Islamabad, Pakistan – The International Monetary Fund (IMF) and Pakistan have agreed on terms for a $6bn bailout package, to be disbursed over a span of more than three years, bringing an end to months of negotiations with the international lender.
The agreement was confirmed by the IMF which added that the funds would be disbursed over 39 months.
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“Pakistan is facing a challenging economic environment, with lacklustre growth, elevated inflation, high indebtedness, and a weak external position,” said Ernesto Ramirez Rigo, the head of the IMF’s mission to Pakistan, said in the statement.
“This reflects the legacy of uneven and procyclical economic policies in recent years aiming to boost growth, but at the expense of rising vulnerabilities and lingering structural and institutional weaknesses.”
Abdul Hafeez Shaikh, Prime Minister Imran Khan’s adviser on finance, said on Sunday that “after negotiations over many months, Pakistan and the IMF have reached a staff-level agreement”.
The IMF said the programme of structural reforms will target increasing government revenues and reducing spending, bringing down the primary fiscal deficit – which excludes development spending – to 0.6 percent of the Gross Domestic Product (GDP) in Pakistan’s upcoming budget.
The overall fiscal deficit currently stands at roughly 1.9 percent of the GDP, according to central bank data.
The programme will include “tax policy revenue mobilisation measures to eliminate exemptions, curtail special treatments, and improve tax administration”.
It will also target Pakistan’s loss-making state-owned enterprises and the country’s energy sector, long plagued by structural issues that have led to a burden of heavy subsidies on the government.
The agreement will now be reviewed by the IMF’s management and board, and approval will be “subject to the timely implementation of prior actions and confirmation of international partners’ financial commitments”, the IMF said.
Shaikh said this agreement would open up at least $2bn in additional financing from the World Bank and the Asian Development Bank.
Pakistan’s economy has been struggling since last year with spiralling current account and fiscal deficits, and steepening inflation in the last three months.
The large trade deficit has prompted authorities to devalue the Pakistani rupee by as much as 24 percent in the last year.
In March, the country’s central bank revised its GDP growth target down to a sluggish 3.5 percent, from the original target of around six percent.
A tightening of monetary policy, with interest rates raised to 10.75 percent in March, has seen some import substitution and slowing demand, with the trade deficit dropping by 13.1 percent to roughly $26.2bn in the first 10 months of the fiscal year, central bank data shows.
In April, consumer price inflation (CPI) stood at 8.8 percent, up from roughly 3.8 percent at the same time last year, according to the country’s Bureau of Statistics.
Pakistan has availed 12 IMF stabilisation programmes and bailouts since 1988, totalling roughly $18.9bn in funds drawn, according to IMF data.
The country’s last bailout, taken in 2013, was worth roughly $6.6bn, with the programme ending three years ago.
‘Severe contraction’ expected
“There are two legs on which every IMF programme walks: the macroeconomic adjustments of getting the currency and deficits right, and the other is the structural transformation of the economy, which targets state-owned enterprises, improving competitiveness and other steps,” Khurram Husain, business editor at Pakistan’s Dawn newspaper, told Al Jazeera.
“Pakistan has had a good track record of doing rudimentary macroeconomic adjustments, but it never gets quite beyond that.”
Husain said the programme would extract a steep cost in the short term, as reforms were being put in place.
“There will be severe contraction of the economy, plummeting investment and rising inflation [in the short term],” he said. “The programme will increase costs on the common citizenry, and raise the cost of doing business. It will administer costs and pain on both the citizen and investors.”
Stock market analysts said Sunday’s announcement would ease investor concerns by bringing an end to uncertainty around the IMF’s programme.
“The IMF agreement will provide the much-needed confidence to both local and foreign investors in Pakistan as it will remove nine-month uncertainty on IMF funding,” said Muhammad Suhail, CEO of Karachi-based Topline Securities.