Pakistan gets initial approval on $6bn IMF loan package

Imran Khan's government is tackling a deepening economic crisis with rising inflation and widening deficit

Pakistan gets staff level agreement with IMF for a $6bn loan package. Paulo Vecina / The National

The International Monetary Fund signed a staff-level agreement with Pakistan for a $6 billion (Dh22bn) loan package to help the country’s ailing economy and cut its widening deficit.

The Extended Fund Facility (EFF) is to support inclusive growth by reducing domestic and external imbalances, increase transparency and strengthen social spending, the IMF said after meetings with Pakistani officials.

The Washington lender has suggested a structural reform agenda to supplement the government’s economic policies to boost growth and improve living standards of the people, who have faced sharp rise in the prices of staples and utilities.

Financing support from Pakistan’s international partners, however, will remain critical to government’s adjustment efforts and will ensure that the medium-term programme objectives are achieved, the IMF said.

The EFF agreement is subject to ratification by the IMF management and executive board. It is also contingent on the timely implementation of actions by the government and confirmation of financial commitments by Pakistan's international partners, said Ernesto Rigo, who led IMF's mission to Islamabad from April 29 until May 11.

The South-Asian country, led by cricketer-turned politician Imran Khan who swept to power last year on a pledge to change the social, economic and justice systems, faces deepening economic crisis that is giving rise to social discontent. Pakistan has struggled to replenish is dwindling foreign exchange reserves, which at one point fell to a level that was only sufficient to cover about two months of exports.

The government, which has struggled to raise sufficient revenues to implement its ambitious economic reform agenda, has increased taxes and duties, which resulted in price hikes. Islamabad has replaced its economy minister Asad Omar with Reza Baqir, a former IMF official as the central bank governor.

“Pakistan is facing a challenging economic environment, with lacklustre growth, elevated inflation, high indebtedness and a weak external position. This reflects the legacy of uneven and pro-cyclical economic policies in recent years aiming to boost growth, but at the expense of rising vulnerabilities and lingering structural and institutional weaknesses,” Mr Rigo said.

“The authorities recognise the need to address these challenges, as well as to tackle the large informality in the economy, the low spending in human capital, and poverty.”

The IMF said Pakistan has already initiated a difficult, but necessary, adjustment to stabilise the economy, backed by support from the country's central bank. Decisive policies and reforms, together with significant external financing are necessary to reduce vulnerabilities faster, increase confidence, and put the economy back on a sustainable growth path, with stronger private sector activity and job creation, it added.

“The State Bank of Pakistan will focus on reducing inflation, which disproportionately affects the poor, and safeguarding financial stability,” Mr Rigo said. “A market-determined [currency] exchange rate will help the functioning of the financial sector and contribute to a better resource allocation in the economy.”

Pakistan’s currency has lost more than 30 per cent of its value since late 2017 and the free-float may further push the value down, an issue not favourably seen by the public.

“The forthcoming budget for financial year 2019-20 is a first critical step in the authorities’ fiscal strategy. The budget will aim for a primary deficit of 0.6 per cent of GDP supported by tax policy revenue mobilisation measures to eliminate exemptions, curtail special treatments, and improve tax administration,” Mr Rigo said.

“This will be accompanied by prudent spending growth aimed at preserving essential development spending, scaling up the Benazir Income Support Programme and improve targeted subsidies, with the goal of protecting the most vulnerable segments of society.”