Pakistan has reached an agreement to obtain $3 billion in short-term financing from the International Monetary Fund after months of tense negotiations, providing a respite to the crisis-hit economy as the government struggles to avoid a possible default.
The International Monetary Fund announced Thursday that it has reached a staff-level, or tentative, agreement with Prime Minister Shahbaz Sharif’s government for nine-month financing under a so-called standby arrangement. The IMF said in a statement that the agreement would have to be finalized by the fund’s executive board, with approval expected by mid-July.
Pakistan has descended into one of its worst economic crises, with analysts warning it risks defaulting on its debt without the help of the International Monetary Fund. Foreign reserves fell to $3.5 billion, enough for less than one month’s worth of imports, while inflation rose to 38 percent.
While Pakistan has an existing bailout deal with the International Monetary Fund, signed in 2019, the multilateral lender has since last year refused to release funds as it clashed with Islamabad over economic policy. That agreement was due to expire on Friday, with about a third of the $6.5 billion in financing yet to be disbursed.
The breakthrough came after Pakistan unveiled a series of tax hikes in this month’s budget for the fiscal year starting in July. It also cut energy subsidies and removed a number of currency and import restrictions.
Pakistani markets were closed on Friday, but some analysts welcomed news of the deal. “This new program is much better than our expectations. “There was a lot of uncertainty about what would happen after June,” said Mohammed Sohail, CEO of Karachi-based stockbroker Topline. “Now, this $3 billion, nine-month financing will definitely help restore some investor confidence.”
The International Monetary Fund called on Pakistan to adopt measures to broaden the tax base, liberalize the economy and free up resources for development spending.
But Sharif’s government has long resisted such steps, arguing that they would prove too draconian and politically charged given the fragile economic conditions. National elections are due in October and Sharif is expected to face a tough race against opposition leader and former prime minister Imran Khan.
However, economists have warned that a deal with the International Monetary Fund will not solve Pakistan’s overall economic problems. Activity slowed sharply, leading to power outages, a lack of vital imports, and increasing poverty.
The government faces $25 billion in debt payments in the fiscal year starting in July, which analysts said it would struggle to meet without more financial help from lenders such as China and Saudi Arabia, as well as another International Monetary Fund programme.
Last month, Islamabad asked Beijing to carry forward more than $2.3 billion in commercial and government loan payments by providing new funds.
Some critics have argued that the economy needs much deeper reforms than those proposed. Pakistan, which has had 23 IMF programs in its history including Friday’s plan, has long been stuck in boom-bust cycles that have constrained growth.
“Over the past three decades, IMF aid has not been able to bring about tangible reforms,” said Abid Hasan, a former World Bank adviser in Islamabad. “The IMF programs were just an aid.”
