The International Monetary Fund (IMF) and the State Bank of Pakistan (SBP) discussed the potential for further monetary policy tightening and increasing foreign exchange reserves by the end of June 2023.
By February 10, 2023, Pakistan’s SBP-held foreign exchange reserves had increased by $276 million to $3.01 billion.
To meet the IMF’s recommendations, which call for increasing foreign exchange reserves to $12 billion by the end of June 2023, Pakistan will need to secure at least $17-18 billion over the next four and a half months. Through June 30, 2023, $5 billion was necessary to repay external debt, $3–4 billion for financing the current account deficit (CAD), and $8–9 billion to increase foreign exchange reserves.
If the IMF grants Pakistan’s request, it will require dollar inflows of $11–12 billion by the end of June 2023 to cover foreign debt servicing, CAD financing, and the growth of foreign exchange reserves to $6–7 billion.
The IMF has also requested that the SBP increase the policy rate by 300 to 400 basis points to change the trajectory of the interest rate from negative to positive.
However, SBP officials clarified that the SBP Amendment Act established the independent Monetary Policy Committee (MPC) and that the forum was authorized to make decisions while keeping macroeconomic fundamentals in mind.
A senior official of the finance ministry sources confirmed that the Pakistani side had asked the IMF review mission to reach an agreement on the staff level agreement (SLA) the following week before the IMF’s executive board meeting, which is expected to occur in four to six weeks.
The Pakistani government is still hopeful that a staff-level agreement will be reached by next week, but there was a discrepancy in their projections for external financing.
A senior official acknowledged that Pakistan made bold and courageous decisions by increasing electricity and gas prices and imposing Rs170 billion in taxes via a mini-budget. As a result of the market-based exchange rate, the price of POLs (petrol, oil, and lubricants) increased.
Even though Pakistani authorities had the authority to take all of these actions, the most crucial ones were still pending because they needed confirmation from all multilateral and bilateral creditors to meet the program’s ominous external financing requirements. As a result, the EFF’s IMF program, which expires on June 30, 2023, cannot be extended further.
“Until the end of June 2023, the IMF is exerting great effort to raise the gross foreign exchange reserves to target $11–$12 billion. However, according to official sources who are aware of the most recent developments in the ongoing virtual negotiations with the IMF mission to move toward the signing of the staff-level agreement, the Pakistani side is requesting a fix of gross foreign exchange reserves in the range of $6 to $8 billion, which is less than double digits. In light of the possibility of reduced confirmation from bilateral partners, this request is made.
The seventh and eighth reviews under the $6.5 billion EFF arrangement have been completed, and both parties have agreed that gross foreign exchange reserves of up to $16.2 billion cannot be touched until the end of June 2023.
Despite Pakistan’s request for a 50% reduction in the target for determining the end of the program period, the IMF insists on obtaining confirmation from all available sources.
The finance minister, Ishaq Dar, has been frantically contacting commercial banks, multilateral creditors, and bilateral creditors while in Dubai to secure the necessary dollar infusion support to win IMF approval for the revival of the stalled program.
