IMF mission leaves Pakistan without completing EFF review
An International Monetary Fund mission left Pakistan without completing a review of an Extended Fund Facility as the country experienced severe monetary instability despite having gone to the lender early.
“The IMF team welcomes the Prime Minister’s commitment to implement policies needed to safeguard macroeconomic stability and thanks the authorities for the constructive discussions,” Mission chief Nathan Porter said in a statement.
“Considerable progress was made during the mission on policy measures to address domestic and external imbalances.
“Key priorities include strengthening the fiscal position with permanent revenue measures and reduction in untargeted subsidies, while scaling up social protection to help the most vulnerable and those affected by the floods…
Pakistan ran out of reserves after printing for coronavirus credit (re-finance) and operating its policy rate amid a strong economic recovery and the State Bank of Pakistan net reserves are now negative.
The IMF said “allowing the exchange rate to be market determined to gradually eliminate the foreign exchange shortage,” was a priority.
The State Bank of Pakistan floated the rupee and it has started to stabilize around 270 to the US dollar after falling from 233 to the US dollar, shortly before the mission left the country. A float eliminates conflicts between monetary and exchange rate policies that cause forex shortages.
Reserve collecting central banks (externally anchored) get into trouble because they have a policy rate through which they chase an inflation target (a domestic anchor).
In the two years to January 2022 the Pakistan rupee collapsed from 160 to the US doll 233 throwing finances of energy utilities into further disarray.
The IMFs said enhancing energy provision by preventing further accumulation of circular debt and ensuring the viability of the energy sector,” was a key reform.
A successful float will eliminate the need to use for reserve for imports, but the country still needs to collect dollars to repay loans.
With gross reserves below thee billion dollars, the country has difficulties meeting debt repayments.
“The timely and decisive implementation of these policies along with resolute financial support from official partners are critical for Pakistan to successfully regain macroeconomic stability and advance its sustainable development,” Porter said.
“Virtual discussions will continue in the coming days to finalize the implementation details of these policies.”
IMF has to complete the review to disburse funds and also sign a new staff level agreement with revised targets to continue the program.