Pakistan’s foreign exchange reserves have surged to cover two months’ worth of imports after the arrival of the first tranche from the International Monetary Fund’s (IMF) 37-month loan deal under the $7 billion Extended Fund Facility (EFF), Governor State Bank of Pakistan (SBP) Jameel Ahmed said on Wednesday.

In much-needed support for the country’s fiscally-challenged economy, the State Bank of Pakistan (SBP) received the first tranche of $1.03 billion (SDR 760 million) on Monday, September 30, 2024.

Pakistan had been working on implementing conditions deemed “strict” to complete the loan programme agreed to in July, which Prime Minister Shehbaz Sharif time and again hoped would be Pakistan’s last.

The liquid reserves now stand at $10 billion, providing much-needed stability to the country’s foreign exchange position.

“The foreign exchange reserves have stabilised, and we expect further improvements,” Ahmed said speaking at a banking conference.

He highlighted that the recent IMF disbursement has eased pressure on the rupee, ensuring a smooth supply of dollars in the market.

“[Overseas workers’] remittances have increased, and the supply of dollars has improved,” said Ahmed, noting that a decline in inflation has positively impacted monetary policy.

The governor expressed satisfaction over the government’s fiscal situation, which he said had also improved.

“The rate of borrowing from banks has decreased,” he further stated.

Dispelling the impression of a holdup in repayments to commercial banks, Ahmad said the government was not short of funds. “We are making early repayments of bank loans,” the governor said.

Ahmed also briefly outlined the central bank’s strategy to modernise Pakistan’s banking sector, underlining that promoting innovation in banking could spur economic growth.

“We aim to launch fully digital banking by 2025,” he said, noting that the initiative will enhance financial inclusion and accessibility for millions of Pakistanis.

The SBP governor further revealed plans to expand Small and Medium Enterprises (SMEs) financing, with a target to increase the current volume from Rs550 billion to Rs1.1 trillion over the next five years.

This will support small and medium-sized enterprises, key drivers of economic activity in the country.

As the popularity of digital banking continues to grow in Pakistan, Ahmed acknowledged the rising risks of online fraud.

“Banks have been warned to strengthen their cybersecurity measures,” he said, stressing the importance of safeguarding the growing number of users, which currently stands at 12 million for mobile banking and was increasing at an annual growth rate of 70%.

The central bank governor pointed out that branchless banking was already serving 59 million customers, while the use of mobile and internet banking continues to surge, with internet banking growing at 30% annually.

The governor also highlighted the phenomenal success of Raast, Pakistan’s digital payments platform, which has so far processed transactions worth Rs19 trillion since its launch in 2021.

“Daily transactions on Raast now exceed 2.5 million, and the system is being linked with Middle Eastern software to facilitate low-cost remittances for overseas Pakistanis,” Ahmad noted, adding, “This will make it easier and cheaper for expatriates to send money back home.”

Citing the SBP’s ongoing push towards a more modern, digital-driven banking environment, Governor Ahmed said that innovation was the future of banking and a key factor in Pakistan’s economic development.

State Bank of Pakistan (SBP) on Friday received the first tranche of SDR 760 million (equivalent to $1.0269 billion) from the International Monetary Fund (IMF) under the $7 billion Extended Fund Facility (EFF).

The IMF Executive Board approved a 37-month programme on Wednesday.

These inflows will be reflected in SBP liquid reserves to be released on Thursday, September 30, 2024, the central bank said in a statement.

Following the long-awaited approval, the IMF said the new programme would require “sound policies and reforms” to strengthen macroeconomic stability and address structural challenges alongside “continued strong financial support from Pakistan’s development and bilateral partners”.

Pakistan had been working on implementing conditions deemed “strict” to complete the loan programme agreed to in July, which Prime Minister Shehbaz Sharif time and again hoped would be Pakistan’s last.

Though, the country’s economy has stabilised since it came close to defaulting last summer, it is dependent on IMF bailouts and loans from friendly countries to service its huge debt, which swallows up half of its annual revenues.

“There will be transitional pain, but if we are to make it the last programme, then we have to carry out structural reforms,” Finance Minister Muhammad Aurangzeb said.

The IMF said in a statement it would issue an “immediate disbursement” of around $1 billion.

“This past year has seen a very welcome return to economic stability in Pakistan,” IMF Pakistan mission chief Nathan Porter told reporters on Thursday.

“The challenge confronting Pakistan now is to move beyond this renewed sense of stability and towards stronger and sustained growth, with its benefits shared more broadly and evenly across society,” he added.

Speaking on the sidelines of the United Nations General Assembly in New York on Wednesday, Prime Minister Shehbaz Sharif said the deal came through thanks to the “tremendous support” of Saudi Arabia, China and the United Arab Emirates.

“In the final phase (of negotiations), the IMF’s conditions were related to China. The way the Chinese government supported and strengthened us during this time is something I am truly grateful for,” he told reporters shortly before the deal was announced.

Last month, Aurangzeb had said Pakistan was negotiating a $12 billion loan reprofiling from bilateral lenders.

The amount comprised $5 billion from Saudi Arabia, $4 billion from China and $3 billion from the UAE for a three- to five-year period.

Porter said all three countries had “provided significant financing assurances,” beyond these commitments to rolling over the $12 billion in existing loans.

‘Formidable’ vulnerabilities

Kaiser Bengali, a Pakistani economist, said the deal “will help us pay back our immediate debts, but nothing more.”

“The only economic reforms that we are required to implement is more taxes. There is no progress on reducing government expenditures,” he told AFP.

At the end of 2023, Pakistan — long locked in a cycle of overlapping political and economic crises — had amassed a total debt of more than $250 billion, or 74% of GDP, according to the IMF.

About 40% of its debt is owed to external creditors in foreign currencies. Its biggest single foreign creditor is China and Chinese commercial banks, at just under $30 billion, followed by the World Bank at more than $20 billion, according to the report.

Last year the country came to the brink of default as the economy shrivelled amid political chaos following catastrophic 2022 monsoon floods and decades of mismanagement, as well as a global economic downturn.

It was saved by last-minute loans from friendly countries as well as an IMF rescue package.

Islamabad wrangled for months with IMF officials to unlock the latest loan, which came on the condition of reforms including hiking household bills to remedy a permanently crisis-stricken energy sector and raising pitiful tax takings.

In a nation of more than 240 million people where most jobs are in the informal sector, only 5.2 million filed income tax returns in 2022.

The IMF said Pakistan “has taken key steps to restoring economic stability with consistent reforms”. But “despite this progress, Pakistan’s vulnerabilities and structural challenges remain formidable”, it warned.

“A difficult business environment, weak governance, and an outsized role of the state hinder investment, which remains very low compared to peers,” it added.

The State Bank of Pakistan (SBP) reduced its policy rate by 200 basis points to 17.5% on Thursday, as headline and core inflation saw a sharper-than-expected decline over the last two months.

The rate cut will be effective from September 13, 2024.

The Monetary Policy Committee (MPC) of the SBP attributed this decision to falling global oil and food prices and a delay in the anticipated increase in administered energy prices.

The central bank, however, warned of potential risks tied to global economic volatility and domestic energy adjustments, urging a cautious approach to future monetary policies.

Inflation fell to 9.6% year-on-year in August, down from 12.6% in June.

Core inflation also dropped to 11.9%, reflecting improved supplies of food commodities and a reduction in domestic demand.

The MPC expects inflation to continue its downward trend but noted that risks remain, particularly related to the timing and scale of adjustments in energy tariffs and the course of global commodity prices.

The SBP’s foreign exchange reserves stood at $9.5 billion as of September 6, despite weak inflows and continued debt repayments.

Remittance inflows and a rebound in exports helped keep the current account deficit contained at $0.2 billion in July 2024.

While the industrial and services sectors are expected to benefit from this policy easing, the agriculture sector faces challenges due to an expected shortfall in cotton production.

Nonetheless, the SBP maintains its projection for GDP growth between 2.5% and 3.5% for FY25.

The central bank also reported that tax collection in July and August 2024 fell short of the Federal Board of Revenue’s (FBR) target, adding pressure on fiscal policy measures to meet revenue goals for the remainder of the year.

This will be critical for maintaining macroeconomic stability, the SBP noted.

The MPC reiterated that its cautious stance on monetary policy remains necessary to control inflation while supporting sustainable economic growth over the medium term.