Pakistan and IMF reach $3 billion stand-by agreement

The International Monetary Fund (IMF) announced Friday it has reached a staff-level agreement with Pakistan on a $3 billion (€2.76 billion) stand-by arrangement. The deal is seen as crucial for the economy of the South Asian nation, which has been on the verge of default.

The deal is subject to approval by the IMF board in July. It comes after an eight-month delay and aims to address Pakistan's acute balance of payments crisis and dwindling foreign exchange reserves.

Pakistan's Finance Minister, Ishaq Dar shared the announcement on Twitter, saying "Praise be to God."

He said Pakistan will sign, seal and return the letter of intent to the IMF by Friday night.

Pakistan's stock and currency markets were closed on Friday.

Why is Pakistan in trouble?

With soaring inflation and foreign exchange reserves that can barely cover a month's worth of controlled imports, Pakistan has been grappling with its worst economic crisis in decades. Analysts had warned that without the IMF agreement, the country could spiral into a debt default.

The conditions of the latest deal exceed initial expectations. Pakistan had been awaiting the release of the remaining $2.5 billion from a $6.5 billion bailout package agreed upon in 2019, which expired on Friday.

According to IMF official Nathan Porter, the new stand-by arrangement builds upon the 2019 program. Porter noted that Pakistan's economy has faced various challenges in recent times, including devastating floods last year and commodity price hikes following the war in Ukraine.

"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. 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," Porter said.

Reforms in the energy sector, which has amassed nearly 3.6 trillion Pakistani rupees (€11.57 billion) in debt, have been a key focus in the discussions with the IMF.

In order to secure the deal, Islamabad implemented a series of policy measures, including a revised budget for 2023-24 to meet the IMF's demands.

What is the price of the deal for Pakistan?

Other adjustments demanded by the IMF included the removal of subsidies in the power and export sectors, increases in energy and fuel prices, adopting a market-based currency exchange rate, and arranging external financing.

Pakistan also raised over 385 billion rupees (€1.23 billion) in new taxation through a supplementary budget for the 2022-23 fiscal year and the revised budget for 2023-24.

But these adjustments have contributed to record-high inflation of 38% year-on-year in May.

Porter stated that the fiscal year 2024 budget targets a primary surplus of around 0.4% of GDP by taking steps to broaden the tax base and increase tax collection from under-taxed sectors.

He added that the budget allows for strengthening support for the vulnerable through a cash handout program.

Mohammed Sohail of Topline Securities expressed optimism about the new program, stating, "This new program is far better than our expectations." However, he noted the uncertainties that lie ahead as a new government will come to power after June 2023.