Washington – The International Monetary Fund approved the immediate disbursement of $506.4 million to Pakistan as part of a three-year Extended Fund Facility after noting “encouraging” progress in stabilizing the country’s fragile economy.
The disbursement is part of a $6.6 billion loan Pakistan secured in 2013 after South Asia’s second-biggest economy faced an imminent default on its foreign payments. The IMF Executive Board released the new tranche after completing the 7th review of the country’s economic performance under the program.
“Progress toward macroeconomic stabilization is encouraging, thanks to strong performance under the program and despite significant legal, political, and security challenges,” Mitsuhiro Furusawa, Deputy Managing Director, said after the meeting. Including the latest tranche, Pakistan has received a total of $4.05 billion out of the loan.
A set of reforms in line with the IMF program helped Pakistan reduce the deficit from the peak of 8.2 percent of GDP in FY12/13 to an expected below 5 percent in the current financial year ending June 30. The government announced plan to trim it to 4.3 percent in the new federal budget for FY15/16 announced in early June.
“The planned fiscal adjustment in the context of the FY2015/16 budget is appropriate,” Furusawa noted. “The authorities’ plans to broaden the tax base, including eliminating tax exemptions and concessions, are welcome, though significant scope remains for increasing tax compliance and enforcement.”
While the structural reforms were progressing, the board stressed more needs to be done in the face of risk of legal challenges to the reforms. The country’s chronic energy shortages which have hampered growth remain a “key bottleneck”, the board noted.
Pakistan has long suffered power and gas shortages that forced many factories to close. Frequent power outages of as long as 12 to 18 hours during summer, and gas shortages in winter have led to often violent protests in recent years.
The IMF board acknowledged that the government was “implementing plans to reduce costly and inefficient electricity subsidies, and steps are being taken to contain arrears in the electricity sector”.
Arrears, usually referred to as “circular debt” – unpaid bills and price controls delaying payments to fuel suppliers which in turn owe oil refiners – have been a major source of electricity crisis in the country of nearly 200 million people.
The government of Prime Minister Nawaz Sharif, which took over after the historic 2013 election that for the first time saw peaceful transfer of civilian rule from one government to another in its 66-year history, is focusing on projects to produce more electricity.
The board noted stability and progress in the financial sector but stressed that efforts to combat financing terrorism, anti-money laundering, and tax offenses should continue.
Pakistan, which borders on Afghanistan on the west, has long fought al-Qaeda-linked and homegrown Taliban militants which has claimed more than 50,000 lives since 2001. A U.S. raid by its Navy Seals killed al-Qaeda chief Osama bin Laden in Pakistan in 2011.