China to Contribute Over $6 Billion as IMF’s EFF Put on Hold

China will contribute $6.3 billion in financing to Pakistan in the next 12 months as all the key bilateral partners have committed to maintaining their exposure throughout the Extended Fund Facility (EFF) program which would remain in effect, says the International Monetary Fund (IMF).

IMF updated its website with “IMF Extended Fund Facility arrangement for Pakistan – Frequently Asked Questions”, stated that discussions for the EFF were paused in late-March 2020 to focus on purchase under the Rapid Financing Instrument (RFI).

With the Covid-19 shock in Pakistan still unfolding and the full magnitude of its impact, both in Pakistan and globally, still unknown, it is premature at this time to set out a concrete timeline for the resumption of the EFF, although IMF staff remains engaged with the authorities. Strong policies and reforms remain critical to increase resilience and boost Pakistan’s growth potential in order to deliver benefits for all Pakistanis, especially the most vulnerable.

In response to a question, the IMF stated that debt transparency is essential to conduct a proper analysis of the sustainability of a country’s debt, in Pakistan as in all IMF member countries. In this context, the authorities have provided information on public debt and loans from other countries, including China, in support of a comprehensive debt sustainability analysis, which is a key component of an IMF-supported program.

IMF financing is aimed to support the implementation of policies to reduce vulnerabilities and bring about sustainable growth. Financial support from Pakistan’s international partners will be critical, including additional financing from other international financial institutions and bilateral creditors.

The authorities have received commitments from key bilateral partners, including China, to maintain their exposure throughout the program period and to ensure that the new financing will be consistent with debt sustainability objectives. China will contribute $6.3 billion in financing in the next 12 months.

It further stated the RFI provides emergency one-off financing to a country experiencing a large shock, like that from Covid-19. Pakistan requested a purchase equivalent to 50 percent of its quota (about US$1.4 billion), which was approved by the IMF Executive Board on April 16, 2020. The resources will provide critical support for medical supplies, the vulnerable population, and food security.

The RFI is not a replacement for the EFF. Strong policies and reforms remain critical to increase resilience and boost Pakistan’s growth potential in order to deliver benefits for all Pakistanis, especially the most vulnerable.

The Fund further stated that Pakistan has been facing long-standing economic challenges, including low revenue mobilization, high fiscal deficit and indebtedness, low spending on education, health, and social programs, and a weak external position. This reflects the legacy of uneven and procyclical economic policies in recent years aiming to boost growth, but at the expense of rising vulnerabilities and lingering structural and institutional weaknesses.

The Pakistani authorities have already started implementing difficult but necessary measures aimed at helping Pakistan revive its economy and create the foundation for lasting change and inclusive growth. The policy reforms and measures mark a positive and significant turning point in Pakistan’s economic prospects for the population at large. These efforts need to be strengthened.

Decisive policies and reforms, together with significant external financing are necessary to reduce vulnerabilities faster, increase confidence, and put the economy back on a sustainable growth path, with stronger private sector activity and job creation.

The adoption of a market determined exchange rate that will help the functioning of the financial sector and contribute to a better resource allocation in the economy.

A comprehensive plan for cost-recovery in the energy sectors and state-owned enterprises will help eliminate or reduce the quasi-fiscal deficit that drains scarce government resources. This will free up resources for spending in priority areas such as health, education, human capital development and reducing poverty.

Improving public finances and reducing public debt through tax reforms to strengthen revenue mobilization and ensure a more equal and transparent distribution of the tax burden. Provinces are committed to contribute to these efforts by better aligning their fiscal objectives with those of the federal government.

The program envisages budget increase on social spending in a significant way. Social protection is a key element of the program to help alleviate effects on the vulnerable groups, particularly the poorest.

The program includes improved plans for social protection measures. Over the medium term—the next three to five years– there will be more jobs, better health care and improvements in education.

The authority’s objective is to exit the gray-listing that is why there is a structural benchmark for end of October 2019. Gray-listing has no direct consequences on Pakistan’s borrowing ability from the IMF, although its economic consequences could include higher costs of borrowing for the private sector on foreign financial transactions, stated the IMF..

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