$3 billion rescue financing agreement agreed between Pakistan and IMF

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Pakistan has reached an agreement on $3 billion in short-term financing from the IMF after months of tense negotiations, which will provide relief to the beleaguered economy as the government struggles to prevent a possible default.

The IMF announced on Thursday that it has reached a staff-level, or preliminary, agreement with Prime Minister Shehbaz Sharif’s government for nine months of financing under a so-called standby arrangement. The deal is subject to finalization by the Fund’s executive board, with approval expected by mid-July, the IMF said in a statement.

Pakistan has reached one of its worst economic crises, with analysts warning that it risks defaulting on its debt payments without IMF help. Foreign reserves have dropped to $3.5 billion, enough for less than a month’s worth of imports, while inflation has risen to 38 percent.

While Pakistan had an existing bailout agreement with the IMF, which was signed in 2019, the multilateral lender has refused to release funds since last year as it clashed with Islamabad over economic policy. The settlement was due to expire on Friday, with about a third of the $6.5 billion in funding yet to be distributed.

The breakthrough comes as Pakistan unveiled a series of tax hikes in its budget this month for the fiscal year starting in July. It has also cut subsidies on energy and removed many currency and import restrictions.

Pakistan’s markets were closed on Friday, but some analysts welcomed the news of the agreement. “This new program has far exceeded our expectations. There were a lot of uncertainties on what would happen after June,” said Mohammad Sohail, chief executive of Topline Securities brokerage in Karachi. “Now, this $3 billion in funding for another nine months will certainly help restore some investor confidence.”

The IMF urged Pakistan to adopt measures to broaden the tax base, liberalize the economy and free up resources for development expenditure.

But Sharif’s government has long resisted such moves, arguing that they would prove overly harsh and politically dangerous given fragile economic conditions. National elections are due in October and Sharif is expected to face a tough fight with opposition leader and former prime minister Imran Khan.

However, economists warned that the IMF deal would not solve Pakistan’s systemic economic problems. Activity has slowed sharply, leading to blackouts, shortages of vital imports, and increased poverty.

The government will face debt payments of about $25 billion in the fiscal year starting July, which analysts have said it cannot meet without additional financial support from lenders such as China and Saudi Arabia, as well as another IMF program. Have to struggle to do.

Last month, Islamabad asked Beijing to pay more than $2.3 billion in commercial and government debts by providing fresh funds.

Some critics have argued that the economy needs more in-depth reforms than those proposed. Pakistan, which has had 23 IMF programs in its history, including Friday’s plan, has long been trapped in cycles of boom and bust, hampering development.

“Over the past three decades, IMF assistance has not been able to bring about substantive reforms,” ​​said Abid Hasan, a former World Bank adviser in Islamabad. “IMF programs have become a mere band-aid.”