Pakistan could get temporary relief for its ballooning foreign debt with a new stand-by arrangement worth $3 billion announced by the IMF in Washington late Thursday.
The economy has been stricken by a balance-of-payments crisis as it attempts to service crippling external debt, while months of political chaos have scared off potential foreign investment.
Inflation has rocketed, the rupee has reached a record low against the dollar, and the country can no longer afford imports, causing a severe decline in industrial output.
“I am pleased to announce that the IMF team has reached a staff-level agreement with the Pakistani authorities on a nine-month standby arrangement in the amount of SDR 2,250 million (about $3 billion),” said IMF official Nathan Porter in a statement.
The deal will need to be approved by the IMF’s executive board and will be considered by mid-July, Porter said.
The figure represents 111 percent of Pakistan’s IMF quota.
Pakistan’s negotiations with the IMF for the last tranche of a $6.5 billion bailout package agreed in 2019 stalled in November, with the government making last-minute changes to the national budget to meet the deal’s requirements.
That package expires on Friday, and the new agreement builds on the IMF’s efforts under the previous deal, Porter said.
– Economy in crisis –
Pakistan’s Finance Minister Ishaq Dar celebrated the new potential deal by tweeting “AlhamdoLilah!”, meaning “praise be to God!”.
But Michael Kugelman, director of the South Asia Institute at the Wilson Center, criticised Pakistan’s slow progress on meeting IMF requirements for a deal.
“Islamabad waited until the very final hour to take the (politically risky) fiscal policy steps that the IMF had been hoping to see for months,” he tweeted.
Years of financial mismanagement have pushed Pakistan’s economy to the limit, exacerbated by the Covid pandemic, a global energy crisis since Russia’s invasion of Ukraine, and record monsoon floods that submerged a third of the country in 2022.
The grim data gave the government little room to introduce vote-attracting budget measures ahead of an election due in October.
The IMF had told Pakistan it needed to secure additional external financing, scrap a swathe of populist subsidies, and allow the rupee to float freely against the dollar, before unlocking more funds.
Mohammed Sohail, chief of Topline Securities, told AFP the IMF’s additional loan would restore some investor confidence.
“This new programme is far better than our expectations. There were a lot of uncertainties on what will happen after June 2023 as there will be new government coming to power,” he said.
Pakistan needs billions of dollars in financing to service staggering levels of external debt, and foreign exchange reserves have dwindled to just $3.5 billion, roughly enough for three weeks of imports.
– History of bailouts –
The crisis prompted the government to temporarily impose a months-long broad import ban, stalling multiple industries.
Pakistan failed to meet any economic growth targets for the fiscal year 2022-23, with GDP growth at 0.3 percent, while the country’s standing on the global economic rank fell from 24th in 2017 to 47th.
Inflation reached a record 38 percent in May, after more than a decade of declining real wages for working-class Pakistanis.
The IMF acknowledged the external shocks to the economic system, “as well as some policy missteps”, in its deal.
The stand-by deal would support government’s economic stability efforts and “provide a framework for financing from multilateral and bilateral partners”, the IMF said.
Decades of mismanagement have seen Pakistan broker nearly two dozen arrangements with the IMF, most of which have gone uncompleted.
Thursday’s deal struck an optimistic note, but also warned that Pakistan’s crisis required consistent economic firefighting.