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IMF Country Report No. 24/310

PAKISTAN

2024 ARTICLE IV CONSULTATION AND REQUEST FOR AN EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR PAKISTAN

October 2024

In the context of the 2024 Article IV Consultation and the request for an Extended Arrangement under the Extended Fund Facility, the following documents have been released and are included in this package:

• A Press Release including a statement by the Chair of the Executive Board, and summarizing the views of the Executive Board as expressed during its September 25, 2024, consideration of the staff report on issues related to the Article IV Consultation and the IMF arrangement.

• The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on September 25, 2024, following discussions that ended on May 23, 2024, with the officials of Pakistan on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on September 11, 2024.

• An Informational Annex prepared by the IMF.

• A Statement by the Executive Director for Pakistan.

The documents listed below have been or will be separately released.

Selected Issues

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

Copies of this report are available to the public from

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© 2024 International Monetary Fund

Press Release

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PR 24/343

IMF Executive Board Concludes 2024 Article IV Consultation for Pakistan and Approves 37-month Extended Arrangement

FOR IMMEDIATE RELEASE

• The Executive Board of the International Monetary Fund (IMF) concluded the 2024 Article IV consultation with Pakistan and approved a 37-month Extended Arrangement under the Extended Fund Facility (EFF) for Pakistan in the amount of SDR 5,320 million (or around US$7 billion). The Fund’s immediate disbursement will be SDR 760 million (or about US$1 billion).

• The new program will require sound policies and reforms to support the authorities’ ongoing efforts to strengthen macroeconomic stability, address deep structural challenges, and create conditions for a stronger, more inclusive, and resilient growth.

• Continued strong financial support from Pakistan’s development and bilateral partners will also be critical for the program to achieve its objectives.

Washington, DC – September 27, 2024: The Executive Board of the International Monetary Fund (IMF) concluded the 2024 Article IV consultation¹ and approved a 37-month Extended Arrangement under the Extended Fund Facility (EFF) for Pakistan on Wednesday, September 25, 2024 in the amount of SDR 5,320 million (262 percent of quota, or around US$7 billion). The Board’s decision allows for an immediate disbursement of SDR 760 million (or about US$1 billion).

Pakistan has taken key steps to restoring economic stability with consistent policy implementation under the 2023-24 Stand-by Arrangement (SBA). Growth has rebounded (2.4 percent in FY24), supported by activity in agriculture, while inflation has receded significantly, falling to single digits, amid appropriately tight fiscal and monetary policies. A contained current account and calm foreign exchange market conditions have allowed the rebuilding of reserve buffers. Reflecting disinflation and steadier domestic and external conditions, the State Bank of Pakistan has been able to cut the policy rate by a total of 450 bps since June also supported by an appropriately tight FY25 budget.

Despite this progress, Pakistan’s vulnerabilities and structural challenges remain formidable. A difficult business environment, weak governance, and an outsized role of the state hinder investment, which remains very low compared to peers, while the tax base remains too narrow to ensure tax fairness, fiscal sustainability and meet Pakistan’s large social and development spending needs. In particular, spending on health and education has been insufficient to tackle persistent poverty, and inadequate infrastructure investment has limited economic potential and left Pakistan vulnerable to the impact of climate change. Without a concerted adjustment and reform effort, Pakistan risks falling further behind its peers.

Because of the progress and stability achieved under the 9-month 2023 SBA, the authorities are embarking on renewed efforts to address these challenges, build resilience and enable sustainable growth. Key priorities under the new EFF-supported program include (i) rebuilding policy making credibility and entrenching macroeconomic sustainability through consistent implementation of sound macro policies and a broadening of the tax base; (ii) advancing reforms to strengthen competition, and raise productivity and competitiveness; (iii) reforming SOEs and improving public service provision and energy sector viability; and (iv) building climate resilience.

Following the Executive Board discussion, Kenji Okamura, Deputy Managing Director and Acting Chair, made the following statement:

The implementation of sound policies over the past year has been critical to restore economic stability, reduce near-term risks and rebuild confidence. Growth has returned, external pressures have eased with reserves doubling over the last year, and inflation has declined markedly. However, despite this progress, significant structural challenges remain, and ambitious and sustained efforts are needed to strengthen Pakistan’s resilience and economic prospects. The authorities’ EFF-supported program provides a critical anchor to policies and structural reforms and provides a framework for partner financing.

Continuing fiscal consolidation in FY25 and beyond, through enhanced revenue mobilization and prudent expenditure management, is critical to securing fiscal sustainability and reducing the crowding out of private investment. Increasing revenue mobilization by broadening the tax base, removing special sectoral regimes, and placing a fairer burden on previously undertaxed sectors (including industrialists, developers, and large-scale agriculture), will enhance fairness and efficiency and create needed space for essential investments in human capital, infrastructure, and social spending. Complementary institutional and structural reforms will focus on strengthening federal-provincial institutional arrangements, improving tax administration and compliance, and making public investment management more effective.

Timely energy tariff adjustments under the previous program have helped stabilize energy sector circular debt. Going forward, deep cost-side reforms are critical to securing the sector’s lasting viability and reducing its costs.

The recent marked decline in inflation is very welcome, allowing the SBP to lower the policy rate while maintaining an appropriately tight monetary stance. The buildup in FX reserves should continue, supported by inflows under the Extended Arrangement, as well as price discovery in the interbank market to help buffer external shocks, attract financing, and protect competitiveness and growth. Strong action to address undercapitalized financial institutions and, more broadly, vigilance over the financial sector is needed to ensure financial stability.

Overcoming Pakistan’s longstanding structural challenges—most notably low productivity and economic openness, resource misallocation, and climate vulnerability—requires faster implementation of structural reforms. Reform priorities include advancing the SOE reform agenda; scaling back distortive incentives, promoting a level playing field for all business; strengthening governance and anti-corruption institutions; and continuing to build climate resilience.

Executive Board Assessment²

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for strengthening policymaking over the past year under the Stand-by Arrangement, which has delivered renewed economic stability. Noting the still high risks and narrow path to sustained stability, Directors urged continued strong commitment and ownership of sound policies and structural reforms under the Extended Arrangement to create the conditions for durable and inclusive growth and to put debt firmly on a downward trajectory. They emphasized in particular the criticality of sustained program implementation, supported by capacity development and close collaboration with developments partners, to mobilize additional financing and restore market access. Directors also stressed the importance of vigilant monitoring of program implementation, close consultation with the Executive Board, and robust contingency planning to safeguard the program’s success.

Directors urged steadfast execution of the planned continued consolidation in the FY25 Budget and underscored the need for sustained gradual consolidation, underpinned by strengthening of fiscal institutions, to durably improve debt sustainability. In this regard, some Directors noted that given the ambitious growth projections, there is no room for policy slippages without undermining debt sustainability. Directors also welcomed steps taken toward a fairer tax system and stressed the importance of additional revenue mobilization efforts by broadening the tax base and enhancing tax administration. Alongside prudent spending management, this will create space for essential investments in human capital, infrastructure, and social protection. Directors also called for reforms to strengthen the fiscal framework, including federal-provincial institutional arrangements; measures to ensure the energy sector’s lasting sustainability, including through cost-based tariffs; and enhanced liquidity and debt management.

Directors supported continued tight and data-driven monetary policy to ensure that inflation continues moving toward the target range on a sustained basis. They emphasized the importance of allowing the exchange rate to serve as a shock absorber, buffering competitiveness and helping rebuild reserves. Safeguarding financial stability requires enhancing the bank regulatory and supervisory frameworks, monitoring risks associated with the sovereign-bank nexus, and addressing long-undercapitalized financial institutions. Directors also called for continued enhancements in the AML/CFT framework.

Directors noted that Pakistan needs to move away from its state-led growth model, strengthen the business environment, and ensure a more even playing field with freer competition to reverse the decline in living standards. Priorities include reforming SOEs, removing trade barriers and market distortions, and strengthening governance frameworks. Directors emphasized the need for further steps towards building climate resilience through the effective implementation of the C-PIMA action plan and enhanced climate adaptation investments.

Directors noted the Ex-post Peer Review assessment and the negative impact caused by deviations from programmed policies, and stressed the importance of strong ownership for program implementation and financing. They emphasized the need for effective communication to build broad consensus and support for reforms.

It is expected that the next Article IV consultation with Pakistan will be held in accordance with the Executive Board decision on consultation cycles for members with Fund arrangements.

Annex

While the 2023–24 SBA supported the restoration of economic stability, Pakistan’s vulnerabilities and structural challenges remain substantial. The proposed 37-month EFF-supported program aims to underpin the authorities’ efforts to address Pakistan’s challenges, build resilience and enable sustainable growth. Key priorities under the EFF include:

Rebuilding policy making credibility and entrenching macroeconomic sustainability through consistent implementation of sound fiscal, monetary, and exchange rate policies, better public spending, and raising fairer and more efficient taxes, especially from undertaxed sectors, while creating space for higher spending on health and education and strengthening social protection.

Advancing reforms to raise productivity and competitiveness by creating a more favorable private sector business environment, by removing state-created distortions and ensuring a fair and level playing field with increased competition. This includes streamlined subsidies, an improved FDI regime, deepened bank intermediation, and scaled-up human capital investment.

Reforming SOEs and improving public service provision, through SOE restructuring and privatization, governance and transparency reforms, measures to reduce the cost structure of the energy sector and phasing out the government’s role in price setting.

Building climate resilience through implementation of the C-PIMA Action Plan and supporting the authorities’ National Adaptation Plan.

^{Table 1.}

Pakistan: Selected Indicators, FY2023-FY2025 1/

Sources: Pakistani authorities; World Bank; and IMF staff estimates and projections. 1/ Fiscal year ends June 30. 2/ Excludes one-off transactions, including asset sales. In FY25 it excludes the projected windfall from exceptionally high SBP dividends. 3/ Period average. 4/ Excluding gold and foreign currency deposits of commercial banks held with the State Bank of Pakistan.

^{Table 1.}

Pakistan: Selected Indicators, FY2023-FY2025 1/

Population: 236.0 million (2023/24) Quota: SDR 2,031 million Main exports: Textiles (US$16.5 billion, 2022/23) Key export markets: European Union, United States, UAE	Per capita GDP: US$1,572.3 (2023/24) Poverty rate: 21.9 percent (national line; FY2019)
	FY2023	FY2024	FY2025
		Est.	Proj.
Output and prices (% change)
Real GDP at factor cost	-0.2	2.4	3.2
Employment (%)
Unemployment rate	8.5	8.0	7.5
Prices (%)
Consumer prices, period average	29.2	23.4	9.5
Consumer prices, end of period	29.4	12.6	10.6
General government finances (% GDP)
Revenue and grants	11.5	12.6	15.4
Expenditure	19.2	19.3	21.4
Budget balance, including grants	-7.7	-6.7	-6.0
Budget balance, excluding grants	-7.8	-6.8	-6.1
Primary balance, excluding grants	-0.9	0.9	2.0
Underlying primary balance (excluding grants) 2/	-0.7	0.9	1.0
Total general government debt excl. IMF obligations	74.9	67.0	69.0
External general government debt	28.6	22.6	24.0
Domestic general government debt	46.3	44.5	45.0
General government debt incl. IMF obligations	77.3	69.2	71.4
General government and government guaranteed debt incl. IMF	81.5	73.0	75.1
Monetary and credit (% change, unless otherwise indicated)
Broad money	14.2	16.1	13.8
Private credit	2.3	3.9	16.0
Six-month treasury bill rate (%) 3/	18.3	21.5
Balance of Payments (% GDP, unless otherwise indicated)
Current account balance	-1.0	-0.2	-0.9
Foreign direct investment	0.5	0.5	0.4
Gross reserves (millions of U.S. dollars) 4/	4,455	9,381	12,757
Months of next year's imports of goods and services	0.8	1.6	2.1
Total external debt	40.2	31.4	33.6
Exchange rate (% change)
Real effective exchange rate	-8.0

Sources: Pakistani authorities; World Bank; and IMF staff estimates and projections. 1/ Fiscal year ends June 30. 2/ Excludes one-off transactions, including asset sales. In FY25 it excludes the projected windfall from exceptionally high SBP dividends. 3/ Period average. 4/ Excluding gold and foreign currency deposits of commercial banks held with the State Bank of Pakistan.

View Table

^{Table 1.}

Pakistan: Selected Indicators, FY2023-FY2025 1/

Population: 236.0 million (2023/24) Quota: SDR 2,031 million Main exports: Textiles (US$16.5 billion, 2022/23) Key export markets: European Union, United States, UAE	Per capita GDP: US$1,572.3 (2023/24) Poverty rate: 21.9 percent (national line; FY2019)
	FY2023	FY2024	FY2025
		Est.	Proj.
Output and prices (% change)
Real GDP at factor cost	-0.2	2.4	3.2
Employment (%)
Unemployment rate	8.5	8.0	7.5
Prices (%)
Consumer prices, period average	29.2	23.4	9.5
Consumer prices, end of period	29.4	12.6	10.6
General government finances (% GDP)
Revenue and grants	11.5	12.6	15.4
Expenditure	19.2	19.3	21.4
Budget balance, including grants	-7.7	-6.7	-6.0
Budget balance, excluding grants	-7.8	-6.8	-6.1
Primary balance, excluding grants	-0.9	0.9	2.0
Underlying primary balance (excluding grants) 2/	-0.7	0.9	1.0
Total general government debt excl. IMF obligations	74.9	67.0	69.0
External general government debt	28.6	22.6	24.0
Domestic general government debt	46.3	44.5	45.0
General government debt incl. IMF obligations	77.3	69.2	71.4
General government and government guaranteed debt incl. IMF	81.5	73.0	75.1
Monetary and credit (% change, unless otherwise indicated)
Broad money	14.2	16.1	13.8
Private credit	2.3	3.9	16.0
Six-month treasury bill rate (%) 3/	18.3	21.5
Balance of Payments (% GDP, unless otherwise indicated)
Current account balance	-1.0	-0.2	-0.9
Foreign direct investment	0.5	0.5	0.4
Gross reserves (millions of U.S. dollars) 4/	4,455	9,381	12,757
Months of next year's imports of goods and services	0.8	1.6	2.1
Total external debt	40.2	31.4	33.6
Exchange rate (% change)
Real effective exchange rate	-8.0

Sources: Pakistani authorities; World Bank; and IMF staff estimates and projections. 1/ Fiscal year ends June 30. 2/ Excludes one-off transactions, including asset sales. In FY25 it excludes the projected windfall from exceptionally high SBP dividends. 3/ Period average. 4/ Excluding gold and foreign currency deposits of commercial banks held with the State Bank of Pakistan.

Title page

PAKISTAN

STAFF REPORT FOR THE 2024 ARTICLE IV CONSULTATION AND REQUEST FOR AN EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY

September 11, 2024

EXECUTIVE SUMMARY

Context. While the 2023–24 Stand-By Arrangement (SBA) supported the restoration of economic stability, Pakistan’s vulnerabilities and structural challenges remain substantial. The new government formed after the February elections has continued efforts to strengthen economic conditions and is embarking on a multi-year home-grown reform program to achieve resilient and inclusive economic growth.

Program objectives. The program aims to reinforce the authorities’ efforts to bolster policy credibility and entrench stability and accelerate structural reforms to strengthen public finances, improve the provision of critical public services, and create a favorable environment for private-led growth. Key policies include: (i) revenue-based fiscal consolidation and institutional reforms to strengthen the fiscal framework, including the federal-provincial fiscal relations; (ii) appropriate monetary policy to bring down inflation and exchange rate flexibility to aid the rebuilding of reserves; (iii) measures to restore the energy sector’s viability, including the timely implementation of energy tariff adjustments; and (iv) reforms to state-owned enterprise (SOE) governance, deregulation of product markets, governance and anti-corruption reforms, removal of subsidies and relaxation of trade barriers which create resource misallocation, and (v) efforts to strengthen climate resilience.

Program modalities. To support their policy efforts, the authorities have requested a 37-month Extended Arrangement Under the Extended Fund Facility (EFF) in the amount of SDR 5,320 million (261.9 percent of quota, or around US$7 billion). The authorities believe that their commitment to sound policies can catalyze new multilateral and bilateral financing and restore market access.

Article IV discussions. The discussions focused on Pakistan’s medium-term prospects, which helped inform policies and define program objectives. They were complemented by the ex-post peer review assessment that drew lessons from Pakistan’s recent history of Fund-supported programs.

Approved By

Thanos Arvanitis and Kenneth Kang

Contents

• CONTEXT

• A. Recent Developments

• B. Pakistan’s Protracted Structural Challenges

• C. A New EFF

• MACROECONOMIC OUTLOOK AND RISKS

• POLICY DISCUSSIONS

• A. Fiscal Policies

• B. Poverty Reduction and Social Protection

• C. Monetary, Exchange Rate, and Financial Sector Policies

• D. Energy Sector Policies

• E. Structural Policies

• F. Climate Policies

• PROGRAM MODALITIES AND CAPACITY TO REPAY

• STAFF APPRAISAL

• BOXES

• 1. Pakistan’s Trade, Competitiveness, and Openness

• 2. Pakistan’s Implementation of Past Fund Advice

• 3. The Sovereign–Bank Nexus in Pakistan

• 4. Strengthening Growth, Inclusion, and Climate Resilience

• FIGURES

• 1. Selected Economic Indicators

• 2. Selected Financial Indicators

• 3. Selected Banking and Financial Indicators, 2010/11-2022/23

• 4. Education Performance Indicators

• 5. Health Performance Indicators

• TABLES

• 1. Selected Economic Indicators

• 2. Medium-Term Macroeconomic Framework, 2019/20-2028/29

• 3a. Balance of Payments, 2018/19-2028/29

• 3b. Gross Financing Requirements and Sources, 2018/19-2028/29

• 4a. General Government Budget, 2018/19-2028/29 (In billions of Pakistani rupees)

• 4b. General Government Budget, 2018/19-2028/29 (In percent of GDP)

• 5. Monetary Survey, 2018/19-2024/25

• 6. Financial Indicators for the Banking System, 2013-24

• 7. Indicators of Fund Credit, 2015-29

• 8. Schedule of Reviews and Purchases

• 9. Decomposition of Public Debt and Debt Service by Creditor, 2022/23-2024/25

• ANNEXES

• I. Risk Assessment Matrix

• II. Sovereign Risk and Debt Sustainability Analysis

• III. External Debt Sustainability Assessment

• IV. External Sector Assessment

• V. Ex-Post Peer Review Assessment

• VI. From Boom-Bust to Stabilization: Monetary Policy and Business Cycles in Pakistan

• VII. Data Issues

• APPENDIX

• I. Letter of Intent

  • Attachment I. Memorandum of Economic and Financial Policies

  • Attachment II. Technical Memorandum of Understanding