Will Pakistan’s IMF agreement save its economy?

The International Monetary Fund’s board approved a $3bn bailout programme for Pakistan on
Wednesday, which includes the immediate disbursal of about $1.2bn to help stabilize the South
Asian country’s economy.

Pakistan and the fund reached a staff-level agreement last month, securing a short-term pact,
which got more funding than expected for the country of 230 million facing an acute balance of
payments crisis.

The bailout had been on hold since December when the IMF refused to release a critical $1.1bn
part of the loan because of the country’s lack of compliance with a 2019 agreement signed
between the IMF and former Prime Minister Imran Khan.

The release of funds comes amid longstanding fears the country would default, providing much-
needed relief to the incumbent government.

However, the agreement with the international lender also means strict conditions when it comes
to spending and structural reforms that are likely to further increase economic hardship for many
common people.

Why was the IMF bailout needed?

Pakistan’s economy has been in dire straits, hit by a balance of payments crisis as it attempted to
service high levels of external debt and crushing inflation.

Prior to the bailout, the country’s foreign reserves were teetering at around $4bn, an amount
good enough to cover a month’s worth of imports, although Pakistan banned some of the imports
to save dollars.

According to analysts, the country needs at least $20bn in the next two years to pay back foreign
loans with interest.

Earlier this year, the Pakistani rupee dove to a historic low against the US dollar after an
exchange cap was lifted as the cash-strapped nation sought to unlock the vital IMF bailout.

The currency and inflation could have gone out of control had the government and IMF not
reached this agreement.
The absence of foreign exchange could have resulted in massive shortages of fuel, food,
medicine and other items. Things are likely to improve now – as the currency will stabilize and
inflation will slowly come down in the short to medium term.

To make matters worse, the catastrophic floods of last year caused a loss of some $30bn to the
economy, from which Pakistan has still not fully recovered.
What is the IMF asking for?

Pakistan has taken a number of steps demanded by the IMF since its mission arrived in Pakistan
in February, including revising its 2023-24 budget and raising its policy rate to 22 percent in
recent weeks.

The Washington-based international lender also got Pakistan to raise more than 385 billion
Pakistani rupees ($1.34bn) in new taxation to meet the IMF’s fiscal adjustments. The IMF has
said the central bank should remain proactive to reduce inflation and maintain a foreign
exchange framework.

The adjustments have already fuelled all-time high inflation of 38 percent year-on-year in May,
the highest in Asia.

Meanwhile, reforms in the energy sector, which has accumulated nearly 3.6 trillion Pakistani
rupees ($12.58bn) in debt, have been a cornerstone of the IMF talks.

The IMF said it would want steadfast policy implementation by Pakistan to overcome
challenges, “particularly in the energy sector”, where it expects a rise in electricity prices.

Pakistan, IMF reach staff-level deal to release $1.1bn from bailout package
The funds are the final tranche of a $3bn programme agreed upon last year to avert a default, as
Islamabad seeks another long-term bailout.

Pakistan and the International Monetary Fund (IMF) have reached a staff-level agreement for the
release of $1.1bn from a $3bn bailout package the indebted country needed to avert a sovereign
default.

“The IMF team has reached a staff-level agreement with the Pakistani authorities on the second
and final review of Pakistan’s stabilization programme,” the IMF said in a statement on
Wednesday.

The United States-based lender said the money will be disbursed after approval by the IMF’s
executive board before the deal, agreed last year, expires on April 11.

The announcement came after five days of talks between the IMF and the newly elected
government of Prime Minister Shehbaz Sharif in Islamabad.

The IMF said Pakistan’s “economic and financial position has improved” in recent months, but
added that growth is “expected to be modest this year and inflation remains well above target”
and the South Asian country will need more policy reforms to address “deep-seated economic
vulnerabilities”.

Pakistan is desperately seeking financial assistance from global lenders and bilateral partners to
shore up its $350bn economy, which has been under severe strain for two years.
Its economy is particularly burdened by debt obligations, which amount to more than $130bn of
external debt. The foreign reserves are a paltry $8bn, enough to cover eight weeks of imports in a
country that relies on imported goods to fuel its economy.

Meanwhile, inflation, despite a gradual decline, is still at 23 percent, as the currency has lost
more than 50 percent of its value against the US dollar in the last two years.

To fight the crisis, Finance Minister Muhammad Aurangzeb recently said the government is
looking for a “longer, larger” IMF bailout package once the current deal expires.

Economist Safiya Aftab told Al Jazeera the successful completion of the IMF programme means
the government is “seriously attempting to start bringing about [policy] reforms which the IMF
has been asking for”.

She, however, warned that a new bailout package being mulled by the government could be
tough given the conditions put forward by the lender.

“IMF will turn the screws and demand increase in taxation and broadening the [taxation] net, and
the government, as we have seen in the past, often goes for quick solutions which increase the
burden on the salaried class,” she said.

Aftab said the government will have to look towards privatising state-owned enterprises in order
to generate revenue and cut down expenditure.

“Despite the difficulties, I think the government has no choice but to comply with the
requirements,” she said, adding that the short-term effects of a new IMF programme will
“certainly lead to more inflation and more burden on the public.”