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The State Bank of Pakistan building in Karachi, Pakistan. Image Credit: Agency

Dubai: The international Monetary Fund (IMF) staff and the Pakistani authorities have reached an agreement to resume funding under  the IMF Extended Fund Facility (EFF).

An IMF team led by Ernesto Ramirez Rigo, concluded virtual discussions with the Pakistani authorities and reached a staff-level agreement on the resumption of the $6 billion EFF. This agreement is subject to the approval of the IMF’s Executive Board.

Pending approval of the Executive Board, the IMF agreed to release around $500 million.

“The COVID-19 shock temporarily disrupted Pakistan’s progress under the EFF-supported program. However, the authorities’ policies and allowing higher than expected COVID-related social spending, have been critical in supporting the economy and saving lives and households,” the IMF said in a statement.

Policy response

The IMF commended the fiscal and monetary policy responses of Pakistan to support the economy in the face of COVID-induced economic hardships.

“As result of the authorities’ actions, the COVID-19 first wave started to abate over the 2020 summer and the impact on the economy was significantly reduced. The external current account improved, due to stronger-than-expected remittances, import compression, and a mild export recovery,” said Ramirez Rigo.

High-frequency economic data have started to point to a recovery. Considering these improvements, the economy is projected to expand by 1.5 per cent in2021 from the -0.4 per cent in 2020. Still, with the COVID-19 second wave still unfolding around the world, the outlook is subject to a high level of uncertainty and downside risks.

Recalibration of policy

The IMF noted that the Covid-19 shock has required a careful recalibration of the macroeconomic policy mix, the reforms calendar, and the EFF review schedule. Against this background, the authorities have formulated a package of measures that strikes an appropriate balance between supporting the economy, ensuring debt sustainability, and advancing structural reforms.

The strengthened international reserves’ position since the start of the programme—with gross reserves almost doubling to $13 billion until January 2021 and net international reserves (NIR) increasing by over $9 billion until December 2020—and the shock absorption displayed by the market-based exchange rate, allowed the SBP’s to pre-emptively proceed to a large easing of monetary policy, and a sizeable expansion of refinancing facilities.