IMF reaches $3 billion funding deal with Pakistan

A $6.5 billion rescue program, agreed with the IMF in 2019, expires on Friday with about $2.5 billion not yet released to the country. The new agreement “will support the authorities’ immediate efforts to stabilize the economy from recent external shocks,” the IMF said.

Pakistan suffers from inflation running at 38% and and foreign reserves held by the central bank stood at $3.5 billion in mid-June, not enough to cover a month of imports.

In announcing the staff-level agreement for “stand-by” assistance, the IMF said Pakistan needed to stick to the path laid out in an agreed revised budget. “It will be important that the budget is executed as planned, and that the authorities resist pressures for unbudgeted spending or tax exemptions in the period ahead,” the lender said. It also said Pakistan needs to allow the market to set the exchange rate for the rupee, and to overhaul its energy sector.

The length of the program should see Pakistan through its coming election period, and the installation of a new government, but any new government could face domestic pressure to roll back taxes or fuel price increases, the Wall Street Journal reported.

Pakistan’s dollar bonds were trading higher after the announcement, with the 2024 issue up more than 8 cents at just above 70 cents in the dollar, according to Tradeweb data.

The country’s domestic stock and currency markets were closed on Friday due to Islamic holiday of Eid.

With foreign exchange reserves enough to cover only one month of imports, Pakistan’s economic crisis could have resulted in a debt default without the IMF deal.

The IMF funding may also unlock other external financing and debt rollovers, from Saudi Arabia and the UAE, which have already pledged around $3 billion.

“This will support near-term policy efforts and replenish gross reserves, with the aim of bringing them to more comfortable levels,” the IMF said.

Pakistan’s economy had faced devastating floods last year and commodity price hikes following the war in Ukraine.

The IMF would want steadfast policy implementation by Pakistan to overcome challenges, “particularly in the energy sector,” the IMF statement said. “The authorities’ programme also includes ongoing efforts to strengthen the viability of the energy sector (including through a timely FY24 annual rebasing),” the IMF said.

Islamabad has taken 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 required by the IMF before the deal included reversing subsidies in power and export sectors, rises in energy and fuel prices, raising the central bank’s policy interest rate to 22%, to quell inflation running at 38%, and a market-based currency exchange rate.

Political uncertainty has compounded Pakistan’s problems, as the government faced a protest movement headed by former Prime Minister Imran Khan, who was ousted in a no-confidence vote in April 2022 and has sought to challenge the country’s new government and accused Pakistan’s military of being behind his ouster.