IMF to disburse $1.1 billion to Pakistan

Pakistan has reached a staff-level agreement with the International Monetary Fund (IMF) for the release of $1.1 billion from a $3 billion bailout package. The funds, which are crucial for the indebted country to avoid a sovereign default, will be disbursed after approval by the IMF’s executive board before the current deal expires on April 11, 2023. The announcement comes after five days of talks between the IMF and the newly elected government of Prime Minister Shehbaz Sharif in Islamabad.

Pakistan’s Economic Challenges:

Pakistan’s $350 billion economy has been under severe strain for the past two years, with the country desperately seeking financial assistance from global lenders and bilateral partners. The nation is burdened by debt obligations, amounting to more than $130 billion in external debt, while its foreign reserves stand at a meager $8 billion, sufficient to cover only eight weeks of imports. Furthermore, despite a gradual decline, inflation remains high at 23 percent, and the currency has lost more than 50 percent of its value against the US dollar in the last two years.

IMF’s Assessment and Recommendations:

The IMF acknowledged that Pakistan’s “economic and financial position has improved” in recent months but cautioned that growth is expected to be modest this year, and inflation remains well above target. The lender emphasized the need for more policy reforms to address “deep-seated economic vulnerabilities.” The IMF called for broadening the tax base and adjusting power and gas tariffs to generate revenue and cut down expenditure.

Government’s Efforts and Future Plans:

Finance Minister Muhammad Aurangzeb recently stated that the government is seeking a “longer, larger” IMF bailout package once the current deal expires. The successful completion of the IMF programme indicates that the government is seriously attempting to implement policy reforms requested by the IMF. However, economist Safiya Aftab warned that a new bailout package could be tough, given the conditions put forward by the lender, and the short-term effects may lead to more inflation and burden on the public.

Privatization of State-Owned Enterprises:

As part of the IMF’s recommendations, the government is looking towards privatizing state-owned enterprises to generate revenue and reduce expenditure. The cabinet has approved setting up a holding company to park the debt and liabilities of Pakistan International Airline (PIA), terming it an important milestone towards its privatization.

Bond Market Reaction:

Following the announcement of the IMF agreement, Pakistan’s sovereign dollar bonds rallied, with several gaining more than 1 percent. All of its sovereign dollar bonds were trading above 75 cents on the dollar after a remarkable rally so far this year, with the 2026 maturity bid at 88.53 cents, 21 cents higher than in January and more than 50 cents above its level a year ago.

Important Facts for Exams:

  • Pakistan has a history of seeking IMF bailouts, with the current agreement being the 23rd since 1958.
  • The IMF has previously criticized Pakistan for its slow progress on structural reforms and its inability to meet revenue collection targets.
  • Pakistan’s economy has been hit hard by the COVID-19 pandemic, with the country experiencing a sharp contraction in GDP growth and a significant increase in poverty levels.

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