FeaturedNationalVOLUME 18 ISSUE # 34

Pakistan’s IMF deal and the road ahead

After a prolonged delay and numerous false starts, Pakistan has finally reached a staff-level agreement with the International Monetary Fund (IMF) on a $3 billion stand-by arrangement. This deal, pending approval by the IMF board, provides some respite for Pakistan, which has been grappling with a severe balance of payments crisis and teetering on the edge of default.

The delay in finalizing the deal was partly attributed to the hesitation of Ishaq Dar, who wasted precious time deliberating on the matter. Eventually, Pakistan found itself back where it started, realizing that submission to IMF conditions was inevitable. The new stand-by arrangement offers a second chance for Pakistan to address the economic challenges that should have been tackled much earlier.

The positive aspect of the agreement is that the $3 billion in IMF funding exceeds expectations. Pakistan has been eagerly awaiting the release of the remaining $2.5 billion from a $6.5 billion bailout package agreed upon in 2019, which expired last week. The new deal will disburse an initial amount of $1.1 billion shortly after the IMF board’s meeting, expected to take place in July.

The new stand-by arrangement builds upon the 2019 programme and comes at a critical time as Pakistan continues to grapple with the aftermath of last year’s devastating floods and the subsequent surge in commodity prices following the Ukraine conflict. As a result, foreign exchange reserves reached dangerously low levels, and inflation soared. In this context, the new IMF arrangement will facilitate much-needed financial support from multilateral and bilateral partners in the days ahead.

In a press statement, the IMF emphasized that the new stand-by arrangement will support Pakistan’s immediate efforts to stabilize the economy amidst recent external shocks, preserve macroeconomic stability, and create a framework for financing from various partners. Furthermore, the arrangement will allow for social and development spending.

However, the new deal represents just one piece of the puzzle and should be viewed as a temporary reprieve. In the long run, Pakistan must put its economic affairs in order and undertake essential reforms for sustained improvement. These reforms include implementing greater fiscal discipline, establishing a market-determined exchange rate to absorb external pressures, advancing energy sector reforms, and improving the business climate. The government must also strictly adhere to budget targets to ensure fiscal sustainability and revenue mobilization, enabling increased social and development spending. Equally important are measures to broaden the tax base and enhance tax collection from sectors that are currently undertaxed.

It is crucial for Pakistan to execute the 2023-24 budget as planned, resisting pressures for unplanned spending or tax exemptions in any sector or industry. The IMF also highlighted the State Bank of Pakistan’s commitment to ensuring full market determination of the exchange rate by withdrawing import prioritization guidance.

Experts have rightly pointed out that the desired outcomes of the IMF deal will not be achieved unless the government, with support from the State Bank, swiftly addresses inflation, particularly its impact on vulnerable segments of society, and maintains a foreign exchange framework free of restrictions on international transactions and multiple currency practices.

In this context, the government’s biggest challenge is to secure new financing and successfully roll over upcoming debt repayments. This necessitates rapidly building up foreign exchange reserves through boosting exports and generating additional internal revenue. Apart from improving the viability of the energy sector, urgent efforts are needed to enhance state-owned enterprise governance and strengthen the public investment management framework.

There is a consensus among economic experts that the new IMF deal serves as a short-term solution, and its various provisions must be fully and timely implemented to steer the national economy back on track. Violating the agreed conditionalities, as experienced in the past, will only exacerbate future difficulties.

While the deal provides a short-term cover, Pakistan must remain committed to meeting the reviews under the stand-by arrangement to access additional financing from bilateral and other multilateral sources. However, substantial work lies ahead for the new government, which will need to negotiate another long-term external fund facility (EFF) programme with the IMF following the elections, given the protracted nature of Pakistan’s balance of payments and external debt repayment challenges. It cannot be emphasized enough that without fundamental reforms, including curbing non-development expenditure, particularly extravagant perks and privileges, Pakistan will remain dependent on multilateral lenders, and its people will continue to endure poverty and hardship.