Pakistan, IMF reach $3bn staff-level agreement

The International Monetary Fund (IMF) has reached a staff-level agreement with Pakistan on a $3bn standby arrangement, the lender said, a decision long awaited by the South Asian nation which is teetering on the brink of default.

The deal, subject to approval by the IMF board in July, comes after an eight-month delay and offers some respite to Pakistan, which is battling an acute balance of payments crisis and falling foreign exchange reserves.

“Praise be to God,” tweeted Finance Minister Ishaq Dar after the deal was announced early on Friday. Dar had said on Thursday the deal was expected any time soon.

With sky-high inflation and foreign exchange reserves barely enough to cover one month of controlled imports, Pakistan has been facing its worst economic crisis in decades, which analysts say could have spiralled into a debt default in the absence of the IMF deal.

The $3bn funding, spread over nine months, is higher than expected for Pakistan. The country was awaiting the release of the remaining $2.5bn from a $6.5bn bailout package agreed in 2019, which expired on Friday.

The new standby arrangement builds on the 2019 programme, IMF official Nathan Porter said in a statement 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 ($12.58bn) 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 percent, a market-based currency exchange rate and arranging for external financing.

It also got Pakistan to raise over 385bn rupee ($1.34bn) 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 percent 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 that 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 3bn dollars and for 9 months will definitely help restore some investor confidence,” he said.