ISLAMABAD:
The International Monetary Fund on Wednesday announced a staff-level agreement for the release of the next tranches of loans worth $1.2 billion after Islamabad, for now, accepted the old pre-flood budget targets and released the governance report ahead of the board meeting.
The agreement will consolidate 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 Diagnostic assessment report before mid-November paved the way for the staff-level agreement, Pakistani officials told The Express PAkGazette.
The IMF held talks 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 from 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 Facility of the Fund (SAF) and the first review of the 28-month agreement under the Resilience and Sustainability Fund (RSF), said Iva Petrova, head of the IMF mission in Pakistan. The staff-level agreement is subject to approval by the Executive Board of the IMF. IMF.
Following the board’s approval, Pakistan will have access to around $1 billion under the SEF and another $200 million under the RSF, Iva Petrova said. In total, the IMF will disburse $3.1 billion under the SAF 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 fiscal figures reflecting the impact of the floods on the budget.
Before the start of talks, Prime Minister Shehbaz Sharif met IMF Managing Director Kristalina Georgieva and asked her to relax the strict conditions in view of the damage caused by the floods.
Pakistani authorities had told the IMF that the country was suffering economic losses of Rs 744 billion, Rs 681 billion in Punjab alone. However, the IMF’s assessment was that the losses were less than Rs 585 billion. The tax losses were much smaller than these two figures, the sources said.
Iva stated that the Pakistani authorities reaffirmed their commitment to the programs supported by the SEP and the RSF, and to maintaining sound and prudent macroeconomic policies while advancing ongoing structural reforms.
He added that the “Pakistani authorities remain committed to achieving the fiscal year 2025-26 primary budget surplus of 1.6% of GDP.”
The primary budget surplus target of 1.6% of GDP or 2.1 trillion rupees was agreed in June, which the Finance Ministry asked the IMF to reduce by about half a percentage point of GDP, sources said.
Iva stated that the primary budget surplus target of 1.6% of GDP is based on sustained efforts to mobilize revenue through tax policies and compliance measures, and Pakistani authorities are also ready to take necessary actions in case revenue shortfalls jeopardize the program objectives.
The FBR missed its first quarter fiscal target by a wide margin of Rs 198 billion, jeopardizing the annual target of Rs 14.13 trillion. Any shortfall in the fiscal target will also negatively impact provincial cash surplus targets. However, according to the IMF statement, Pakistan has committed to take necessary measures to offset the impact of the revenue shortfall.
Sources said that 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 move to send Pakistan’s case to the IMF board, the sources said.
The report has extensively discussed weaknesses in governance in state-owned enterprises, vulnerabilities to corruption, poor state of rule of law and recommended measures to address these ills, according to sources.
The original deadline to publish the report was the end of July.
Strong implementation of the program.
The IMF said that, supported by its programme, Pakistan’s economic program was strengthening macroeconomic stability and rebuilding market confidence. The recovery continues: the fiscal year 2025 current account recorded a surplus (the first in 14 years), the fiscal primary balance exceeded the program target, inflation remained contained, external reserves strengthened and financial conditions improved as sovereign spreads narrowed significantly.
However, the recent floods, which have affected almost 7 million people, caused more than 1,000 deaths and severely damaged homes, public infrastructure and agricultural land, have affected the outlook, particularly for the agricultural sector, reducing the projected 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 fiscal year.
The IMF said the floods underlined Pakistan’s high vulnerability to natural disasters and significant climate-related risks, and the continued need to build climate resilience. He added that authorities are assessing flood damage and are providing urgent aid in affected provinces through reallocations in provincial and federal budgets.
The IMF said Pakistan was making efforts to improve revenue mobilization, expand burden-sharing between federal and provincial governments and strengthen public financial management.
In particular, recognizing the vital role of provinces in domestic revenue mobilization, federal authorities will continue to deepen collaboration with their provincial counterparts, according to the global lender.
Authorities are also making important progress in strengthening tax policy design, with the newly created tax policy office set to lead medium-term reforms to simplify the tax code and reduce reliance on ad hoc measures, he added.
External sector
Iva stated that the State Bank of Pakistan remains committed to a prudent monetary policy stance, guided by incoming data, including the impact of the recent floods and the evolution of the economic recovery, to ensure that inflation remains durably within its target range of 5-7%.
It added that while the floods are likely to have a temporary impact on prices, the SBP is willing to adjust its policy stance should price pressures intensify or inflation expectations become unanchored.
Commenting on foreign exchange policies, 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 opposed a near-fixed peg between the rupee and the dollar, to which the central bank claimed before the IMF that there was no demand for dollars in the market, sources said. On a concentrated basis, the rupee is appreciating by one paisa to five paisa per day.
The IMF said Pakistan also remained 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 misguided policy of fixing circular debt by raising prices has already pushed consumers off the grid and is probably not learning its lesson. During the talks, the Energy Division informed the IMF that inefficiencies in the power sector would add another Rs 536 billion to the circular debt, which will be largely offset by provision of subsidies, sources said.
The IMF emphasized that “greater efforts are needed to advance the state-owned enterprise reform agenda and reduce the state’s footprint in the economy.”
He added that 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.
