ISLAMABAD:
The International Monetary Fund on Wednesday announced a staff-level agreement for the release of $1.2 billion next loan tranches after Islamabad, for now, agreed to the old pre-floods budget targets and to publish the governance report before the board meeting.
The deal will cement the positive market sentiments and ensure the continuity of fragile economic stability.
Pakistan’s decision not to push further its demand for relaxation in the primary budget surplus target at this stage to offset the impact of floods on the budget and to officially release the Governance and Corruption Diagnosis assessment report before the mid of November paved the way for the staff level agreement, the Pakistani authorities told The Express Tribune.
The IMF held discussions for the second review under the Extended Fund Facility (EFF) and the first review under the Resilience and Sustainability Facility (RSF), according to an early morning announcement by the global lender.
“The IMF team has reached a staff-level agreement with the Pakistani authorities on the second review of the 37-month Extended Arrangement under the Extended Fund Facility (EFF) and the first review of the 28-month arrangement under the Resilience and Sustainability Facility (RSF), said Iva Petrova, the IMF’s Mission Chief to Pakistan. The staff-level agreement is subject to approval by the IMF Executive Board.
Upon approval by the board, Pakistan will have access to about $1 billion under the EFF and another $200 million under the RSF, said Iva Petrova. Cumulatively, the IMF will disburse $3.1 billion under the EFF out of the $7 billion deal.
Pakistan and the IMF negotiated for three weeks to reach a staff level agreement. One of the irritants was the lack of finalization of the fiscal numbers reflecting the impact of the floods on the budget.
Before the start of the talks, Prime Minister Shehbaz Sharif had met with the Managing Director of the IMF Kristalina Georgieva and requested her to relax the stringent conditions in the light of the damages caused by the floods.
The Pakistani authorities had told the IMF that the country sustained Rs744 billion economic losses, Rs681 billion in Punjab alone. However, the IMF’s assessment was that the losses were less than Rs585 billion. The fiscal losses were far less than these two numbers, said the sources.
Iva stated that the Pakistani authorities reaffirmed their commitment to the EFF- and RSF-supported programmes, and to maintaining sound and prudent macroeconomic policies while advancing ongoing structural reforms.
She added that the Pakistani “authorities remain committed to meeting the fiscal year 2025-26 budget primary surplus of 1.6% of the GDP”.
The 1.6% of the GDP or Rs2.1 trillion primary budget surplus target had been agreed in June, which the Finance Ministry requested the IMF to lower by around half percentage point of the GDP, said the sources.
Iva stated that the 1.6% GDP primary budget surplus target is anchored in sustained efforts to mobilize revenue through tax policy and compliance measures, and Pakistani authorities also stand ready to take necessary actions should revenue shortfalls risk programme targets.
The FBR missed its first quarter tax target by a wide margin of Rs198 billion, endangering the annual target of Rs14.13 trillion. Any shortfall in the tax target will also adversely impact the provincial cash surplus targets. However, as per the IMF statement, Pakistan has committed to take necessary actions to offset the impact of the revenue shortfall.
The sources said that in order to remove another irritant, Pakistan has committed that it will release the Governance and Corruption Diagnosis Assessment report by November 15th. The release of the report is a prior action for sending Pakistan’s case to the IMF board, said the sources.
The report has extensively discussed the governance weaknesses in the state-owned enterprises, the vulnerabilities to corruption, the poor status of the rule of law and has recommended measures to fix these ills, according to the sources.
The original deadline to publish the report was at the end of July.
Strong implementation on the programme
The IMF stated that supported by its programme, Pakistan’s economic programme was entrenching macroeconomic stability and rebuilding market confidence. The recovery remains on track, with the fiscal year 2025 current account recording a surplusthe first in 14 years, the fiscal primary balance surpassing the program target, inflation remaining contained, external buffers strengthening, and financial conditions improving as sovereign spreads have narrowed significantly.
However, the recent floods- which have affected nearly 7 million people, caused over 1,000 deaths, and severely damaged housing, public infrastructure, and agricultural land- have weighed on the outlook, particularly of the agriculture sector, bringing down the projected FY26 GDP to about 3.2% to-3.5%, said Petrova.
The government has set a 4.2% economic growth target for the current fiscal year.
The IMF said that floods underscored Pakistan’s high vulnerability to natural disasters and substantial climate-related risks, and the continuing need to build climate resilience. It added that the authorities are assessing the flood damage and are providing urgent flood relief support in the affected provinces via reallocations in the provincial and federal budgets.
The IMF said that Pakistan was making efforts to enhance revenue mobilization, broaden burden-sharing between federal and provincial governments, and strengthen public financial management.
In particular, recognizing the provinces’ vital role in domestic revenue mobilization, the federal authorities will continue deepening collaboration with provincial counterparts, according to the global lender.
The authorities are also making important progress in strengthening tax policy design, with the newly established tax policy office, which will lead medium-term reforms to simplify the tax code and reduce reliance on ad hoc measures, it added.
External Sector
Iva stated that the State Bank of Pakistan remained committed to a prudent monetary policy stance, guided by incoming data, including the impact of recent floods and the evolving economic recovery, to ensure inflation remains durably within its target range of 5-7%.
She added that while the floods are likely to have a temporary impact on prices, the SBP stands ready to adjust its policy stance should price pressures intensify or inflation expectations become unanchored.
While commenting on the exchange rate policies, the IMF welcomed the sustained buildup of international reserves but added that “further steps are needed to deepen the foreign exchange market to facilitate transactions, support price discovery, and cushion external shocks”.
The IMF had objected to nearly a fixed rupee-dollar parity to which the central bank claimed before the IMF that there was no demand for the dollar in the market, said the sources. In a concentrated manner, the rupee is appreciating one paisa to five paisa a day.
The IMF said that Pakistan also remained committed to preventing the accumulation of circular debt through timely tariff adjustments that ensure cost recovery and maintaining a progressive tariff structure.
However, the IMF’s wrong policy of fixing the circular debt by increasing the prices has already pushed the consumers to off-grid and it is probably not learning its lessons. During the talks, the Power Division informed the IMF that the power sector’s inefficiencies would add another Rs536 billion in the circular debt, which will largely be offset by giving subsidies, said the sources.
The IMF emphasized that “further effort is needed to advance the state-owned enterprise reform agenda and scale back the state’s footprint in the economy”.
It added that the Pakistani authorities are also planning reforms to reduce government intervention in commodity markets to foster a productive, diversified, and internationally competitive agricultural sector that meets food security needs. Efforts to boost international trade continue, including with the implementation of the new national tariff policy.
