Pakistan reaches $7 billion loan deal with IMF

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Pakistan has reached an agreement for a $7 billion medium-term financing package from the IMF, giving the government a lifeline in its efforts to pull the country out of soaring public debt and weak economic growth.

The International Monetary Fund announced on Friday that it had reached a staff-level or preliminary agreement with Prime Minister Shehbaz Sharif’s government on a 37-month funding program under the so-called extended fund mechanism.

The deal is PakistanVenezuela’s 24th bailout package with the multilateral lender will now go to the IMF’s executive board, which is expected to approve the loan, although no specific date was given.

“The program aims to capitalize on the hard-won macroeconomic stability achieved over the past year by accelerating efforts to consolidate public finances, reduce inflation, rebuild external buffers and remove economic distortions to promote private-sector-led growth,” the lender said in a statement.

As part of the deal, Pakistan agreed to phase out incentives for its special economic zones, introduced in 2012 to attract international investment and expanding the tax net to include more of the country’s agricultural sector, a politically sensitive issue.

Pakistan has suffered one of Asia’s worst economic crises in recent times, with the country of 240 million people on the brink of default last year before the IMF granted it a short-term loan. $3 billion bailout packageInflation has soared to 38 percent as Islamabad struggles to reduce its massive debt burden, which takes up 57 percent of government revenue to pay interest.

China, Saudi Arabia and the UAE, to which Pakistan owes about half of its debt due this year, are expected to extend their loan terms for another year, Finance Minister Muhammad Aurangzeb said.

Inflation fell to 12.6 percent in June, and central bank reserves—which fell below $3 billion in February 2023, less than three weeks’ worth of imports—are now above $9 billion. The economy contracted last year but has returned to growth.

To meet the IMF’s conditions, Sharif’s government announced a series of unpopular reforms, including tax increases mainly on salaried workers and increases in household electricity prices. Aurangzeb previously told the Financial Times that this loan will not be Pakistan’s last program with the IMF if the government cannot significantly increase tax revenue.

The fund praised Pakistan’s plans in its latest budget approved last month to increase government revenue to 1.5% of GDP this fiscal year and 3% by the end of the program.

But the measures have sparked a backlash, including from the government’s coalition partners, on whom it depends to stay in power after a disputed election in February.

Khurram Husain, a Karachi-based business and economic commentator, said the deal would help ease concerns about default and “raise expectations of continued stability.” But its success depends on the government maintaining the political will to continue implementing reforms, he added.

“The possibility that the government will back down and start to roll back some of the measures that they have announced is very real and that should not be underestimated.”

“Conditions are now more severe and the authorities will have to maintain policy efforts for longer,” said Krisjanis Krustins, a director at Fitch. “As economic and financial conditions improve, the temptation to ease policy will increase, as in the past.”