The International Monetary Fund (IMF) said on Monday it had agreed with Pakistan on measures needed to revive a halted $ 6 billion financing program for the South Asian country, which is facing growing economic challenges.
“The Pakistani authorities and IMF staff have reached a staff-level agreement on policies and reforms needed to complete the sixth review,” the IMF said in a statement.
Pakistan has been in talks with the IMF for several months to seek a relaxation in the terms and conditions of the package. Its government bonds jumped between 1.3 and 2.8 cents on the US dollar on the news of a deal, and were on course for their best day in more than a year.
“The agreement is subject to approval by the Executive Council, following the implementation of previous actions, in particular on fiscal and institutional reforms,” the IMF said.
The completion of the review, pending since earlier this year, will provide 750 million in IMF special drawing rights, or about $ 1 billion, bringing the total disbursement so far to about $ 3 billion, the statement said.
Pakistan will ensure that central bank autonomy legislation is enforced, as agreed with the IMF, said Shaukat Tarin, financial adviser, which is equivalent to the country’s finance minister.
“If God wills, we will spend it,” he said. “We believe that the state bank … should be independent in monetary policy and exchange rate.”
Pakistan’s government has a simple majority in parliament to pass the law.
Tarin also promised to take four more steps as agreed before the fund’s board meets to consider whether to approve the issuance of the latest portion.
Those actions are: withdrawal of tax exemptions and subsidies, an increase in the petroleum levy, higher energy tariffs and an audit of about $ 1.4 billion in additional funds lent to Pakistan in April 2020 to help meet the COVID-19 to resist pandemic.
“They asked for it, and we should do it,” Tarin told a news conference, referring to the audit.
Pakistan entered into a $ 6 billion 39-month funding program with the IMF in July 2019, but funding came to a standstill earlier this year due to issues over the required reforms.
Despite a difficult environment, progress is still being made in implementing the program, the IMF said.
“All quantitative performance criteria (PCs) for the end of June have been met by wide margins, except for those on the primary budget deficit,” it said.
Pakistan is struggling with a historic devaluation of currency, high inflation, a current account deficit and dwindling foreign reserves – and the talks between the government and the IMF have contributed to investor nerves.
“It will be removed [a] many uncertainties, ”said a spokesman for the Ministry of Finance about the agreement with the fund.
The central bank warned last week that a higher-than-expected primary deficit is likely to worsen the inflation outlook and undermine economic recovery. It also raised its benchmark interest rate by 150 basis points to 8.75 per cent to counter inflationary pressures and maintain stability with growth.
Headline inflation reached 9.2 percent in October, compared with 8.4 percent two months earlier, the bank said.
The bank also lifted the cash reserve requirement for commercial banks by one percentage point, the first such move in more than a decade, in another step to deal with accelerating inflation.