IMF agrees to long-awaited bailout of $3 billion for Pakistan

The International Monetary Fund (IMF) has agreed to provide $3 billion to Pakistan in a long-awaited relief to bail out the country facing a serious economic crisis.

IMF and Pakistan reached a staff-level agreement on a $3 billion stand-by arrangement, the lender said. The staff-level agreement is subject to approval by the IMF Executive Board, with its consideration expected by mid-July.

The $3 billion funding, spread over nine months, is higher than expected for Pakistan. The country was awaiting the release of the remaining $2.5 billion from a $6.5 billion bailout package agreed in 2019, which expired on Friday.

The deal comes after an eight-month delay and offers some respite to Pakistan, which is battling an acute balance of payments crisis and falling foreign exchange reserves. The agreement was reached after the Pakistan government focused efforts on obtaining new financing and securing the rollover of debts.

IMF highlights inflation and external shocks

The IMF staff team led by Nathan Porter held in-person and virtual meetings with the Pakistani Authorities to discuss a new financing engagement for Pakistan under an IMF Stand-by Arrangement (SBA).

“IMF team has reached a staff-level agreement with the Pakistani authorities on a nine-month SBA in the amount of SDR2,250 million (about $3 billion or 111 percent of Pakistan’s IMF quota). The new SBA builds on the authorities’ efforts under Pakistan’s 2019 EFF-supported program which expires end-June. This agreement is subject to approval by the IMF’s Executive Board, which is expected to consider this request by mid-July,” Porter said at the conclusion of the mission.

The IMF statement noted that since the completion of the combined seventh and eight reviews under the 2019 Extended Fund Facility (EFF) in August 2022, Pakistan’s economy has faced several external shocks such as the catastrophic floods in 2022 that impacted the lives of millions of Pakistanis which together with some policy missteps stalled the economic growth.

“Inflation, including for essential items, is very high. Despite the authorities’ efforts to reduce imports and the trade deficit, reserves have declined to very low levels. Liquidity conditions in the power sector also remain acute, with further buildup of arrears (circular debt) and frequent loadshedding,” the statement said.

Measures suggested

Given these challenges, the new IMF-Pakistan agreement would provide a policy anchor and a framework for financial support from multilateral and bilateral partners in the period ahead.

The Pakistani authorities have already taken these actions ahead of the new program:

• Parliament has approved the FY24 budget in line with the goals of supporting fiscal sustainability and mobilizing revenue, which will enable greater social and development spending. The budget advances a primary surplus of around 0.4% of GDP by taking some steps to broaden the tax base and increase tax collection from undertaxed sectors while ensuring space to strengthen support for the vulnerable through the BISP program. It will be important that the budget is executed as planned.

• The State Bank of Pakistan (SBP) has withdrawn the guidance on import prioritization and is committed to ensuring the full market determination of the exchange rate. The SBP should remain proactive to reduce inflation, which particularly affects the most vulnerable, and maintain a foreign exchange framework free of restrictions on payments and transfers for current international transactions and multiple currency practices.

Continued efforts to mobilize financial support from multilateral institutions and bilateral partners have been suggested in addition to generous climate-related pledges from the January 2023 Conference on Climate Resilient Pakistan held in Geneva.