IMF approves revival of EFF programme to cushion Pakistan's struggling economy

Finance Minister Miftah Ismail announced on Monday that the IMF's Executive Board has approved the  seventh and eighth tranche worth $1.17 billion of its stalled Extended Fund Facility (EFF).

The  global lender's Executive Board approved the programme after months-long efforts by Pakistan's government.

The finance minister took to his Twitter to reveal the development.

"Alhamdolillah the IMF Board has approved the revival of our EFF program," Miftah tweeted, while congratulating the nation on securing the much needed bailout money.

In his tweet, the minister also thanked Prime Minister Shahbaz Sharif for taking tough economic decisions to stabilise the country's economy during a time when it was at a risk of default.

IMF increases loan size; extends duration

In a statement issued in this regard, the Fund announced that the executive board completed the combined seventh and eighth reviews of the "extended arrangement" under the Extended Fund Facility (EFF) for Pakistan.

"The board’s decision allows for an immediate disbursement of SDR 894 million (about $1.1 billion), bringing total purchases for budget support under the arrangement to about US$3.9 billion," the statement read.

The global lender also approved to increase the loan size and extended it till June 2023.

The Fund further added that in order to support programme implementation and meet the higher financing needs in FY23, as well as "catalyse additional financing, the IMF Board approved an extension of the EFF until end-June 2023, rephasing and augmentation of access by SDR 720 million that will bring the total access under the EFF to about $6.5 billion."

"Pakistan is at a challenging economic juncture. A difficult external environment combined with procyclical domestic policies fuelled domestic demand to unsustainable levels," the global lender noted, adding that the resultant economic overheating led to large fiscal and external deficits in FY22, contributed to rising inflation, and eroded reserve buffers.

It mentioned that the programme seeks to address domestic and external imbalances, and ensure fiscal discipline and debt sustainability while protecting social spending, safeguarding monetary and financial stability, and maintaining a market-determined exchange rate and rebuilding external buffers.

Moreover, the executive board has also approved today the authorities' request for waivers of nonobservance of performance criteria.

A look at the timeline

Pakistan entered the IMF programme in 2019, but only half the funds had been disbursed as Islamabad has struggled to keep targets on track.

The last disbursement was in February and the next tranche was to follow a review in March, but the government of ousted prime minister Imran Khan introduced costly fuel price caps which threw fiscal targets and the programme off track.

However, after months-long efforts of the coalition government that came into power in April completed all conditions of the Washington-based lender after which the executive board resumed the programme and approved the seventh and eighth loan tranches.

Pakistan is now likely to receive a $1.17 billion loan tranche from Fund within six days.

Islamabad reached the staff-level agreement with the Washington-based lender in July but the board meeting could not be held despite Pakistan’s appeal to expedite the process.

Challenging IMF deal

The uncertainty surrounding the IMF programme has been taking a toll on the economy of Pakistan as the financial markets have been awaiting the final decision for the last several months.

While the previous PTI-led government breached the conditions agreed with the Fund to provide relief to the nation; the coalition government took a “tough decision” to convince the board to resume the stalled programme.

However, the intense political atmosphere of Pakistan kept the uncertainty regarding EFF programme’s revival hanging on the leadership and markets.

Last week, just days before the scheduled Executive Board meeting. The PTI-led Khyber Pakhtunkhwa government allegedly refused to implement the terms of the IMF agreement in a letter as part of “a ploy to plunge Pakistan into a flood of economic crisis”.

In a letter written to Miftah, KP Finance Minister Taimur Khan Jhagra said that the provincial administration might find it difficult to run a provincial surplus this year in view of flood-related damages.

It should be noted that ensuring surpluses by provinces this fiscal year is a key requirement previously agreed upon to revive the IMF programme.

The coalition government was once again worried after the development as it might have jeopardised Islamabad’s position during the executive board’s meeting.

The ruling parties also criticised the Khyber Pakhtunkhwa government for “playing politics” after it allegedly refused to implement the terms of the IMF agreement in a letter as part of “a ploy to plunge Pakistan into a flood of economic crisis”.

Later, it was learnt that former minister Shaukat Tarin allegedly asked Punjab and Khyber Pakhtunkhwa to withdraw from the International IMF deal.

The revelations came to the fore in an audio leak earlier today where the ex-finance minister could be heard directing Punjab Finance Minister Mohsin Leghari and Jhagra to cite recent floods as a core reason for withdrawing from the deal.

PM Shahbaz terms IMF's approval 'major step'

Reacting to the “good news”, Prime Minister Shahbaz Sharif said that the revival of the IMF programme has eliminated the default threat looming over Pakistan.

“The IMF programme is a major step forward in our efforts to put Pakistan's economy back on track,” he said, adding the revival of the programme will provide much-needed stability.

The premier further added that he prays that this becomes the last programme with the global lender. “I hope Pakistan doesn’t go back to the IMF in future,” he stated.

Would IMF relax conditions?

Following the development, the finance minister said that keeping in view Pakistan’s current state it is expected that the Fund will give relaxation in some of its conditions.

“The Fund sympathised with the flood affectees today, and we are hopeful that the conditions of this programme will be relaxed,” he said, adding that any problems that arise in future will be dealt with after consultations with the IMF.

Regarding the market’s reaction, Miftah said that the rupee will stabilise from tomorrow. “We have successfully saved the county from default,” he stated.