Pakistan, IMF reach crucial $3 billion bailout deal

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The International Monetary Fund (IMF) says it has reached staff-level pact with Pakistan on a $3 billion short-term financial aid.

The deal, subject to approval by the IMF board in July, came hours before the current agreement with the IMF expires later on Friday.

Although essentially a bridge loan, it offers much respite to Pakistan, which is battling an acute balance of payments crisis and falling foreign exchange reserves.

Pakistani Prime Minister Shehbaz Sharif said the so-called Stand-by Arrangement (SBA) will enable Pakistan to achieve economic stability and put the country on the path of sustainable economic growth.

The new stand-by arrangement builds on the 2019 programme, IMF official Nathan Porter said on Thursday,

Porter added that Pakistan’s economy had faced several challenges in recent times, including devastating floods last year and commodity price hikes following the war in Ukraine.

“Despite the authorities’ efforts to reduce imports and the trade deficit, reserves have declined to very low levels. Liquidity conditions in the power sector also remain acute,” Porter said in a statement.

“Given these challenges, the new arrangement would provide a policy anchor and a framework for financial support from multilateral and bilateral partners in the period ahead.”

Finance Minister Ishaq Dar said Pakistan will receive formal documents on the deal later on Friday from the IMF.

With sky-high inflation and foreign exchange reserves barely enough to cover one month of controlled imports, analysts say Pakistan’s economic crisis could have spiralled into a debt default in the absence of an IMF deal.

The $3 billion funding, spread over nine months, is higher than expected as it looks set to replace the remaining $2.5 billion from a $6.5 billion Extended Fund Facility longer-term bailout package agreed in 2019, which expires on Friday.

Also Read: Pakistan Hopeful For IMF Bailout Decision

The IMF funding will also unlock other bilateral and multilateral external financing and debt rollovers, particularly from friendly countries like Saudi Arabia and the UAE, which have already pledged around $3 billion.

“This will support near-term policy efforts and replenish gross reserves, with the aim of bringing them to more comfortable levels,” the IMF said.

Policy reforms

Islamabad has taken a slew of policy measures since an IMF team arrived in Pakistan earlier this year, including a revised 2023-24 budget last week to meet the lender’s demands.

Adjustments demanded by the IMF before clinching the deal included reversing subsidies in power and export sectors, hikes in energy and fuel prices, jacking up the key policy rate to 22%, a market-based currency exchange rate and arranging for external financing.

It also got Pakistan to raise over 385 billion rupee ($1.34 billion) in new taxation through a supplementary budget for the 2022-23 fiscal year and the revised budget for 2023-24.

Going forward, the IMF said, the central bank should remain pro-active to reduce inflation and maintain a foreign exchange framework.

The painful adjustments have already fuelled all time high inflation of 38% year-on-year in May.


Source Reuters
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