The International Monetary Fund (IMF) said on Monday that it has agreed with Pakistan on the measures needed to resume a stalled $6 billion financing plan, which faces growing economic challenges.
“Pakistan authorities and IMF staff have reached a staff-level agreement on the policies and reforms needed to complete the sixth review,” the IMF said in a statement.
For months, Pakistan has been negotiating with the International Monetary Fund to seek relaxation of the terms and conditions of the package. As a result of the news of the agreement, the exchange rate of its government bonds against the U.S. dollar rose by 1.3 to 2.8 cents, and it is expected to hit its best day in more than a year.
The International Monetary Fund said: “In implementing previous actions, especially in terms of fiscal and institutional reforms, the agreement has yet to be approved by the Executive Board.”
The statement stated that after the pending review since earlier this year is completed, it will provide 750 million U.S. dollars of IMF Special Drawing Rights, or about 1 billion U.S. dollars, bringing the total expenditure to date to about 3 billion U.S. dollars.
Pakistan will ensure that legislation on central bank autonomy agreed with the International Monetary Fund is passed. Financial adviser Shaukat Tallinn said he is equivalent to the country’s finance minister.
“God willing, we will let it pass,” he said. “We believe that the National Bank…should remain independent in terms of currency policy and exchange rate.”
The Pakistani government passed the law by a simple majority in the parliament.
Tallinn also promised that before the fund’s board of directors meets to consider whether to approve the latest payment, it will take four more actions in the agreed manner.
These actions are: the removal of tax exemptions and subsidies, the increase of oil taxes, the increase of energy tariffs, and the audit of approximately US$1.4 billion in additional funds lent to Pakistan in April 2020 to help it withstand the COVID-19 pandemic.
“They made a request and we have to do this,” Tallinn said at a press conference, referring to the audit.
Pakistan joined the International Monetary Fund’s $6 billion, 39-month financing plan in July 2019, but the funding stalled earlier this year due to the required reforms.
The IMF said that despite the difficult environment, the implementation of the plan continues to make progress.
It said: “Except for the main budget deficit, all the quantitative performance standards (PC) at the end of June were widely met.”
Pakistan has been struggling to cope with historical currency devaluations, high inflation, current account deficits and reductions in foreign exchange reserves-negotiations between the government and the International Monetary Fund have increased investor tension.
“This will eliminate [a] A lot of uncertainty,” a spokesperson for the Ministry of Finance said of the agreement with the fund.
The central bank warned last week that a higher-than-expected underlying deficit could worsen the inflation outlook and undermine the economic recovery. It also raised the benchmark interest rate by 150 basis points to 8.75% to cope with inflationary pressures and maintain stable growth.
The bank said that headline inflation in October rose to 9.2% from 8.4% two months ago.
The bank also raised the cash reserve requirement of commercial banks by one percentage point. This is the first measure in more than a decade and another measure to deal with accelerating inflation.