Pakistan in Talks with IMF to Boost Reserves and Tighten Monetary Policy

State Bank of Pakistan (SBP) and the International Monetary Fund (IMF) held a round of talks to discuss the possibility of increasing foreign exchange reserves and tightening monetary policy by the end of June 2023.

The country’s foreign exchange reserves held by the State Bank currently stand at $3.1 billion, after an increase of $276 million until February 10, 2023.

The IMF has advised Pakistan to raise its foreign exchange reserves up to $12 billion by the end of June 2023, which means the country needs to secure $17-18 billion in the next four and a half months.

This amount includes external debt repayment requirements of $5 billion, financing the current account deficit (CAD) of $3-4 billion, and $8-9 billion for building up foreign exchange reserves.

Pakistan hopes to secure dollar inflows of $11-12 billion to meet the requirements for foreign debt servicing, financing the CAD, and building up the reserves to $6-$7 billion by the end of June 2023.

The IMF has also requested that the State Bank increase its policy rate by 300 to 400 basis points to move towards a positive interest rate trajectory from a negative one.

However, the SBP officials clarified that the Monetary Policy Committee (MPC) established under the SBP’s Amendment Act has the power to make decisions based on macroeconomic fundamentals.

Pakistan’s finance ministry hopes to strike a staff-level agreement (SLA) with the IMF review mission before the executive board meeting, expected in four to six weeks. However, a gap remains on the projection of external financing.

The Pakistani government has already taken tough decisions, such as increasing electricity and gas tariffs, imposing Rs170 billion in taxes through a mini-budget, and bringing the exchange rate to a market-based system, resulting in an increase in petrol, oil, and lubricant prices.

However, the most critical steps remain unresolved, as confirmation is required from all multilateral and bilateral creditors to meet external financing requirements during the program period. The IMF’s EFF program will expire on June 30, 2023, and there is no possibility of any further extension.

Official sources revealed that the IMF is pressing for a gross foreign exchange reserves target of $11-$12 billion by the end of June 2023, while Pakistan is requesting a target of $6 to $8 billion due to the possibility of reduced confirmation from bilateral partners.

Both sides have agreed that the gross foreign exchange reserves cannot be increased to $16.2 billion by the end of June 2023, as previously sought during the finalization of the 7th and 8th reviews under the $6.5 billion EFF arrangement.

The Pakistani government is working hard to secure confirmation from multilateral, bilateral creditors, and commercial banks to muster up the required dollar inflows to revive the stalled program and gain approval from the IMF.

The Finance Minister, Ishaq Dar, is currently in Dubai, trying to secure these confirmations.

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