The International Monetary Fund (IMF) has reached a staff-level pact with Pakistan on a $3 billion stand-by arrangement, the lender said, a decision long awaited by Pakistan, which is teetering on the brink of default.
The deal — subject to approval by the IMF board in July — 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 $3bn funding, spread over nine months, is higher than expected for Pakistan. The country was awaiting the release of the remaining $2.5bn from a $6.5bn bailout package agreed in 2019, which expired on Friday (today).
Pakistan will receive formal documents on the deal later on Friday, Finance Minister Ishaq Dar told Reuters, which he said he would “sign, seal and return by tonight”.
The new deal will disburse an upfront amount of $1.1 billion shortly after the IMF board’s meeting in July, he said.
Dar said Pakistan aimed to take the central bank’s foreign exchange reserves to $14 billion by the end of July. “We have stopped the decline, now we have to turn to growth,” he added.
The new stand-by arrangement builds on the 2019 programme, IMF official Nathan Porter said in a statement on Thursday, adding that Pakistan’s economy had faced several challenges in recent times, including devastating floods last year and commodity price hikes following the war in Ukraine.
“As a result of these shocks as well as some policy missteps — including shortages from constraints on the functioning of the FX market — economic growth has stalled. Inflation, including for essential items, is very high,” he added.
“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,” Porter said in a statement.
“Given these challenges, the new arrangement would provide a policy anchor and a framework for financial support from multilateral and bilateral partners in the period ahead,” he said.
Meanwhile, the IMF’s press release states, “The IMF staff and the Pakistani authorities have reached a staff-level agreement on policies to be supported by a Stand-By Arrangement (SBA).”
It added that the new SBA will “support the authorities’ immediate efforts to stabilise the economy from recent external shocks, preserve macroeconomic stability and provide a framework for financing from multilateral and bilateral partners”.
“The new SBA will also create space for social and development spending through improved domestic revenue mobilization and careful spending execution to help address the needs of the Pakistani people,” the IMF said.
It further said, “Steadfast policy implementation is key for Pakistan to overcome its current challenges, including through greater fiscal discipline, a market-determined exchange rate to absorb external pressures, and further progress on reforms, particularly in the energy sector, to promote climate resilience, and to help improve the business climate.”
The IMF noted that the parliament had approved the FY24 budget “in line with the goals of supporting fiscal sustainability and mobilising revenue, which will enable greater social and development spending”.
It added that the budget “advances a primary surplus of around 0.4 per cent of GDP by taking some steps to broaden the tax base and increase tax collection from undertaxed sectors, as well as improving progressivity, while ensuring space to strengthen support for the vulnerable through the BISP (Benazir Income Support Programme)”.
“It will be important that the budget is executed as planned, and the authorities resist pressures for unbudgeted spending or tax exemptions in the period ahead,” the lender emphasised.
It went on to note that the State Bank of Pakistan (SBP) has “withdrawn the guidance on import prioritisation and is committed to ensuring the full market determination of the exchange rate”.
“Going forward, 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,” the IMF highlighted.
The press release added: “In addition to generous climate-related pledges from the January 2023 Conference on Climate Resilient Pakistan held in Geneva, the authorities’ efforts have focused on obtaining new financing and securing the rollover of debt falling due.
“This will support near-term policy efforts and replenish gross reserves, with the aim of bringing them to more comfortable levels,” it asserted.
The IMF noted that the “authorities’ programme also includes ongoing efforts to strengthen the viability of the energy sector (including through a timely FY24 annual rebasing), improving SOE (state-owned enterprise) governance and strengthening the public investment management framework, including for projects needed to build resilience to climate change”.
The international lender emphasised, “The full and timely implementation of the programme will be critical for its success in light of the difficult challenges.”
Last night, Dar had said that a staff-level agreement for a crucial bailout deal with the IMF was “very close” and expected in the next 24 hours.
A total of $4bn had already been released. Dar had earlier told media the government was working on a mechanism to try to unlock the full $2.5bn pending under the IMF programme.
Following the deal’s securement today, Prime Minister Shehbaz Sharif also announced the same on his Twitter account, highlighting its positive outcomes for Pakistan.
He appreciated the “efforts and hard work” of Dar and the finance ministry for reaching the agreement.
The premier further thanked IMF Managing Director Kristalina Georgieva and her team for their “cooperation and collaboration, especially during the course of last week”.
Dar also shared the IMF’s press release while thanking God.
Information Minister Marriyum Aurangzeb said the prime minister and Dar would hold an “important press conference” today at 4pm regarding the IMF deal and “take the nation into confidence through the media”.
Planning Minister Ahsan Iqbal termed the development “good news”.
He said in a tweet, “Let’s resolve to implement Turn Around Pakistan 5E framework to make our economy strong & sustainable by developing it to its full potential.”
Defence Minister Khawaja Asif congratulated the finance minister and in an apparent reference to the PTI — which had been saying that Pakistan to default soon — said, “The hopes of many ‘well-wishers’ have been dashed, including friends and enemies.”
He also expressed his hope that those eligible to pay taxes would do so as “tax evasion is the worst kind of anti-nationalism and is equivalent to the economic murder of the poor people”, he added.
Asif remarked, “The IMF agreement only gives us a chance to get rid of economic diseases — we have to do the complete treatment ourselves.”
‘Short-term bridging operation’
Commenting on the IMF deal, former SBP deputy governor Murtaza Syed told Reuters, “The SBA provides Pakistan with much-needed short-term cover, in the lead up to and immediate aftermath of the upcoming elections.”
He remarked that “as long as Pakistan remains on track under the SBA’s reviews, it should catalyse additional financing from bilateral and other multilateral sources”.
“In this way, we should be able to meet the external debt repayments coming due in the next few months. Terming the SBA a “short-term bridging operation”, Syed noted that it was not the “end of our relationship with the IMF”.
“The new government will “almost definitely need to negotiate another long-term EFF (external fund facility) programme with the IMF after the elections, as our balance of payments and external debt repayment problems are of a more protracted nature,” he said.
Former finance minister Miftah Ismail termed the development as “great news” for the country and congratulated the prime minister for his “personal commitment and intervention” which he said enabled the deal.
“As I have been saying, a deal with the Fund is the best insurance we have against default. Now God willing the clouds of default will recede, demand for hoarding dollars will slowly decrease and there will be renewed hopefulness and vibrancy in the business climate.
“We lost almost nine months in reaching this agreement but Pakistan is now firmly back on the right track,” he tweeted, adding that officials of the finance ministry merited recognition for their efforts in securing the deal.
“We must recognise that this IMF deal gives us yet another chance for making fundamental reforms. Unless we undertake these reforms, Pakistan will remain at the mercy of multilateral lenders and the people of Pakistan will continue to pay for the structural and governance failures of their governments,” Ismail opined.
Separately, Bloomberg quoted Brendan McKenna, strategist at Wells Fargo & Co. in New York, as saying, “IMF support lifts the immediate risk of default and provides much-needed liquidity to support an aggressive reform agenda.”
“I would expect Pakistan debt to rally in the short term and potentially have long-term value if the government demonstrates commitment to the IMF’s programme targets,” she added.
Michael Kugelman, South Asia Institute Director at The Wilson Centre, noted that “Islamabad waited until the very final hour to take the (politically risky) fiscal policy steps”, adding that if taken earlier, “much of the drama and fraught negotiations of recent months likely wouldn’t have had to play out”.
He further surmised, “In all likelihood, when PM Sharif met the IMF director in Paris last week, she delivered a ‘now or never’ warning to him.”
Hammad Azhar, finance minister during the previous PTI government, said that a new IMF programme needed to be negotiated by the new government “as soon as it comes in”.
Bank of Punjab Chief Executive Officer (CEO) Zafar Masud told Reuters: “It’s important to see how much of the 3bn is being disbursed upfront and what conditionalities are attached to the remaining tranches.
“Our target shall be that the next IMF programme should be the last one and it would be a great opportunity to correct our fiscal account once and for all.”
Arif Habib Ltd CEO Shahid Habib termed the development as a “major positive” and said it will “reduce risks and uncertainties and serve as a source of comfort to investors and lenders”.
“It will also allow access to funding from other multilateral and bilateral partners which is essential given Pakistan has about $9bn of debt repayments including $4bn of sovereign rollovers until December,” he added.
Overseas Investors Chamber of Commerce and Industries Chief Executive and General Secretary Abdul Aleem said, “We see it as a significant supportive move which was long awaited to remove the perpetual uncertainty in the economic landscape of the country.
“While the State Bank had managed the delicate situation remarkably well but certainly the hard measures dented the confidence of investors and reputation of the country as a destination for new foreign direct investment.”
Topline Securities CEO Mohammed Sohail commented, “This new programme is far better than our expectations. There were a lot of uncertainties on what will happen after June 2023 as there will be a new government coming to power.”
Noting that the funding will “definitely help restore some investor confidence”, he said, “The newly elected government, likely by Nov/Dec, will have some time to evaluate the economic situation and decide on the way forward (bigger IMF loan with or without debt restructuring/reprofiling).”
Sakib Sherani, Macro Economic Insights founder and chief executive, told Reuters, “It’s clear the EFF has ended unsuccessfully. The SBA gives a temporary lifeline to this government and the new one post-elections.
“The successor government will have to negotiate a fresh, longer-term arrangement with the Fund.”
Gareth Leather, a senior Asia economist at Capital Economics in London, told Reuters: “The agreement of a loan deal between Pakistan and the IMF should put the economy back on a more secure footing and limit the biggest downside risks.
“However, past experience suggests that the government will struggle to stick to the tough spending promises it has agreed to. There is a strong risk that Pakistan reneges on the deal once the immediate crisis has passed.”
He termed the upcoming general elections as “one obvious trigger”, cautioning that even if Shehbaz is “committed to a deal, he could be out of office by the end of the year and replaced by someone less committed to the agreement”.
Former Pakistani ambassador to the US Maleeha Lodhi tweeted, “At last … a relief.”
Dr Asma Hyder, Dean of the School of Economics and Social Sciences at the Institute of Business Administration said, “Going to the IMF programme was the only option to prevent Pakistan from defaulting, and we had been anxiously waiting for this opportunity.
“At this moment, all we can say is ‘thanks’ for the privilege to keep receiving this opportunity without achieving anything and with empty promises from our side. The measures outlined in the agreement appear superficial and short-sighted, potentially exacerbating future economic instability.”
She further said, “Given the magnitude of our financial mismanagement and fiscal chaos, reflected in substantial external debt, BoP crisis, and circular debt in the energy sector, these $3bn for nine months are a pinch of salt even if considered with other financiers.”
Dr Hyder pointed out the agreement cannot address challenges like “fostering inclusive growth, promoting social justice, implementing structural reforms, addressing inefficient governance, bringing better curriculum that can help to improve productivity [and] an ever-increasing defence budget”.
“These are the issues that every level of government whether vertically or horizontally, must be considering. Unfortunately, no such intentions are visible at any level.”
She added the deal represented “yet another sad episode in Pakistan’s economic history” and that the country should be preparing for an inevitable economic crisis looming not too far ahead“ instead of celebrating the deal.
Dr Ali Hasanain, associate professor of economics at LUMS, noted that now Pakistan will be able to pay external debts coming due over the next few months.
“It thus reduces the short-term risk of default, gives us time to hold elections in a stable economic environment and design and build support for a long-term reform plan,” he said.
He further pointed out that “our authorities failed to complete the Extended Fund Facility, adding it to the long line of uncompleted IMF programmes littering our past”.
“Will we now reform taxation and the energy sector? Will we fix the anti-export bias in the way we have shaped investor incentives, without relying on unsustainable ‘special initiatives’ that strangle some sectors to lift others? Or reverse discretionary MNA budgets and Senator perks?” the economist asked.
Citing the SBP’s hike in policy rates, the tax collection target being missed and the revising of the budget, Dr Hasanain said, “Our balance of payments crisis and external debt are unsustainable. Pakistan Bureau of Statistics data is losing credibility.”
“True change will likely come when the country’s economic team is held responsible for missteps and will be built on a different politics from the one we are seeing today. For now, we live quite literally on more borrowed time.”
Meanwhile, former PPP senator Mustafa Nawaz Khokhar questioned what all the “celebrations” were for.
“Couple of months down the line & without any meaningful economic reforms we’ll most probably be at the brink again!” he tweeted.
Additional reporting by Areesha Rehan.