In a major support to shore up the declining reserves following the outflow of hot money, the International Monetary Fund (IMF) on Thursday night approved the disbursement of $1.386 billion to Pakistan under the Rapid Financing Instrument (RFI) to address the economic impact of the Covid-19 shock.

“The Executive Board of the IMF approved a purchase of Pakistan under the RFI equivalent to SDR 1,015.5 million ($1.386 billion, 50 per cent of quota) to meet the urgent balance of payments needs stemming from the outbreak of the Covid-19 pandemic,” the IMF said in a statement.

With the near-term outlook deteriorating sharply, the authorities have swiftly put in place measures to contain the impact of the shock and support economic activity. Crucially, health spending has been increased and social support strengthened.

As the impact of the Covid-19 shock subsides, the authorities’ renewed commitment to implementing the policies in the existing Extended Fund Facility (EFF) will help support the recovery and strengthen resilience, the Fund said.

The disbursement will enable country to meet urgent balance of payments needs stemming from outbreak of Covid-19

While uncertainty remains high, the near-term economic impact of Covid-19 is expected to be significant, giving rise to large fiscal and external financing needs. The IMF support will help provide a backstop against the decline in international reserves and provide financing to the budget for targeted and temporary spending increases aimed at containing the pandemic and mitigating its economic impact.

“The IMF remains closely engaged with the Pakistani authorities and as the impact of the Covid-19 shock subsides will resume discussions as part of the current EFF,” said the IMF.

Following the Executive Board discussion, Geoffrey Okamoto, the First Deputy Managing Director and Acting Chair, said that “the outbreak of Covid-19 is having a significant impact on the Pakistani economy”. The domestic containment measures, coupled with the global downturn, are severely affecting growth and straining external financing. This has created an urgent balance of payments need, the Fund noted.

In this context of heightened uncertainty, The IMF emergency financing under the Rapid Financing Instrument provides strong support to the authorities’ emergency policy response, preserving fiscal space for essential health spending, shoring up confidence, and catalysing additional donor support.

In response to the crisis, the government of Pakistan has taken swift action to halt the community spread of the virus and introduced an economic stimulus package aimed at accommodating the spending needed to tackle the health emergency and supporting economic activity.

Crucially, the authorities are increasing public health spending and strengthening social safety net programmes to provide immediate relief to the most vulnerable. Similarly, the State Bank of Pakistan has adopted a timely set of measures, including lowering of the policy rate and new refinancing facilities, to support liquidity and credit conditions and safeguard financial stability. “In this context, the authorities’ policies should be targeted and temporary,” the IMF emphasised.

The State Bank of Pakistan (SBP) slashed the country's policy rate for the third time in a month by 200 basis points to 9 percent to counter the growing financial uncertainty and ease businesses amid the COVID-19 pandemic, said a statement.

According to the statement from the SBP issued on Thursday evening, the economy is expected to contract by 1.5 percent in the ongoing financial year ending on June 30, 2020, before recovering to around 2 percent growth in the fiscal year ranging from July 2020 to June 2021, reports Xinhua news agency.

The bank said the decision was taken after observing the reduction in growth and inflation expectations and to "cushion the impact of the coronavirus shock on growth and employment, including by easing borrowing costs and the debt service burden of households and firms, while also maintaining financial stability".

The central bank hoped that the cut would supplement other measures to support the economy, including concessional financing to companies that do not lay off workers, one-year extension in principal payments and doubling of the period for rescheduling of loans.

It said the reduction in the rate, which was 13.25 percent before March 17, would also help ensure that economic activity is better placed to recover when the pandemic subsides.

The statement referred to some domestic market research reports saying that high-frequency indicators of activity, including retail sales, credit card spending, cement production, export orders, tax collections and mobility data showed "a significant slowdown in most parts of the economy in recent weeks".

The bank expected that the inflation would be close to the lower end of the previously announced 11-12 percent range during this fiscal year, and to fall to 7-9 percent range next fiscal year.
However, it feels that there are some upside risks to headline inflation in case of temporary supply disruptions or food price shocks.

The SBP added that it is working to take whatever further actions which become necessary in response to the evolving economic impact of the coronavirus amid a worsening outlook for global and domestic economic activity.

Published in Dawn, April 17th, 2020

https://www.dawn.com/news/1549897/imf-okays-over-13bn-aid-to-help-pakistan