of Pakistan’s economic activity picking up

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4 months ago

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  • IMF sees inflation at 18.5% by end-June 2024.
  • Says current account deficit to rise to 1.5% of GDP in FY24.
  • Market-determined exchange rate urged to buffer external shocks.

With the approval by the Executive Board for the release of the second tranche under the Stand-By Arrangement (SBA), the International Monetary Fund’s (IMF) Deputy Managing Director Antoinette Sayeh commented that the economy is showing “tentative signs of activity picking-up and external pressures easing” for cash strapped Pakistan.

Sayeh noted that the country’s performance under the SBA has supported significant progress in stabilising the economy following the significant shocks of the last fiscal year.

“There are now tentative signs of activity picking-up and external pressures easing. Continued strong ownership remains critical to ensure the current momentum continues and stabilisation of Pakistan’s economy becomes entrenched,” said the deputy MD who was also the chair of the board meeting that approved the release of $700 million. The release means total disbursements under the SBA stand at close to $1.9 billion.

“The authorities’ strong revenue performance in FY24Q1 as well as federal spending restraint have helped to achieve a primary surplus in line with quarterly program targets. However, in the context of pressures, including from provincial spending, efforts at mobilising revenues and ongoing non-priority spending discipline need to continue to ensure that the budgeted primary surplus and debt goals remain achievable,” said the deputy MD.

The IMF official advised the authorities in Pakistan to go for broad-based reforms to improve the fiscal framework by mobilising additional revenues specifically from non-filers and under-taxed sectors and improving public financial management. She believes these actions would give Pakistan fiscal space to further social and development spending.

“Inflation remains high, affecting particularly the more vulnerable, and it is appropriate that the State Bank of Pakistan maintains a tight stance to ensure that inflation returns to more moderate levels. Pakistan also needs a market-determined exchange rate to buffer external shocks, continue rebuilding foreign reserves, and support competitiveness and growth. In parallel, further action to address undercapitalized financial institutions and, more broadly, vigilance over the financial sector is necessary to support financial stability,” said Sayeh.

IMF expects 2% growth

The lender in its statement also stated that macroeconomic conditions have generally improved in the country and expects 2% growth in ongoing fiscal year as the “nascent recovery expands in the second half of the year”.

“The fiscal position also strengthened in FY24Q1 achieving a primary surplus of 0.4% of GDP driven by overall strong revenues. Inflation remains elevated, although with appropriately tight policy, this could decline to 18.5% by end-June 2024,” said the IMF.

The lender forecasts that the current account deficit may increase to around 1.5% of GDP in FY24 as the recovery takes hold.

“Assuming sustained sound macroeconomic policy and structural reform implementation, inflation should return to the SBP target and growth continue to strengthen over the medium term,” said the IMF.

Pakistan was nearing a default when the Pakistan Democratic Movement-led government (PDM) was about to end its term last year. However, entering the SBA with the IMF helped the South Asian nation stave off the sovereign default.

The forex reserves held by the State Bank of Pakistan (SBP), as of January 5, stand at $8.1 billion, while the country’s total reserves have reached $13.2 billion after a debt of $66 million was repaid.

With the addition of the latest tranche, Pakistan’s forex reserves will reach a six-month-high — as on July 14, the SBP reserves were around $8.73 billion.

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The International Monetary Fund (IMF) and Pakistan have initiated discussions at the policy level.

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8 hours ago

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The International Monetary Fund (IMF) and Pakistan will commence policy-level discussions today (Monday), as financially-strained Islamabad aims to secure another agreement with the Washington-based lender while satisfying all the stringent requirements associated with it.

The negotiations will primarily focus on deciding the magnitude of the upcoming IMF programme, establishing the corresponding terms and conditions, and defining the objectives and aims for the next budget.

Simultaneously, both parties will establish the macroeconomic objectives for the upcoming fiscal year’s budget. The IMF is determined to enforce policies such as monetary tightening (raising interest rates), increasing energy tariffs, adopting a market-based exchange rate, and implementing privatisation.

The expectation is that both parties will conclude the negotiations during the current week and finalise a staff-level agreement, which will then be subject to the ultimate approval of the IMF Executive Board.

A significant number of experts argue that the International Monetary Fund (IMF) has proposed a misguided policy of increasing interest rates, which has severely damaged the economy of the country. Consequently, it is imperative for the State Bank of Pakistan to promptly initiate a cycle of reducing interest rates.

They believe that the existing monetary policy will result in an overwhelming accumulation of debt and taxes, which will hinder the revival of economic activity and investment. This outcome has already been evident to all.

Despite the prevailing cost of living crisis in Pakistan, the IMF is insisting on raising the minimum energy bill, citing its necessity in managing the escalating circular debt.

However, due to the stringent conditions imposed by the IMF and Pakistan’s inability to address the issues in the energy sector, as well as the nature of agreements made with independent power producers (IPPs), the country is unable to benefit from the decline in global prices of solar panels and related equipment.

Further information: Should I choose solar power or not? The inefficiency of the energy sector provides a compelling reason to reconsider the solar energy policy.

Pakistan and the MF initiated discussions on both the Extended Fund Facility (EFF) and climate funding. Pakistan is seeking a larger and more extensive bailout package to stabilise and revitalise its economy.

According to sources, it has been stated that the two parties have reached an agreement on the significant objectives outlined for the forthcoming budget, which encompass the punctual settlement of foreign debt obligations.

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Pakistan’s gold prices are still declining; see the most recent

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1 week ago

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The price of 10-gram gold reduced by Rs943 to settle at Rs207,733, while the price of gold dropped by Rs1200 to close at Rs242,300 a tola, according to the Sindh Sarafa Jewellers Association.

In the global market, the price of the precious metal fell by $10 to $2,349 per ounce, resulting in losses.

At 04:48 GMT, the spot price of gold had dropped by 0.2% to $2,354.77 per ounce. In the previous session, prices reached a two-week high.

American gold futures dropped 0.6% to $2,361.

Spot silver decreased by 0.4% to $28.03 per ounce, while palladium remained steady at $978.03 and platinum decreased by 0.1% to $992.89.

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Pakistan and the IMF begin talks for a new loan.

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1 week ago

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Pakistan is requesting a $6 to $8 billion bailout package from the international lender over the next three to four years to address its financial troubles.

A mission team led by Nathan Porter, the IMF’s Mission Chief in Pakistan, is meeting with a Pakistani delegation led by Finance Minister Muhammad Aurangzeb.

According to sources familiar with the situation, Islamabad may face more difficult options, such as raising power and gas bills.

Mr. Aurganzeb informed the IMF team that the country’s economy has improved as a result of the IMF loan package, and Islamabad is ready to sign a new loan programme to further develop.

The IMF mission expressed satisfaction with Islamabad’s efforts to revive the country’s struggling economy.

The IMF praised Pakistan’s economic growth in its staff report earlier this week, but warned that the outlook remains challenging, with very high downside risks.

The country nearly avoided collapse last summer, and its $350 billion economy has stabilized since the end of the last IMF program, with inflation falling to roughly 17% in April from a record high of 38% last May.

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