The International Monetary Fund’s board (IMF) on Wednesday approved a $7 billion Extended Fund Facility (EFF) for Pakistan, providing a critical boost to the country’s struggling economy.
The development was announced by the Prime Minister’s Office (PMO) while a statement is expected from the IMF. The PMO said the premier expressed his satisfaction with the programme’s approval.
“The implementation of economic reforms is going on rapidly,” he said, adding that the government would continue to work hard to achieve goals related to economic development after achieving economic stability.
The prime minister said the increase in business activities and investment in the country was “welcome and a testament to the hard work of the economic team”.
“Along with the successes on the diplomatic front, the increase in remittances from Pakistanis living abroad is a reflection of their confidence in the government’s policies,” he said, adding that the government was grateful to the Pakistani community.
“If the same hard work continues, God willing, this will be Pakistan’s last IMF programme,” PM Shehbaz said.
The premier thanked Saudi Arabia, China, and the UAE for their support regarding the package, as well as IMF Managing Director Kristalina Georgieva and her team.
Speaking to reporters in New York, PM Shehbaz expressed optimism, reiterating his hope that this would be Pakistan’s final IMF-backed programme. “We are committed to ensuring this is the last time we seek such financial support from the IMF,” he said.
Ahead of the board’s approval, he assured the nation that the IMF agreement was in its final stages. “The IMF had set stringent conditions, and we have fulfilled them all,” he said, crediting China for its continued support and expressing gratitude to Saudi Arabia and the UAE for their essential contributions.
PM Shehbaz acknowledged the economic difficulties faced by his government when it took office but expressed confidence that the country was moving toward recovery. “With the grace of God and the combined efforts of the government and all institutions, we have overcome significant challenges,” he said.
Citing recent assessments by global rating agencies, the prime minister pointed to gradual improvements in key economic indicators, suggesting that Pakistan’s financial outlook was beginning to improve.
Primary goals of new deal
The primary goals of the new bailout package include stabilising Pakistan’s economy by consolidating public finances, rebuilding foreign exchange reserves, and reducing fiscal risks from state-owned enterprises. The programme also aims to create a more conducive environment for private-sector-led growth.
Pakistan secured $5bn in deposits from Saudi Arabia, $4bn from China, and $3bn from the UAE. An additional condition from the IMF required Pakistan to obtain $2bn in external funding from bilateral and commercial sources.
The remaining financing gap of $2-2.5bn was bridged through various means, including Saudi Arabia’s oil facility, a $400 million loan from the International Islamic Trade Finance Corporation (ITFC) and contributions from Middle Eastern commercial banks, such as Standard Chartered Bank.
The fears of approval were laid to rest after the State Bank Governor Jameel Ahmad said that Pakistan planned to raise up to $4bn from banks by the next fiscal to plug the gap. According to him, Pakistan was in the “advanced stages” of securing $2bn in additional external financing required for IMF approval.
Pakistan has long relied on IMF programmes to avoid default, frequently turning to financial assistance from friendly nations to meet IMF requirements.
This is Pakistan’s 25th IMF programme since 1958 and its 6th under the EFF framework. Despite the influx of funds, the programme leaves unaddressed a crucial issue: restructuring Pakistan’s external and domestic debt, which consumed 81 per cent of the nation’s tax revenues in the last fiscal year.
Faced with chronic mismanagement, Pakistan’s economy had found itself on the brink, challenged by the Covid-19 pandemic, the effects of the war in Ukraine and supply difficulties that fuelled inflation, as well as record flooding that affected a third of the country in 2022.
In February 2023, the rupee had undergone a historic devaluation of 15pc while the foreign reserves shrunk to a meagre $3.7bn, exacerbating fears that Pakistan was heading towards a default without a comprehensive IMF programme to prop it up. However, the country managed to clinch a nine-month $3bn IMF deal in June after addressing the Fund’s concerns about its reform agenda — with reserves hovering around $3bn.
In April, the finance minister had confirmed that the country had initiated talks for a longer programme to support strengthening public finances, restoring the energy sector’s viability, returning inflation to the target, and promoting private-led activity.
To meet the Fund’s criteria, the government announced new tax measures in several areas to generate additional revenue in the coming fiscal year in the finance bill, which included a 48 per cent increase in direct taxes, 35pc hike in indirect taxes, and a whopping 64pc increase in non-tax revenue such as petroleum levies.
The latest bailout, coming to Pakistan in the form of loans, follows a commitment by the government to implement reforms, including a major effort to broaden the country’s tax base.
In a nation of over 240m people and where most jobs are in the informal sector, only 5.2m filed income tax returns in 2022.
The government has amped up its efforts to raise nearly $46bn in taxes for the year, which includes drastic measures by the Federal Board of Revenue (FBR) such as ordering the telecommunications authority to block the connections of 210,000 SIM cards.
In the edict passed in April, the FBR is also now empowered to disable mobile phones and SIM cards, discontinue electricity connections, discontinue gas connections, and restrict foreign travel of non-filers.
