Islamabad: In a relief for cash-strapped Pakistan, the International Monetary Fund (IMF) has approved a $7 billion loan as the country faces heavy economic losses. Pakistan will face the first $1 billion immediately while the rest of the loan will be paid out over the next three years to ease its financial crunch.
The IMF board met on Wednesday in Washington to give a nod to the staff-level agreement with Pakistan after Islamabad promised to overhaul its agriculture income tax, transfer some fiscal responsibilities to provinces, and agree to limit subsidies. The Prime Minister’s Office confirmed the Executive Board of the IMF approved the 37-month Extended Fund Facility (EFF) totalling $7 billion.
Pakistan's Prime Minister Shehbaz Sharif welcomed the decision and thanked the head of the IMF, Kristalina Georgieva, and her team. "We also agreed on the urgent need to mobilise financing for Climate Resilience. I am confident that, with the assistance and support of IMF and other friendly countries, Pakistan’s economy is now back on the road to recovery," he said. Pakistan will pay around a 5 per cent interest rate on the IMF loan as per media reports.
Notably, Pakistan has become the fifth-largest debtor of the IMF and has taken more than 20 loans since 1958. Shehbaz Sharif on Wednesday reiterated this would be Pakistan’s last IMF programme; a statement he made after the approval of the 24th programme in 2023 as well.
What does the package entail?
IMF's Extended Fund Facility is aimed at providing financial assistance to countries facing serious medium-term balance of payments problems because of structural weaknesses that require time to address. It is typically approved for periods of 3 years but may be approved for periods as long as 4 years to implement deep and sustained structural reforms.
The new bailout package targets achieving macroeconomic stability by consolidating public finances, rebuilding the foreign exchange reserves, reducing fiscal risks from state-owned enterprises, and improving the business environment to encourage growth led by the private sector, according to the Express Tribune. The government has adopted some unpopular measures as part of the loan, such as raising agricultural income tax from 12-15 per cent to 45 per cent next year.
The federal government will not be entitled to have any new economic zones and will end the tax incentives of the existing zones by 2035. All four provincial governments will align their agriculture income tax rates to the federal personal and corporate income tax rates by amending their laws by October 30. All the provincial governments will refrain from giving further subsidies on electricity and gas.
What did Pakistan do to receive the IMF loan?
Notably, Pakistan has also borrowed from countries like China, Saudi Arabia and the United Arab Emirates to secure the package. It also took the most expensive loan in Pakistan's history -- USD 600 million -- to win a board meeting date from the IMF. The power sector fiscal viability, privatisation of loss-making entities and enhancing tax revenues are part of the core conditions of the IMF programme.
Pakistan imposed a record Rs 1.8 trillion in new taxes and hiked electricity rates by up to 51 per cent to secure the package. Last month, China, Saudi Arabia and the UAE agreed to roll over Pakistan's $12 billion debt for one year.
Pakistan is still experiencing high inflation and staggering public debts. Pakistan’s inflation rate peaked at 38 per cent in May 2023, while the Pakistani rupee (PKR) fell about 20 per cent against the US dollar in the same year. Much of the country is facing multi-dimensional poverty, wherein the citizens are not even getting the basic essentials to live properly.
Finance Minister says Pakistan will face 'transitional pain'
Pakistan's Finance Minister Muhammad Aurangzeb warned that the country would face "transitional pain" after the IMF loan. "There will be transitional pain, but if we are to make it the last program, then we have to carry out structural reforms," said Aurangzeb while emphasising the need for carrying out reforms.
The three-year program "will require sound policies and reforms" to support Pakistan's ongoing efforts to strengthen its economy "and create conditions for a stronger, more inclusive, and resilient growth," the IMF said in a statement. Pakistan last year came to the brink of default as the economy shrivelled amid political chaos following catastrophic 2022 monsoon floods and decades of mismanagement, as well as a global economic downturn.
In June last year, the IMF disbursed a $3 billion loan for the country to support the government's efforts to stabilise the ailing economy. Pakistan had been struggling to arrange enough foreign exchange to satisfy the IMF which refused to provide the remaining $2.5 billion out of a $6.5 billion loan programme which was signed in 2019 and expired on June 30 this year.
(with agency input)
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