IMF approves $3 billion bailout for cash-starved Pakistan

Islamabad Reuters --

The International Monetary Fund announced on Wednesday that its board had approved a bailout package of $3 billion for Pakistan, which will be disbursed immediately to stabilize the South Asian economy.

Last month, Pakistan and the Fund reached an agreement at the staff level, securing the short-term pact that brought more funding than expected for the country with 230 million citizens.

The country is facing a severe balance of payment crisis, with barely enough reserves at the central bank to cover a month's worth of controlled imports.

Before disbursing a first tranche, the board must approve it. The rest will be paid in later installments.

The IMF Executive Board 'approved an 9-month Standby Arrangement (SBA), for Pakistan, for a total amount of SDR 2,250 million ($3,0 billion or 111% of the quota), to support the government's economic stabilization program', the lender stated in a press release.

The report said that Pakistan was facing a 'difficult external environment', 'devastating floods and missteps on policy have led to large fiscal deficits and external debts, rising inflation, and eroded reserves buffers' in FY23.

After eight months of difficult negotiations on fiscal discipline, the deal was a lifeline to Pakistan which had been on its way to default.

Shehbaz sharif, the Prime Minister of Pakistan, said that the bailout is a significant step in the efforts made by the government to stabilize the economic situation and achieve macroeconomic stability.

He said that the move would help Pakistan overcome its immediate and medium-term economic problems, and give the next government fiscal room to chart a course forward.

Sharif called it a landmark, saying it was accomplished despite 'the most difficult of circumstances & an impossible deadline'

The coalition government of Sharif is expected to hold a national poll this year, and it must take more difficult fiscal discipline measures in order to satisfy the IMF.

The central bank raised its policy rate to an all-time high of 22 %, while the average Pakistani struggles with an inflation rate of about 29 % and the government raised 385 billion rupees ($1,39 billion) worth new taxes.

Policy anchor

IMF stated that the new funding would provide an anchor to address domestic and external imbalances, and a framework of financial support from both multilateral and bilateral partners.

The program would focus on the implementation of the FY24 Budget to facilitate Pakistan's fiscal adjustment, ensure debt sustainability and protect critical social spending, as well as a return to an exchange rate determined by market forces and a proper FX market function to absorb external shocks.

The IMF wants Islamabad's monetary policy to be tightened in order to combat inflation and make further progress with structural reforms. This is especially true for the energy sector, governance of state-owned companies, and climate resilience.

The agreement, which has already provided some relief to investors of the country's stock, exchange rate, and bonds, will allow for more external funding.

Saudi Arabia and the United Arab Emirates, long-time allies of Pakistan, have deposited $3 Billion in Pakistan's Central Bank in the past two days. Sharif claimed that China has rolled $5 billion worth of loans over the past three months in order to keep his country out of default.