Govt, IMF reach staff-level agreement on 1st review of loan programme, new $1.3bn climate fund

The federal government has reached a deal with the International Monetary Fund (IMF) for a new $1.3 billion arrangement and also agreed on the first review of the ongoing 37-month bailout programme, the Fund said on Tuesday.

Pending board approval, the government can unlock the $1.3bn under a new climate resilience loan programme spanning 28 months.

It will also free $1bn for the country under the $7bn bailout programme, which would bring those disbursements to $2bn.

“The IMF team has reached a staff-level agreement (SLA) with the Pakistani authorities on the first review of the 37-month extended arrangement under the Extended Fund Facility (EFF), and on a new 28-month arrangement under the IMF’s [Resilience and Sustainability Trust] with total access over the 28 months of around $1.3 billion,” Nathan Porter, mission chief to Pakistan, said in a statement by the Fund.

Pakistan had requested $1bn from the IMF’s RSF in October. The funding under RSF is made available to nations that commit to high-quality reforms to build resilience against climate catastrophes through adaptation. It is repayable over 30 years, including a 10-year grace, and is normally cheaper than terms for an EFF, such as the $7bn loan programme which is underway.

The programme, secured mid-year in 2024, has played a key role in stabilising the economy and the government has said the country is on course for a long-term recovery.

“Over the past 18 months, Pakistan has made significant progress in restoring macroeconomic stability and rebuilding confidence despite a challenging global environment,” Porter said in the statement.

“Upon approval (by the IMF board), Pakistan will have access to about $1bn under the EFF, bringing total disbursements under the programme to about $2bn,” he added.

“While economic growth remains moderate, inflation has declined to its lowest level since 2015, financial conditions have improved, sovereign spreads have narrowed significantly, and external balances are stronger,” the IMF official said about Pakistan.

After slowing to its lowest level in almost a decade last month, inflation is anticipated to increase slightly up to 3pc in April, the finance ministry said in its monthly economic outlook.

Inflation has been declining for several months, hitting 1.5pc in February, after it soared to around 40pc in May 2023.

However, the statement also noted what it called elevated downside risks such as geopolitical shocks to commodity prices, tightening global financial conditions or rising protectionism.

It said such risks could undermine Pakistan’s “hard-won macroeconomic stability”.

The Fund further stressed, “Climate-related risks continue to pose a significant challenge for Pakistan, creating a need to build resilience, including through adaptation measures.”

“In this regard, it is critical to stay the course and entrench the progress achieved over the past one and a half years, building resilience by further strengthening public finances, ensuring price stability, rebuilding external buffers and eliminating distortions in support of stronger, inclusive and sustained private sector-led growth,” it added.

The Fund noted that Pakistan reiterated its commitment to the EFF-supported programme and plan to supplement its efforts by advancing reforms under the RSF-supported deal.

It said the government’s policy priorities included: continued fiscal consolidation to reduce public debt while creating space for social and development spending; making further progress on fiscal structural reforms; maintaining appropriately tight monetary policy; continuing cost-reducing reforms in the energy sector to lower tariffs; and scaling up climate reform efforts.

Finance Minister Muhammad Aurangzeb expressed optimism with the results of policies that the government has implemented in agreement with the IMF, Geo News reported.

“We remain committed to stay the course and continue to execute structural reforms with respect to taxation, energy and SOEs to put our country on the trajectory of sustainable productivity and export-led growth,” Aurangzeb told Geo News from China.

The government says the $350bn economy has stabilised under the $7bn IMF bailout that had helped it stave off a default threat.

The government had been awaiting the IMF agreement on the first review of the bailout and disbursement of $1bn ahead of the annual budget, usually presented in June.