Pakistan has received an initial approval for a $3 billion loan program from the International Monetary Fund (IMF), reducing the risk of a sovereign default. The agreement, reached at the staff level, is now pending approval from the IMF Executive Board, expected to take place by mid-July, according to a statement on the lender’s website. Pakistan has been a frequent recipient of IMF assistance, having received nearly two dozen bailouts since the 1950s.
The funds will be used to support immediate measures aimed at stabilizing the economy in the face of recent external shocks. Additionally, they will help preserve macroeconomic stability and establish a framework for financing from bilateral and multilateral partners, as stated by the IMF.
Following the news, Pakistan’s dollar bonds due 2031 experienced a surge in Asian trading, with the notes increasing by 1.6 cents to approximately 43 cents on the dollar.
To secure the IMF aid, Pakistan has agreed to implement significant measures, including tax increases and spending cuts. The loan is crucial for the South Asian country to address a dollar shortage, alleviate supply shortages, and revive the economy ahead of this year’s elections.
The IMF emphasized the importance of steadfast policy implementation, including fiscal discipline, a market-based exchange rate, and further progress in energy sector reforms to overcome Pakistan’s ongoing challenges.
Nathan Porter, the mission chief, stressed the need for adhering to the planned budget execution and resisting the temptation of unplanned expenditures or tax exemptions in the future.
Pakistan faces a significant external debt service of around $23 billion for the fiscal year 2024, which began in July. This amount is more than six times the nation’s reserves.
Moody’s Investors Service issued a warning that Pakistan could default without the IMF loan due to its extremely weak reserves. The country has been the last of three South Asian nations to secure IMF funding, facing delays in implementing reforms and obtaining creditor approval amidst a political crisis.
Pakistan has already taken steps to meet the IMF’s requirements, such as increasing taxes, raising energy prices, and allowing the rupee to weaken. The Pakistani currency has depreciated by over 20% this year, making it one of the worst-performing currencies globally.
The country’s foreign exchange reserves have declined by almost 60% over the past year to $3.5 billion as of mid-June, severely limiting its ability to finance imports, including essential raw materials. This situation has resulted in numerous factories suspending their operations.
The nine-month stand-by arrangement builds upon the efforts made by the Pakistani government under the previous IMF-supported program in 2019, which is set to expire at the end of June. In August, the government obtained staff approval for a $1.1 billion loan, but it was subsequently halted due to Islamabad’s failure to fulfill certain conditions.
- Taking lead from Bloomberg