ISLAMABAD:
The International Monetary Fund on Wednesday announced a staff-level agreement for the release of the next loan tranches of $1.2 billion after Islamabad, for now, accepted the old pre-flood fiscal targets and released the governance report ahead of the board meeting.
The agreement will consolidate positive market sentiment and ensure the continuation of fragile economic stability.
Pakistan’s decision not to push further its demand for relaxation of the primary budget surplus target at this stage to offset the impact of the floods on the budget and to formally release the Governance Assessment and Corruption Diagnostic report before mid-November has paved the way for a staff-level agreement, Pakistani officials told the Express PK Press Club.
The IMF held discussions for the second review of the Extended Fund Facility (EFF) and the first review of the Resilience and Sustainability Facility (RSF), according to an early morning announcement by the global lender.
“The IMF team reached a staff-level agreement with the Pakistani authorities on the second review of the 37-month extended arrangement under the Extended Credit Facility (EFF) and the first review of the 28-month arrangement under the Resilience and Sustainability Facility (RSF), said Iva Petrova, IMF Mission Chief in Pakistan. is subject to approval by the IMF Executive Board.
After board approval, Pakistan will have access to about $1 billion under the EFF and another $200 million under the RSF, Iva Petrova said. In total, the IMF will disburse $3.1 billion under the EFF out of the $7 billion planned.
Pakistan and the IMF negotiated for three weeks to reach a staff-level agreement. One irritant was the lack of finalization of fiscal figures reflecting the impact of the floods on the budget.
Before the talks began, Prime Minister Shehbaz Sharif met IMF Managing Director Kristalina Georgieva and asked her to ease the strict conditions in light of the flood damage.
Pakistani authorities had told the IMF that the country had suffered economic losses of 744 billion rupees, including 681 billion rupees in Punjab alone. However, the IMF’s assessment was that the losses were less than Rs585 billion. Tax losses were much lower than both figures, the sources said.
Iva said Pakistani authorities have reaffirmed their commitment to the programs supported by the EFF and the RSF, as well as 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 primary fiscal surplus of 1.6 percent of GDP.”
The target of 1.6 percent of GDP, or a primary fiscal surplus of 2.1 trillion rupees, was agreed in June, and the finance ministry asked the IMF to lower it by about half a percentage point of GDP, the sources said.
Iva said the target of a primary fiscal surplus of 1.6 percent of GDP is anchored in sustained efforts to mobilize revenue through tax policy and compliance measures, and that Pakistani authorities are also ready to take necessary measures if program targets are at risk of falling short of revenue.
The FBR missed its first quarter fiscal target by a wide margin of Rs 198 billion, putting the annual target of Rs 14.13 trillion at risk. Any shortfall in the fiscal target will also have a negative impact on provincial cash surplus targets. However, according to the IMF statement, Pakistan is committed to taking necessary measures to offset the impact of the revenue shortfall.
The sources said that in order to remove another irritant, Pakistan has committed to release the Governance and Corruption Diagnostic Assessment Report by November 15. The release of the report is a preliminary step to submit Pakistan’s case to the IMF board, the sources said.
The report discussed at length governance weaknesses in state-owned enterprises, vulnerabilities to corruption, poor state of rule of law and recommended measures to address these ills, according to the sources.
The original deadline to release the report was the end of July.
Strong program implementation
The IMF said that, supported by its programme, Pakistan’s economic program was consolidating macroeconomic stability and restoring market confidence. The recovery remains on track, with a current account surplus for FY 2025, the first in 14 years, a primary fiscal balance exceeding the program target, inflation remaining contained, external buffers strengthening, and financial conditions improving as sovereign spreads have narrowed significantly.
However, recent floods, which affected nearly 7 million people, caused more than 1,000 deaths and severely damaged housing, public infrastructure and agricultural land, have weighed on the outlook, particularly for the agricultural sector, bringing the forecast GDP for FY26 to around 3.2% to -3.5%, Petrova said.
The government has set an economic growth target of 4.2% for the current financial year.
The IMF said the floods highlighted Pakistan’s high vulnerability to natural disasters and significant climate-related risks, as well as the continued need to strengthen climate resilience. He added that authorities are currently assessing the damage caused by the floods and providing emergency assistance to affected provinces through reallocations in the provincial and federal budgets.
The IMF said Pakistan was working to improve revenue mobilization, expand burden-sharing between the federal and provincial governments and strengthen public financial management.
In particular, recognizing the vital role of provinces in mobilizing domestic revenue, federal authorities will continue to deepen their collaboration with their provincial counterparts, according to the global lender.
The authorities are also making important progress in strengthening tax policy design, with the new tax policy office, which will carry out medium-term reforms to simplify the tax code and reduce the reliance on ad hoc measures, the statement added.
External sector
Iva said the State Bank of Pakistan remains committed to prudent monetary policy, guided by available data, including the impact of recent floods and the ongoing economic recovery, to ensure that inflation remains sustainably within its target range of 5-7 percent.
She added that while flooding is likely to have a temporary impact on prices, the SBP stands ready to adjust policy if price pressures intensify or inflation expectations become no longer anchored.
While commenting on foreign exchange policy, the IMF welcomed the sustained accumulation of international reserves, but added that “additional measures are needed to deepen the foreign exchange market to facilitate transactions, support price discovery and cushion external shocks.”
The IMF had opposed a near-fixed rupee-dollar parity, to which the central bank claimed before the IMF that there was no demand for the dollar in the market, the sources said. Concentratedly, the rupee appreciates from one paisa to five paisa per day.
The IMF said Pakistan also remains committed to preventing the accumulation of circular debt through timely tariff adjustments that ensure cost recovery and maintenance of a progressive tariff structure.
However, the IMF’s poor policy of addressing circular debt by raising prices has already pushed consumers off the grid and it is unlikely to learn its lessons. During the negotiations, the Power Division informed the IMF that inefficiencies in the power sector would add another Rs 536 billion to the circular debt, which would be largely offset by provision of subsidies, the sources said.
The IMF stressed that “further efforts are needed to advance the state-owned enterprise reform agenda and reduce the state’s footprint in the economy.”
He adds that Pakistani authorities are also considering reforms aimed at reducing government intervention in commodity markets in order to foster a productive, diversified and internationally competitive agricultural sector, meeting food security needs. Efforts to stimulate international trade continue, notably with the implementation of the new national tariff policy.
