The International Monetary Fund has released about $1.1 billion to Pakistan as part of its seventh and eighth reviews of the country's bailout programme, helping it avoid a default crisis similar to Sri Lanka's.
The fund also agreed to extend the programme by a year to the end of June 2023 and increase the total amount of funding by about $940 million.
The release of funds will bring the total support extended by the Washington-based lender under the programme to about $6.5bn.
The country's IMF loan programme agreed in 2019 had stalled under the government of former prime minister Imran Khan, which backtracked on subsidy agreements and failed to improve tax collection, but Pakistan and the fund resumed a staff-level agreement last month to resume the funding facility.
Rising prices globally and delayed policy action by Pakistan's government hit the country’s finances, leading to significant exchange rate depreciation, a surge in inflation and an erosion of its foreign currency reserves.
A weakening economy forced the government to raise fuel prices by more than 20 per cent this year and the country is now struggling to recover from floods that have caused at least $10bn of damage and killed about 1,000 people.
Pakistan’s inflation hit a 14-year high in July, exacerbated by a weak currency. Consumer prices surged to 24.93 per cent in July, from a year earlier, after a 21.3 per cent jump in June.
“Pakistan’s economy has been buffeted by adverse external conditions, due to spillovers from the war in Ukraine, and domestic challenges, including from accommodative policies that resulted in uneven and unbalanced growth,” said Antoinette Sayeh, the IMF's deputy managing director and acting chair.
“Steadfast implementation of corrective policies and reforms remain essential to regain macroeconomic stability, address imbalances and lay the foundation for inclusive and sustainable growth.”
The fund said Pakistan's authorities took important measures to address the country's deteriorating fiscal and external positions and spillover effects from the Ukraine war that placed significant pressure on the rupee and foreign reserves.
With inflation this year expected to reach as much as 20 per cent in the country, Pakistan's central bank raised interest rates by 125 basis points to 15 per cent in July.
The tightening of monetary conditions through higher policy rates was a necessary step to contain inflation and continued tight monetary policy will help to reduce inflation and address external imbalances, the fund said.
Ms Sayeh said a plan by Pakistan to achieve a small primary surplus in its 2023 fiscal year would reduce fiscal and external pressures and build confidence.
Pakistan's current account deficit stood at more than $12bn between July 2021 and February 2022, in stark contrast to a $1bn surplus in the same period a year earlier.
Measures to contain current spending and mobilise tax revenue are critical to create space for much-needed social protection, as well as strengthen public debt sustainability, Ms Sayeh said.
Efforts by the government to strengthen the energy sector and reduce unsustainable losses — including a move to adhere to scheduled increases in fuel levies and energy tariffs — are “essential”, she said.
The government will need to hasten the pace of structural reforms, strengthen governance and improve the performance of state-owned enterprises.
“Reforms that create a fair and level playing field for business, investment and trade necessary for job creation and the development of a strong private sector are essential,” Ms Sayeh said.
Further efforts to reduce poverty and protect the most vulnerable by enhancing focused transfers are important, especially in the current high-inflation environment.
Spending on development will need to be protected while fiscal space needs to be created for expanding social support schemes, the fund said.
Pakistan's economy is projected to expand by about 3.5 per cent this year, according to the latest IMF projections. The economy grew 5.6 per cent in 2021.