Pakistan’s economy is set to keep on recovering in fiscal year 2022, with real GDP growth projected at four per cent, the International Monetary Fund (IMF) said on Thursday, hours after approving the continuation of an extended loan arrangement.

The IMF Executive Board also approved Pakistan’s request for waivers of applicability and nonobservance of performance criteria.

The board met in Washington on Wednesday for further consultations with Pakistan on an extended loan facility (EFF) and completed its sixth EFF review. The completion allows Pakistan to draw about $1 billion from the fund, bringing total budget support under the programme to about $3bn, or 106pc of Pakistan’s IMF quota.

In Islamabad, Finance Minister Shaukat Tarin confirmed the approval in a tweet posted on his official account. “I am pleased to announce that the IMF Board has approved the 6th tranche of their program for Pakistan,” he wrote.

Pakistan met some of the conditions in the mini-budget passed recently as well as in a bill to grant more autonomy to the State Bank of Pakistan.

Finance ministry officials told journalists in Islamabad earlier this week that they had sent a report to the IMF about the implementation of these conditions and were hopeful that the Fund would now release the sixth tranche.

Finance ministry officials told journalists in Islamabad earlier this week that they had sent a report to the IMF about the implementation of these conditions and were hopeful that the Fund would now release the sixth tranche.

Inflation

In a statement issued after the meeting, the board warned Pakistan that inflation in the country was “expected to pick up this year before gradually slowing down.”

The IMF reminded Pakistan that “continued commitment to a market-determined exchange rate and a prudent macroeconomic policy mix will help reduce the current account deficit, and ease external pressures over the medium term.”

It also urged Pakistan to make extra efforts to revitalise its economy, noting that recent policy adjustments in Pakistan were “appropriate to address these challenges” and maintain economic stability.

“Further ambitious efforts to remove structural impediments and facilitate the structural transformation of the economy will help unlock sustainable and resilient growth,” the statement added.

The IMF pointed out that making those extra efforts would also “foster job creation and improve social outcomes for the benefit of all Pakistani citizens”.

The sixth review was initially scheduled for January 12, 2022, and later January 28, but was postponed twice on Pakistan’s request, to attain more time for implementing IMF conditions.

The IMF board noted that economic activities in Pakistan have rebounded strongly from the first wave of the ongoing Covid-19 pandemic but “pressures also started to build, reflected in a widening current account deficit and rising inflationary pressures”.

Pakistan’s “recent economic and financial policy efforts, however, were appropriate to safeguard macroeconomic stability and debt sustainability,” the board added.

The IMF provides EFF loan facilities to a country facing serious medium-term balance of payments problems because of structural weaknesses that require time to address. Compared to a stand-by arrangement, EFF assistance features longer programme engagement and a longer repayment period to help countries implement medium-term structural reforms.

Pakistan made a 39-month EFF arrangement with the IMF in July 2019 for an SDR 4.268bn (about $6bn at the time of approval of the arrangement) package, which was 210pc of quota.

The programme aims to support Pakistan's efforts for economic recovery from the Covid-19 pandemic and to ensure macroeconomic and debt sustainability. It also aims to advance structural reforms to lay the foundations for strong, job-rich, and long-lasting growth that benefits all Pakistanis.

Pakistan's vulnerabilities

The IMF noted that Pakistan entered the Covid-19 pandemic with strengthened buffers and “a strong economic recovery has gained hold since summer 2020, benefiting from the authorities’ multifaceted policy response to the unprecedented shock.”

But “external pressures started to emerge in 2021, including a widening current account deficit and depreciation pressures on the exchange rate which also reinforced domestic price pressures,” the IMF added.

The IMF, however, warned that “Pakistan remains vulnerable to possible flare-ups of the pandemic, tighter international financial conditions, a rise in geopolitical tensions, as well as delayed implementation of structural reforms.”

The statement reminded Pakistan that strengthening the medium-term outlook “hinges on ambitious efforts to remove structural impediments and facilitate the structural transformation of the economy”.

To this end, the IMF suggested increased focus on measures to strengthen economic productivity, investment, and private sector development, as well as on the challenges posed by climate change.

Deputy managing director's statement

Following the Executive Board's discussion on Pakistan, Antoinette Sayeh, Deputy Managing Director and Acting Chair, issued the following statement:

“The Pakistani economy has continued to recover despite the challenges from the Covid-19 pandemic, but imbalances have widened, and risks remain elevated. The authorities’ recent policy efforts to strengthen economic resilience are welcomed. Timely and consistent implementation of policies and reforms remain essential to lay the ground for stronger and more sustainable growth.

“The authorities have taken important measures to strengthen fiscal policy and put public finances on a sounder footing. Along with careful spending management, revenue mobilisation will help to create space for much-needed spending on infrastructure and social protection, while improving debt sustainability. Maintaining the momentum on the reform of personal income taxation and harmonisation of general sales taxes is essential. Broader reforms in tax administration and public financial and debt management are expected to further improve the fiscal framework.

“The adoption of amendments to the central bank Act is a welcome step toward strengthening its independence to pursue its mandates of price and financial stability. The recent monetary policy tightening was necessary and continued proactive, data-driven monetary policy would help to anchor inflation. Closer oversight of financial institutions to ensure they remain well-capitalised would help to maintain financial stability. Preserving a market-determined exchange rate is crucial to absorb external shocks, maintain competitiveness, and rebuild reserves. The authorities are committed to removing the existing exchange restrictions and multiple currency practices when BOP conditions stabilise.

“Strong efforts to advance electricity sector reform are needed to restore the sector's financial viability and address adverse spillovers on the budget, financial sector, and real economy. The IFI-supported Circular Debt Management Plan (CDMP) will help to guide the planned management improvements, cost reductions, alignment of tariffs with cost recovery levels, and better targeting of subsidies to the most vulnerable.

“Ambitious steps to remove structural impediments and facilitate structural transformation remain essential to boost growth, job creation, and improve social outcomes. The authorities are focused on state-owned enterprises reform, fostering the business environment and reducing corruption, promoting financial inclusion; and addressing the challenges posed by climate change.”