The International Monetary Fund (IMF) announced a staff-level agreement with Pakistan on a $3 billion stand-by arrangement, a move long anticipated by the South Asian nation on the verge of default.
The agreement, which is subject to IMF board approval in July, comes after an eight-month delay and provides some relief to Pakistan, which is dealing with an acute balance of payments crisis and declining foreign exchange reserves.
“Praise be to God,” Finance Minister Ishaq Dar tweeted after the agreement was announced early Friday.
Dar told Reuters that Pakistan would get official documentation on the accord from the IMF later on Friday, which he will “sign, seal, and return by evening.”
He had stated on Thursday that an agreement was imminent.
According to Tradeweb statistics, Pakistan’s sovereign dollar bonds surged substantially across the curve in early European trade, with the 2025 issue leading the way, up 4.7 cents to trade at 52 cents in the dollar. On Friday, the country’s stock and currency markets were closed.
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. The country was awaiting the release of the remaining $2.5 billion from a $6.5 billion bailout package agreed in 2019, which expired on Friday.
The new stand-by arrangement builds on the 2019 programme, IMF official Nathan Porter said on Thursday, adding 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.”
Porter also pointed out that liquidity conditions in the power sector remained acute, with a buildup of arrears and frequent power outages.
Reforms in the energy sector, which has accumulated nearly 3.6 trillion Pakistani rupees ($12.58 billion) in debt, has been a cornerstone of the discussions with the IMF.
PAINFUL 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.
Other 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.
The painful adjustments have already fuelled all time high inflation of 38% year-on-year in May.
“The FY24 budget advances a primary surplus of around 0.4 percent of GDP by taking some steps to broaden the tax base and increase tax collection from under-taxed sectors,” Porter said, adding it also ensured space to strengthen support for the vulnerable through a cash handout programme.
He said it will be important that the budget is executed as planned, and authorities resist pressures for unbudgeted spending or tax exemptions in the period ahead.
“This new programme is far better than our expectations,” said Mohammed Sohail of Topline Securities, adding, there were a lot of uncertainties on what will happen after June 2023 as there will be a new government coming to power.
“This funding of 3 billion dollars and for 9 months will definitely help restore some investor confidence,” he said.
($1 = 286.1500 Pakistani rupees)