ISLAMABAD:
The International Monetary Fund announced a staff-level agreement on Wednesday to release the next loan tranches of $1.2 billion after Islamabad so far agreed to the old pre-flood budget targets and to publish the government report before the board meeting.
The agreement 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 of the primary budget surplus target at this stage to offset the impact of floods on the budget and to officially release the evaluation report on governance and corruption diagnosis by mid-November paved the way for the agreement on staff levels, Pakistani officials told The Express Pakinomist.
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 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 Fund Facility (EFF) and the first review of the 28-month arrangement under the Resilience and Sustainability Facility (RSF),” said Iva Petrova, the IMF mission chief subject to the agreement on the IMF director for Pakistan.
After approval by the board, Pakistan will have access to about $1 billion under the EFF and another $200 million under the RSF, Iva Petrova said. Cumulatively, the IMF will disburse $3.1 billion under the EFF out of the $7 billion agreement.
Pakistan and the IMF negotiated for three weeks to reach a staff-level agreement. One of the annoyances was the lack of finalization of the fiscal figures reflecting the impact of the floods on the budget.
Before the start of the talks, Prime Minister Shehbaz Sharif had met with IMF Managing Director Kristalina Georgieva and requested her to relax the strict conditions in light of the damage caused by the floods.
Pakistani authorities had told the IMF that the country suffered 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 fiscal losses were far less than these two figures, the sources said.
Iva stated that the Pakistani authorities reaffirmed their commitment to the EFF- and RSF-supported programs and to maintaining sound and prudent macroeconomic policies while promoting ongoing structural reforms.
She added that the Pakistani “authorities remain committed to meeting the fiscal year 2025-2026 primary surplus of 1.6% of GDP”.
The 1.6% of GDP or Rs2.1 trillion primary budget surplus target had been agreed in June, which the finance ministry asked the IMF to lower by about half a percentage point of GDP, the sources said.
Iva stated that the primary budget surplus target of 1.6% of GDP is anchored in sustained efforts to mobilize revenue through tax policy and compliance measures, and Pakistani authorities are also prepared to take necessary action if revenue falls short of risk program targets.
The FBR missed its tax target for the first quarter by a wide margin of Rs198 billion, putting the annual target of Rs14.13 trillion at risk. Any shortfall in the tax target will also negatively impact the 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.
The sources said that to remove another irritant, Pakistan has committed to release the Governance and Corruption Diagnosis Assessment report by November 15. The release of the report is a preliminary action to send Pakistan’s case to the IMF board, the sources said.
The report has extensively discussed the governance weaknesses of the state-owned enterprises, the vulnerability to corruption, the poor state of the rule of law and has recommended measures to correct these ills, according to the sources.
The original deadline for publishing the report was the end of July.
Strong implementation on the program
The IMF stated that Pakistan’s economic program supported by its program was to anchor macroeconomic stability and rebuild market confidence. The recovery remains on track, with fiscal year 2025 on the current account showing a surplus – the first in 14 years, the fiscal primary balance exceeding the programme’s target, inflation remaining subdued, external buffers strengthening and financial conditions improving as sovereign spreads have narrowed significantly.
But the recent floods – which have affected nearly 7 million people, caused over 1,000 deaths and severely damaged housing, public infrastructure and farmland – have weighed on the outlook, particularly for the agriculture sector, bringing FY26 GDP forecast down to around 3.2% to -3.5%, Petrova said.
The government has set a target for economic growth of 4.2% for the current financial year.
The IMF said floods underscored Pakistan’s high vulnerability to natural disasters and significant climate-related risks and the continued need to build climate resilience. It added that the authorities are assessing the flood damage and providing emergency flood support in the affected provinces via reallocations in the provincial and federal budgets.
The IMF said Pakistan was making efforts to increase revenue mobilization, widen burden-sharing between federal and provincial governments and strengthen public financial management.
In particular, in recognition of the vital role of provinces in mobilizing domestic revenue, the federal authorities will continue to deepen cooperation with provincial counterparts, according to the global lender.
The authorities are also making important progress in strengthening tax policy-making with the newly created Tax Policy Office, which will lead medium-term reforms to simplify tax legislation and reduce reliance on ad hoc measures, it added.
External Sector
Iva stated that the State Bank of Pakistan remained committed to a cautious monetary policy stance, guided by incoming data, including the impact of recent floods and the developing economic recovery, to ensure that inflation remains permanently within its target range of 5-7%.
She added that while the floods are likely to have a temporary impact on prices, the SBP is ready to adjust its policy stance if price pressures intensify or inflation expectations become unmoored.
Commenting on exchange rate policies, the IMF welcomed the continued build-up of international reserves but added that “further steps are needed to deepen the foreign exchange market to facilitate transactions, support price discovery and mitigate external shocks”.
The IMF had objected to almost a fixed rupee-dollar parity as the central bank argued to the IMF that there was no demand for the dollar in the market, the sources said. In a concentrated manner, the rupee appreciates one paisa to five paisa a day.
The IMF said 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 misguided policy of fixing the circular debt by raising prices has already pushed consumers off-grid, and it is probably not learning its lessons. During the talks, the Power Division informed the IMF that power sector inefficiencies would add another Rs536 billion in the circular debt, which will be largely offset by providing subsidies, the sources said.
The IMF stressed that “further efforts are needed to advance the SOE reform agenda and scale back the state’s footprint in the economy”.
It added that Pakistani authorities are also planning reforms to reduce government intervention in commodity markets to promote 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 customs policy.
