The International Monetary Fund (IMF) has reached a “staff level pact” with Pakistan in a $3 billion “stand-by deal”, Sunrise reported on Friday (June 30).
The deal, which is subject to IMF board approval in mid-July, offers temporary respite for Pakistan, which is facing an acute balance of payments crisis and declining foreign exchange reserves.
It has been very well received by the government, with Prime Minister Shehbaz Sharif saying that the agreement “will put the country on the path of sustainable economic growth”.
The International Monetary Fund (IMF) has reached a “staff level pact” with Pakistan in a $3 billion “stand-by deal”, Sunrise reported on Friday (June 30).
The deal, which is subject to IMF board approval in mid-July, offers temporary respite for Pakistan, which is facing an acute balance of payments crisis and declining foreign exchange reserves.
It has been very well received by the government, with Prime Minister Shehbaz Sharif saying that the agreement “will put the country on the path of sustainable economic growth”.
“The new Stand-By Agreement (SBA) will support the authorities’ immediate efforts to stabilize the economy… (and) will also create space for development and social spending through better domestic revenue mobilization and careful execution. of spending,” the IMF said in a statement. Press release dated June 29.
The deal is not under the control of Pakistan. Expanded Service Fund (EFF) Program, which the country entered in 2019, and which expired on Friday (June 30). According to the IMF press release, the SBA “builds” on the efforts of the EFF.
So what does the deal entail?
The SBA will make $3 billion available to Pakistan, spread over nine months. a report on Sunrise on June 28, he had said that Pakistan and the IMF were considering a $2.5 billion stand-by deal.
However, the deal comes with some important conditions, issues that had previously been a sticking point in negotiations between the IMF and Pakistan. In its press release, the IMF said it would be important for “the (Pakistani) authorities to resist pressure for unbudgeted spending or tax breaks in the coming period.”
And what are some of the areas where they will be expected to buckle down?
The IMF has mentioned Pakistan’s energy sector. Historically, electricity has been heavily subsidized for Pakistani consumers, and Pakistani consumers are going to end this arrangement.
The IMF has called for a “timely” readjustment of tariffs to ensure cost recovery, according to a Reuters report, which will mean that price increases for consumers are inevitable, amid already sky-high inflation.
Pakistan’s central bank will also have to remove import restrictions established to control external payments in the face of the rapid depletion of foreign exchange reserves, Reuters informed. With a current value of nearly $3.5 million, Pakistan’s investment foreign exchange reserves barely enough to cover controlled imports for a month according to Reuters.
“The SBP (State Bank of Pakistan) has withdrawn guidance on import prioritization and is committed to ensuring full market determination of the exchange rate,” the IMF said.
Currently, there are multiple exchange rate controls and practices in different markets in Pakistan. The IMF has mandated that they be eliminated, with an exchange rate entirely determined by the market, even when the The Pakistani rupee has plunged to record lows in recent weeks.
The deal is also likely to mean further rate hikes by the central bank, with the IMF asking it to be “proactive” in curbing inflation that “particularly affects the most vulnerable.”
Earlier this month, the bank had halted its rate-raising process, only to implement a 100 basis point out-of-cycle hike just days later at the request of the IMF. Currently, the policy rate stands at 22 percent, Reuters informed.
Finally, the deal comes with assurances from the Pakistani government that loss-making government companies will be dealt with, either through privatization or through a “stronger government.”
But is $3 billion enough to tackle Pakistan’s massive financial crisis?
Despite the larger-than-expected IMF bailout, the deal emphasized that Pakistan will have to continue mobilizing multilateral and bilateral financial support, Reuters informed.
According to the Reuters According to the report, Pakistan needs $22 billion to finance its external payment obligations, including international debt service, in fiscal year 2024, which begins on Saturday, July 1, and ends on June 30, 2024.
United Arab Emirates and Saudi Arabia they have pledged $3 billion in support to Pakistan, and the funds are expected to arrive, now that the deal with the IMF has been reached. China, Pakistan’s biggest creditor, is also expected to come to its aid with debt rollovers.
“In addition to the generous climate-related pledges from the January 2023 Pakistan Climate Resilience Conference held in Geneva, the authorities’ efforts have focused on securing new financing and securing the rollover of maturing debt,” the IMF said, adding that the new SBA will provide a “political anchor” to facilitate such financing.
What has been the reaction to this deal?
Markets were closed in Pakistan on Friday, but some analysts have welcomed the news, the financial times informed.
“This new program is much better than our expectations,” said Mohammad Sohail, chief executive of Topline Securities brokerage in Karachi. FOOTadding that the funding will “definitely help restore confidence for some investors.”
Gareth Leather, senior Asia economist at Capital Economics in London, said Reuters: “The loan agreement between Pakistan and the IMF should put the economy back on a more secure footing and limit further downside risks.”
However, he added that “past experience suggests the government will have a hard time delivering on the tough spending promises it has agreed to.”
Where do internal Pakistani political compulsions come in?
This is the biggest uncertainty regarding the deal. The conditions that the IMF has imposed on Pakistan are harsh and will require a degree of fiscal discipline never before seen in the country. With the general elections just around the corner, the government will be under immense political pressure.
said leather Reuters that even if Prime Minister Shehbaz Sharif is “committed to a deal, he could step down at the end of the year and be replaced by someone less committed to the deal.”
Pakistan’s current National Assembly will complete its term on August 12, with rules stipulating that general elections must be held within 60 days of this completion. This means that if the law is followed, Pakistan will see a general election in mid-October, leaving Sharif’s future as prime minister uncertain.
PTI leader Hammad Azhar tweeted that the deal “should be seen as nothing more than a breather for a few weeks,” adding that “before the PDM propaganda team presents this as a solution to all problems, it must be clear that our economy continues. be in a deep hole.”
What about the apolitical reaction in Pakistan?
Some economists have criticized the government for the impact that the IMF’s strict conditions will have.
Dr. Asma Hyder, Dean of the College of Economics and Social Sciences at the Karachi Institute of Business Administration, said Sunrise“Going on the IMF program was the only option to prevent Pakistan from defaulting,” but “the measures outlined in the deal appear superficial and short-sighted, which could exacerbate future economic instability.”
He added that “instead of celebrating the agreement”, the country should prepare for an inevitable economic crisis not too far away.
Critics such as Dr. Hyder have argued that Pakistan’s economy needs far deeper reforms than are being proposed.
“For the last three decades, IMF assistance has failed to bring about tangible reforms,” Abid Hasan, a former World Bank adviser in Islamabad, told the FT. “IMF programs have been more of a Band-Aid.”
How did Pakistan get into this mess to begin with?
Pakistan’s economy has been reeling in the on the brink of collapse for quite some time. He 2022 floodstogether with the external economic shocks caused by Russia-Ukraine The war, among other things, brought him to the brink.
In November 2022, the The IMF decided to stop the disbursement of funds under the 2019 EFF. A payment of $1.18 billion was pending, but the IMF stopped it due to the government’s unwillingness to meet certain demands, including guarantees to increase energy tariffs, impose more taxes, and stop the artificial control over the exchange rate.
This brought Pakistan further to the brink of collapse, giving way to a currency crisis and record inflation that is still going on.
After arguing for a long time that the IMF terms would prove excessively harsh and politically tense for Pakistan, the Shehbaz Sharif government finally agreed to the SBA at literally the last moment.
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