Pakistani prime minister Shehbaz Sharif on Thursday hailed a deal with the IMF that paves the way for the release of $1.2bn to the south Asian nation as it seeks to avert a balance of payments crisis.
Resumption of the stalled IMF lending package has been seen as vital to open the way for funding from other multilateral and bilateral lenders to Pakistan. The IMF said the staff-level agreement would also increase the total size of the package to $7bn from the $6bn originally agreed in 2019.
“The agreement with the fund has set the stage to bring [the] country out of economic difficulties,” Sharif said in a tweet.
A senior Pakistani government official said the IMF’s board of executive directors was expected to approve the agreement in September.
News of the deal eased concerns in Pakistan that it might suffer the same fate as Sri Lanka, where a debt crisis has unleashed political turmoil that has forced president Gotabaya Rajapaksa to flee the country.
In recent weeks Pakistan’s liquid foreign currency reserves have sunk to the equivalent of less than two months of imports, while the rupee has fallen against foreign currencies amid a widening trade deficit fuelled by the rising cost of oil and other commodities.
“Pakistan is at a challenging economic juncture. A difficult external environment combined with procyclical domestic policies fuelled domestic demand to unsustainable levels,” the IMF said in a statement announcing the deal.
“The resultant economic overheating led to large fiscal and external deficits in fiscal year 2022, contributed to rising inflation and eroded reserve buffers,” the fund said.
Pakistan’s KSE 100 shares index rose 1.2 per cent after the news of the deal on Thursday.
Analysts warned that Sharif’s government faced a difficult political test in implementing IMF-driven belt-tightening in the run-up to parliamentary elections due by summer 2023.
Lower- and middle-income voters have already been stung by rising inflation. Fuel prices have almost doubled in the past quarter, while electricity and gas tariffs have been raised.
Sakib Sherani, a former adviser to the finance ministry, said Pakistan’s return to an IMF programme “distances the country from a Sri Lanka-type situation”. But he warned that the likely increased difficulty of providing a safety net for low-income people was one of “several undesirable consequences” of the deal.
The central bank this month raised its interest rate to 15 per cent, more than twice the level just 10 months ago, to combat inflation, which rose to 21.3 per cent in June. Last month, Pakistan imposed a one-off 10 per cent “super tax” on important industries in order to narrow the fiscal deficit.
Business leaders warned that Pakistan still faces severe economic strains.
“With interest rates as high as where they are right now, how can anyone sensibly borrow and run a business successfully? I expect rising unemployment and more poverty,” said the president of a private bank.
Western diplomats said Pakistan had failed repeatedly to plug gaps in its fiscal framework. For example, it had not increased the proportion of the population who pay income tax from the current less than 2 per cent.
“With tax evasion so widespread, you can’t put Pakistan on the same path as other success stories like the economies of south-east Asia,” said one western official. “This bailout might save Pakistan from a default, but a lot more needs to be done to stabilise the economy to benefit ordinary people.”
Source: Economy - ft.com
