Pakistan and the International Monetary Fund (IMF) have reached a staff-level agreement on a $3 billion stand-by arrangement, announced the IMF on Friday. The agreement, subject to approval by the IMF board in July, is seen as crucial for Pakistan’s economy, which has been on the brink of default.
The deal aims to address Pakistan’s acute balance of payments crisis and the rapid depletion of its foreign exchange reserves. Pakistan’s Finance Minister, Ishaq Dar, shared the news on Twitter, expressing gratitude. He stated that Pakistan will sign and return the letter of intent to the IMF by Friday night.
Pakistan’s stock and currency markets were closed on Friday.
Pakistan has been facing its worst economic crisis in decades, characterized by soaring inflation and foreign exchange reserves that can barely cover a month’s worth of controlled imports. Without the IMF agreement, the country risked spiraling into a debt default.
The conditions of the new deal surpass initial expectations. Pakistan had been awaiting the release of the remaining $2.5 billion from a $6.5 billion bailout package agreed upon in 2019, which expired on Friday.
According to IMF official Nathan Porter, the new stand-by arrangement builds upon the 2019 program. Porter acknowledged the challenges faced by Pakistan’s economy, including devastating floods and commodity price hikes. He stated, “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.”
Reforms in the energy sector, burdened with significant debt, were a key focus in the discussions with the IMF. To secure the deal, Islamabad implemented a series of policy measures, including a revised budget for 2023-24 to meet the IMF’s demands.
The IMF also demanded the removal of subsidies in the power and export sectors, increases in energy and fuel prices, adoption of a market-based currency exchange rate, and securing external financing.
Pakistan raised over 385 billion rupees through new taxation in a supplementary budget for the 2022-23 fiscal year and the revised budget for 2023-24. However, these adjustments contributed to a record-high inflation rate of 38% year-on-year in May.
The fiscal year 2024 budget aims to achieve a primary surplus of around 0.4% of GDP by broadening the tax base and increasing tax collection from under-taxed sectors. The budget also includes measures to support vulnerable groups through a cash handout program.
While analysts have expressed optimism about the new program, concerns remain regarding the uncertainties that lie ahead with a new government expected to come to power after June 2023.
