New Delhi: Pakistan Thursday struck a staff-level agreement with the International Monetary Fund (IMF) for a $3 billion funding on a nine-month stand-by arrangement (SBA). The country had earlier been part of a $6.5 billion IMF bailout under the Extended Fund Facility (EFF) struck in 2019, which lapsed June-end this year.
A staff-level agreement is a preliminary agreement, between the IMF staff and the Pakistan government, before it is put for approval by the IMF’s executive board.
Nathan Porter, IMF mission chief to Pakistan, made the announcement in a statement. “The new SBA builds on the authorities’ efforts under Pakistan’s 2019 EFF-supported programme which expires end-June. This agreement is subject to approval by the IMF’s Executive Board, which is expected to consider this request by mid-July,” it stated.
On the crisis facing the Pakistani economy, it added: “…the economy has faced several external shocks such as the catastrophic floods in 2022 that impacted the lives of millions of Pakistanis and an international commodity price spike in the wake of Russia’s war in Ukraine.”
Inflation in Pakistan was at a reported record-high of 38 percent on a year-over-year basis for the month of May, according to the nation’s central bank, State Bank of Pakistan. According to the United Nations Development Programme’s Multidimensional Poverty Index 2022, up to 38 percent of Pakistan is multidimensionally poor.
Pakistan’s economy is also facing the devaluation of the Pakistani rupee, seeing it fall to 285.99 to the US dollar on 27 June, according to data released by the central bank.
The fall of the Pakistani rupee adds further pressure to the economy, given that Pakistan heavily imports crude oil and petroleum products.
Earlier this year, the Pakistani government ordered malls to close early due to the economic crisis and steep fall in its rupee.
Prime Minister of Pakistan Shebhaz Sharif announced the deal with the IMF on Twitter Friday, stating that “this arrangement will help strengthen Pakistan’s foreign exchange reserves, enable Pakistan to achieve economic stability, and put the country on the path of sustainable economic growth”.
Alhamdulillah, I am pleased to announce that Pakistan has reached a Staff-Level Agreement with the IMF on a nine-month US$3 billion Stand-By Arrangement. This Arrangement will help strengthen Pakistan’s foreign exchange reserves, enable Pakistan to achieve economic stability, and…
— Shehbaz Sharif (@CMShehbaz) June 30, 2023
ThePrint looks at Pakistan’s economic crisis and explains what the IMF agreement means.
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The stand-by arrangement
According to the IMF, an SBA “provides short-term financial assistance to countries facing balance of payments problems” and is usually for a period of 12-24 months, but no longer than 36 months. It has been a financial instrument used mostly by advanced and emerging market countries.
A report in the Pakistan newspaper Dawn stated that the country will, under the arrangement, receive $3 billion over nine months, subject to the approval of the final agreement by the IMF executive board.
Ishaq Dar, finance minister of Pakistan, was quoted by the news agency Reuters as saying that the new deal will see the IMF disburse $1.1 billion upfront after its board meeting in July.
The IMF statement explained the reasons behind the agreement, referring to “some policy missteps, including shortages from constraints on the functioning of the FX market” which had led to economic growth stalling in Pakistan.
“Inflation, including for essential items, is very high. Despite the authorities’ efforts to reduce imports and the trade deficit, reserves have declined to very low levels. Liquidity conditions in the power sector also remain acute, with further build-up of arrears (circular debt) and frequent load-shedding,” it noted.
The statement added: “Given these challenges, the new SBA would provide a policy anchor and a framework for financial support from multilateral and bilateral partners in the period ahead.”
The IMF further highlighted a series of important steps taken by the government of Pakistan before the launch of the SBA, including the “approval of the budget for FY24 in line with the goals of supporting fiscal sustainability and mobilising revenue, which will enable greater social and development spending”.
The monetary policy committee of the State Bank of Pakistan last week announced an increase in policy rate by 100 basis points to 22 percent in a reported bid to secure IMF funding. “This would help further anchor inflation expectations,” read a statement by the committee.
In January this year, donors from around the world were reported to have pledged over $9 billion to help Pakistan recover from the floods that hit the country in 2022. The BBC noted that the amount was over half of the estimated $16.3 billion needed to recover from the floods.
Debt situation of Pakistan
According to an April report by the United States Institute of Peace (USIP), Pakistan held an external debt burden of $126.3 billion in December 2022. Nearly 77 percent of this debt is owed by the government of Pakistan to various creditors.
The report said that roughly $45 billion is owed to multilateral institutions, including the World Bank ($18 billion), Asian Development Bank ($15 billion), and the IMF ($7.6 billion). Around $27 billion is owed to China, including $10 billion in bilateral debt, and $6.2 billion provided by the Chinese government to public sector enterprises in Pakistan. China’s State Administration of Foreign Exchange has also put in $4 billion worth of foreign deposits in the State Bank of Pakistan.
Pakistan recently also announced receiving $1 billion from China, as well as discussions for a roll-over of a $1.3 billion loan due to China, along with extension of a $2-billion swap facility.
The USIP report also stated that, from April 2023 to June 2026, Pakistan needed to repay $77.5 billion in external debt, and had to service $4.5 billion in debt primarily to China. Also, Pakistan had to service debt of nearly $25 billion in the next fiscal year and of $24.6 billion in 2024-25.
(Edited by Nida Fatima Siddiqui)
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