The International Monetary Fund’s executive board has approved a three-year $6bn bailout plan requested by the government of Pakistani Prime Minister Imran Khan to resuscitate the country’s ailing economy.
The IMF had reached a staff-level agreement for the loan facility on May 12.
In a statement late on Wednesday, the IMF said the loan will help reduce public debt and expand social spending. But the IMF has attached some tough terms, including a commitment to let the market decide the Pakistani rupee rate, rather than allowing it to be supported by the Central Bank. The rupee has plunged more than 40 percent in the last year.
But with dangerously low foreign reserves, a tax base of barely one percent of its population, crushing trade deficits and a hefty defence budget, Khan has travelled the globe since his election last year seeking funds.
The first IMF disbursement will be $1bn, with the remainder to be phased in over the period of the programme subject to quarterly reviews, the IMF said.
“Pakistan is facing significant economic challenges on the back of large fiscal and financial needs and weak and unbalanced growth,” the IMF’s First Deputy Managing Director David Lipton said in the statement.
“In this context, the authorities’ programme aims to tackle long-standing policy and structural weaknesses, restore macroeconomic stability, catalyze significant international financial support, and promote strong and sustainable growth.”
The IMF wants Pakistan to increase the proportion of its people who pay taxes and for the government to reduce public debt. But protecting the most vulnerable “will be an important priority” as the government makes these changes, Lipton said.
“This will be achieved by a significant increase in resources allocated to key social assistance programmes, supporting measures for the economic empowerment of women, and investment in areas where poverty is high.“
Khan came to power last August, inheriting an economy plagued with problems but he was initially deeply reluctant to turn to the IMF, which has provided more than 20 bailout packages to Pakistan over the decades.
However, despite securing billions of dollars in loans from friendly countries including China, Saudi Arabia and the United Arab Emirates (UAE), mounting economic headwinds forced his government to turn to the fund.
With foreign exchange reserves shrinking to only $7.3bn, less than the equivalent of two months’ worth of imports, and the budget deficit set to top seven percent of gross domestic product this year, Pakistan faces tough economic medicine to tackle problems that have been years in the making.
According to IMF forecasts, growth is expected to slow to 2.8 percent in the current fiscal year ending June 2020, down from 2.9 percent in the year just ended and 5.2 percent in 2018.
Under the IMF’s terms, the government is expected to let the rupee currency fall to help correct an unsustainable current account deficit and make its industries more competitive,
In a bid to cut public debt, the government has set ambitious tax and revenue plans, despite failing to meet the previous year’s targets and hiked prices in the creaking energy sector, where mounting debt backlogs have acted as a growing drain on government resources.
The combined package of belt-tightening measures has prompted anger from opposition parties which say the government hesitated too long before turning to the fund and have pledged a campaign of protests this month.