Pakistan Explores Climate Finance Option to Increase IMF Loan Size

Pakistan is looking for ways to increase its upcoming International Monetary Fund (IMF) loan from $7.5 billion to $8 billion by applying for a new facility that provides long-term financing for countries that undertake reforms to address climate change and pandemic preparedness.

Pakistan had raised the possibility of augmenting the size of its IMF programme while finalising the current Stand-By Arrangement (SBA) in June 2023. However, the IMF did not agree to the proposal at that time, saying that the SBA was a short-term arrangement and that the option could be considered later.

The Pakistani authorities are now considering following the example of Bangladesh, which recently secured a $1.2 billion loan from the IMF under the Resilience and Sustainability Facility (RSF) in addition to its existing Extended Credit Facility (ECF).

The RSF is a new IMF instrument that offers affordable long-term financing to countries that implement policy reforms to reduce risks to their balance of payments stability, such as those related to climate change and pandemic preparedness. The facility aims to strengthen economic resilience and sustainability by supporting policy space and financial buffers to mitigate the impact of such long-term challenges.

To access the RSF, a country needs to have high-quality policy reforms that address the structural challenges of climate change or pandemic preparedness, and a concurrent IMF-supported programme with upper credit tranche quality policies. The RSF can be used to augment one of the following arrangements: SBA, Extended Fund Facility (EFF), Policy Support Instrument (PSI), Precautionary and Liquidity Line (PLL), Flexible Credit Line (FCL), Standby Credit Facility (SCF), Extended Credit Facility (ECF), or Policy Coordination Instrument (PCI). Emergency financing facilities, Staff-Monitored Programme (SMP), or Short-term Liquidity Line (SLL) do not qualify. There should also be at least 18 months remaining in the accompanying programme.

The RSF disbursements are linked to the completion of specific reform measures, which can be a single policy action or a set of closely related actions. All actions must be implemented to unlock the associated disbursement. The reviews take place concurrently with the reviews under the main programme, once the expected date of completion of a reform measure and the associated disbursement availability date has passed.

The RSF has a 20-year maturity and a 10½ -year grace period during which no principal is repaid. The interest rate is modest and varies across country groups, with low-income members benefiting from more concessional terms.

Pakistan is expected to enter into a new IMF programme under the EFF in the coming months, as the current SBA is due to expire in September 2024. The EFF is a medium-term arrangement that provides assistance to countries with protracted balance of payments problems. Pakistan hopes to increase the size of the EFF programme from $6 billion to $7.5 or $8 billion by applying for the RSF, considering the specific quota available to Islamabad under the Special Drawing Rights (SDRs).

Pakistan has recently approved the Public Investment Management Assessment (PIMA) framework, including the Climate-PIMA module, under the guidelines of the IMF’s technical report. The PIMA framework aims to improve public investment management and make public infrastructure more sustainable and resilient to climate change. The assessment identifies the scope for further strengthening of key institutions and recommends several targeted actions to move reforms forward.

Pakistan is facing a challenging economic situation, with high inflation, low growth, large fiscal and external deficits, and depleted reserve buffers. The IMF loan is crucial for Pakistan to avoid a balance of payments crisis and to support its economic recovery and stabilization efforts. The IMF loan also helps Pakistan to mobilize financial support from other multilateral and bilateral partners.

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