KARACHI: The International Monetary Fund (IMF) has attached tough conditions for the government to follow alongside the release of the first tranche of over $1 billion under the new Extended Fund Facility (EFF), including a focus on enhancing productivity and competitiveness.

The new IMF programme is supported by effective policies and reforms aimed at helping Pakistani authorities enhance macroeconomic stability, tackle significant structural challenges, and create conditions conducive to stronger, more inclusive, and resilient growth.

“Rebuilding policy credibility and achieving macroeconomic sustainability: this requires consistent implementation of sound fiscal, monetary, and exchange rate policies,” said the IMF documents released on Saturday.

The IMF has approved a 37-month Extended Fund Facility for Pakistan amounting to SDR 5.32 billion ($7bn), marking the second highest amount ever agreed upon under any IMF programme in terms of SDRs.

Wants govt to consistently implement sound fiscal, monetary and exchange rate policies

Priorities set by the IMF for the Pakistani economy include better public spending, fairer and more efficient taxation — especially from under-taxed sectors — and creating fiscal space for increased spending on health, education, and social protection programmes.

“Reforms should focus on improving the private sector business environment by removing state-created distortions and ensuring a fair and competitive playing field,” stated the IMF. These include streamlining subsidies, improving the foreign direct investment regime, deepening bank intermediation, and scaling up investment in human capital.

The IMF also called for restructuring state-owned enterprises (SOEs) and improving public services. The reform and privatisation of SOEs, along with governance and transparency measures, will help enhance public service provision, according to the paper. Additional measures include reducing the cost structure of the energy sector and phasing out the government’s role in price setting.

The agreement emphasises building climate resilience and implementing the C-PIMA Action Plan, along with supporting the National Adaptation Plan, which will strengthen the country’s resilience to climate change, focusing on sustainable infrastructure and disaster risk reduction.

The IMF expects real GDP growth of 3.2 per cent during FY25, with inflation at 9.5pc (period end: 10.6pc), a primary balance of 2pc of GDP, a current account deficit of 0.9pc, and reserves at $12.75bn by June 2025.

The receipt of the first installment of $1.1 billion will further strengthen Pakistan’s foreign exchange reserves and may also assist in securing additional bilateral and multilateral loans. The statement noted: “Some directors observed that, given the ambitious growth projections, there is no room for policy slippages without undermining debt sustainability.”

Directors also called for reforms to strengthen the fiscal framework, including federal-provincial institutional arrangements; measures to ensure the energy sector’s lasting sustainability, including through cost-based tariffs; and enhanced liquidity and debt management.

Performance review and outlook

Pakistan has made significant strides in restoring economic stability through consistent policy measures under the Stand-by Arrangement in FY24. Economic growth has improved to 2.4pc in FY24, primarily supported by the agriculture sector. Inflation has seen a substantial reduction, reaching single-digit levels, due to tight fiscal and monetary policies. The buildup of reserve buffers has been bolstered by a stable current account and calm foreign exchange market conditions.

Considering lower inflation and stability in domestic and external conditions, the SBP has reduced the policy rate by 450 basis points from June 2025, aided by a tight FY25 budget.

Published in Dawn, September 29th, 2024