IMF assured of building reserves, free floating exchange rate

By Zaheer Abbasi
Published in Business Recuder on January 21, 2024

ISLAMABD: The caretaker government has committed to the International Monetary Fund (IMF) that it would build reserves as conditions permit and let the rupee find its market value as imports are normalised even if pressures re-emerge.

Pakistan in a letter of Intent (LoI), signed and submitted by the caretaker finance minister and governor State Bank of Pakistan to MD IMF, stated that it has initiated structural reforms in the exchange companies sector that will enhance governance and transparency.

In the period ahead, government will seek to build on the strong program performance to gradually widen the path to macroeconomic sustainability and lay the conditions for sustained and balanced growth.

To this end, the priorities of Pakistan’s economic program continue to be: (i) advancing gradual fiscal consolidation –underpinned by continued spending restraint, effective execution of revenue measures, and, if necessary, contingent measures to help lock in a solid primary surplus for fiscal year 24 –to bring down debt, while creating fiscal space for much-needed social and development spending; (ii) reducing quasi-fiscal deficits in the electricity and gas sectors; (iii) completing the return to a market-determined exchange rate; (iv) further building the resilience of the banking sector; (v) pursuing state-owned enterprise (SOE) reform including improved governance; and (vi) boosting efforts to build resilience from climate change.

The approval of the SBA catalysed significant financing from the bilateral partners, including new disbursements of budget and balance of payment support as well as rescheduling of existing bilateral loans.

The government further stated that it is working hard to realise the remaining committed financing during the period of the SBA and also continued its efforts to mobilize financial support pledged during the Conference on Climate Resilient Pakistan, held in Geneva in January 2023, for humanitarian assistance and projects to rehabilitate the damage caused by the 2022 floods.

Finally, the caretaker government, in collaboration with other stakeholders, has been making concerted efforts to attract foreign investment, including through the forthcoming privatisation of SOEs, which will support its efforts to improve economic performance and will help replenish our gross reserves to more comfortable levels. Based on the strong program performance to-date and Pakistan’s commitments for the period ahead, it requests approval by the IMF Executive Board for (i) a waiver of non-observance for the missed end-September quantities performance criteria (QPC) ceiling on the general government primary budget deficit; (ii) modifications to the end-December 2023 targets for net international reserves, the net foreign currency swap/forward position, and net domestic assets, to lock in our progress in rebuilding reserves, and for the general government primary budget deficit, to continue progress towards our FY24 primary balance goal of 0.4 per cent of GDP while balancing our quasi-fiscal effort through the year; (iii) re-phasing of the access date for the second review to March 15, 2024, to allow sufficient time to complete our structural agenda; and (iv) the completion of the first review under the SBA and the related purchase in the amount of SDR 528 million (26 per cent of quota). Completion of the final review scheduled for March 2024 will require observance of the quantitative performance criteria (QPCs), indicative targets (ITs), and continuous performance criteria (PCs) with end December 2023 test dates (set out in MEFP ) and defined in the attached Technical Memorandum of Understanding (TMU). Consistent with our reform agenda, our program also envisages structural benchmarks (SBs set out in MEFP).

Overall, the economic team said it believes that the policies set forth in the MEFP are adequate for the successful implementation of our program, but the government will take any additional measures that may be appropriate for this purpose. We will consult with the IMF on the adoption of these and any new measures, and in advance of revisions to the policies contained in the MEFP, in accordance with the IMF’s policies on such consultation. Pakistan also said that it will supply the IMF with timely and accurate data that are needed for program monitoring and economic team is committed to implementing the recommendations of the 2023 Safeguards Assessment, including revisiting risk mitigating measures for monetary policy operations. The economic team said that reaffirming Pakistan’s commitment to it policy of transparency, it will consent to the IMF’s publication of this letter, the MEFP, the TMU, and the accompanying Executive Board documents.

The LoI read that following the approval of the 9-month Stand-By Arrangement (SBA) in July 2023 the economy has stabilized, with a nascent recovery expected to gain strength over coming months, and inflows of committed financing have instilled greater confidence.

However, the economic environment remains challenging, including due to elevated external risks and the efforts needed to continue to sustainably resolve our macroeconomic and external imbalances.

Against this backdrop, we reaffirm our commitment to the policies and objectives of the SBA, as detailed in the attached Memorandum of Economic and Financial Policies (MEFP).

Since the SBA was approved, Pakistan’s program performance has been strong. This was due to steadfast execution of the fiscal year 2024 budget, continued adjustment of energy prices, an appropriate monetary policy stance, and prudent management of the external accounts, all but one end September 2023 quantitative performance criteria (QPCs) and almost all indicative targets (ITs) were met. For the targets missed, the deviations were small or temporary and we have taken actions to address them. Although we stayed within the agreed nominal ceiling on the general government primary budget deficit, the related QPC was missed by a small margin due to exchange rate valuations of external financing flows as stipulated in the Technical Memorandum of Understanding (TMU).

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