Revival of IMF program to remove economic uncertainty in Pakistan – central bank governor

KARACHI: The governor of Pakistan’s central bank on Friday hoped the revival of the International Monetary Fund (IMF) loan program would eliminate prevailing economic uncertainty over external financing in the country.

The top State Bank of Pakistan (SBP) official, who is currently in Washington to attend the IMF and World Bank spring meetings, issued the statement while addressing international investors and fund managers at an event organized by Barclays Bank on the economic challenges facing the South Asian nation.

Governor Jameel Ahmad said Pakistan had met all its financial obligations in a timely manner contrary to market expectations. He maintained this was despite the fact that the country’s debt repayments were front-loaded while its inflows had been gradual.

“The program loans from other multilateral agencies are waiting for the completion of the IMF review,” he said. “In this interim period, the country continues to receive fresh financing, in addition to the rollover of existing loans, from bilateral partners.”

The SBP governor said Pakistan’s economy was witnessing high inflation and external balance of payments pressures which were largely driven by the adverse global shocks and domestic developments.

“While inflation is currently elevated, it is expected to start decelerating over the next few months,” he added. “And with the revival of the IMF program, the uncertainty regarding external financing will also fade away.”

Pakistan signed a $6 billion bailout program with the IMF in 2019 which was topped up by $7 billion last year. The international lender delayed the release of the next tranche under the loan program amounting to $1.2 billion even as the country implemented tough economic conditions imposed by it.

The SBP governor said while the commodity prices in the international markets had fallen from their peak levels in mid-2022, they were still significantly higher than what they were before the outbreak of the coronavirus pandemic and were leading to high inflation.

At the same time, global financial conditions had tightened which was making it harder for emerging markets like Pakistan to access international lenders.

As a result, he added, the country’s foreign exchange reserves and exchange rate had come under stress. He also mentioned the devastating floods between July and August 2023 in Pakistan, saying they had further accentuated the country’s economic challenges.

The SBP government said Pakistan’s official forex reserves had recovered to $4.2 billion after touching a low of $2.9 billion in the first week of February.

He informed the participants of the gathering the central bank had raised the policy rate by 1400 basis points to 21 percent over the past 18 months.

He noted that other measures taken to reduce the demand-side pressures on inflation and the current account included tightening of regulations. Moreover, the exchange rate had adjusted over the past couple of months, serving as “the first line of defense” against emerging external imbalances.

The top SBP official stated the government was pursuing a contractionary fiscal policy that had lowered the deficit compared to last financial year between July 2022 and January 2023. This, he added, was despite the flood-related rehabilitation and reconstruction expenses. Moreover, the primary balance was in surplus unlike the deficit incurred last year.

The central bank government said the country was on its way to achieving macroeconomic stability, as the impact of policy measures was already playing out in the economy. The current account deficit had narrowed and foreign exchange reserves, albeit low, were gradually increasing.

He pointed out that Pakistan had taken several measures to strengthen the SBP’s operational autonomy, prohibit the government to borrow from the central bank, remove vulnerabilities from the financial system to check money laundering and terrorism financing, and increase the digitalization of the economy.

These measures, he said, had addressed many structural weaknesses and would allow the economy to pick up sharply once the country moved through its current challenges.

He also maintained that Pakistan’s economy had always rebounded strongly after undergoing severe shocks.