The State Bank of Pakistan (SBP) has confirmed the receipt of the first tranche of SDR 760 million (approximately $1.026 billion) from the International Monetary Fund (IMF) as part of the recently approved 37-month Extended Fund Facility (EFF). This inflow will boost the central bank’s foreign reserves and provide immediate relief to Pakistan’s struggling economy.
On Wednesday, the IMF Executive Board officially approved the $7 billion Extended Fund Facility (EFF) for Pakistan, marking a critical step in stabilizing the country’s finances. The 37-month program is aimed at helping Pakistan navigate through its economic challenges, including inflation, fiscal deficits, and a depreciating currency. The inflows from the IMF will be reflected in the SBP’s liquid reserves on Thursday, October 3, 2024, the central bank stated.
IMMEDIATE ECONOMIC IMPACT
The injection of over $1 billion is expected to provide temporary relief to Pakistan’s foreign reserves, which have been under pressure due to a combination of factors, including high import costs, declining exports, and loan repayments. With this fresh injection, Pakistan’s reserves will see a slight increase, offering a cushion to the country’s external payments.
The government’s approval of the IMF program follows months of intense negotiations, with the Fund demanding reforms aimed at addressing long-standing structural issues in Pakistan’s economy, such as improving tax collection, restoring energy sector viability, and tackling high inflation.
REFORMS AND CONDITIONS UNDER THE IMF PROGRAM
To meet the IMF’s stringent requirements, the government of Pakistan has introduced a series of reforms and tax measures to generate additional revenue. This includes a 48% increase in direct taxes, a 35% hike in indirect taxes, and a significant 64% boost in non-tax revenue, with petroleum levies playing a key role in this effort. The new tax measures have been seen as critical for improving fiscal discipline and preventing further economic deterioration.
A major focus of the IMF program is to expand Pakistan’s narrow tax base. Despite having a population of over 240 million people, only 5.2 million filed income tax returns in 2022. This low tax compliance rate has put immense pressure on the country’s financial system, forcing the government to rely on external loans to bridge fiscal gaps.
The Federal Board of Revenue (FBR) has ramped up efforts to collect nearly $46 billion in taxes for the current fiscal year, implementing measures such as blocking telecommunications services and disconnecting utility connections for non-tax filers.
INFLATIONARY PRESSURES AND ECONOMIC OUTLOOK
While the IMF deal is expected to stabilize Pakistan’s economy in the short term, inflation remains a significant concern. The country has been grappling with record-high inflation rates, exacerbated by the global rise in food and energy prices due to the war in Ukraine and domestic challenges like the 2022 floods that affected a third of the country. The new tax measures and IMF reforms are likely to contribute further to inflationary pressures, at least in the near future.
However, the government remains optimistic that these difficult reforms will eventually restore stability and pave the way for sustainable growth. Finance Minister Ishaq Dar confirmed that Pakistan is also in talks for a longer IMF program to support the country’s public finances and energy sector, and to promote private-sector-led economic activity.
LONG-TERM GOALS OF THE IMF PROGRAM
The primary goal of the IMF’s Extended Fund Facility is to help Pakistan achieve macroeconomic stability. Over the next three years, the government will focus on strengthening public finances, restoring the viability of the energy sector, and bringing inflation back to targeted levels. Additionally, the reforms are designed to promote private-led activity, which is seen as essential for long-term economic growth and job creation.
The successful implementation of these reforms, however, will depend on the government’s ability to navigate domestic political challenges and balance the need for economic recovery with the hardships faced by the population due to rising costs of living.
