In a much-needed boost for cash-strapped Pakistan, the International Monetary Fund (IMF) has approved a $7 billion loan under its Extended Fund Facility (EFF) to help alleviate the country’s financial troubles. With the first $1 billion set to be disbursed immediately, the remaining amount will be distributed over the next three years. This package comes at a critical time as Pakistan grapples with soaring inflation, foreign debt, and widespread poverty.

The IMF Executive Board met in Washington on Wednesday to finalize the agreement, following Pakistan’s pledge to introduce major fiscal and structural reforms.

Pakistan’s Commitments: Structural Reforms and Fiscal Adjustments

The IMF loan comes with several stringent conditions. Pakistan has agreed to overhaul its agricultural income tax, limit subsidies, and transfer some fiscal responsibilities to provincial governments. The tax burden on agriculture will increase from the current 12-15% to 45% by next year, a move that is likely to face pushback.

Additionally, all four provincial governments will align their agriculture income tax with federal tax rates by October 30. They will also end electricity and gas subsidies in an effort to reduce fiscal pressure.

Prime Minister Shehbaz Sharif welcomed the IMF decision, expressing optimism that the package would put Pakistan on the path to economic recovery. In a statement, he said,

"We agreed on the urgent need to mobilise financing for Climate Resilience. With IMF support and assistance from friendly nations, Pakistan’s economy is back on the road to recovery."

Pakistan: The Fifth-Largest IMF Debtor

Pakistan has had a long history of seeking financial assistance from the IMF. This latest loan brings the country’s total IMF programs to 24 since 1958, making it the fifth-largest debtor of the international body. Notably, Sharif reiterated that this would be Pakistan’s last IMF program, a promise he made during the previous $6.5 billion loan program signed in 2019.

Details of the IMF Loan Package

The Extended Fund Facility (EFF) aims to help countries with medium-term balance of payments problems stemming from deep structural weaknesses. Typically approved for three to four years, the package allows time for significant structural reforms. According to the Express Tribune, the IMF bailout for Pakistan focuses on:

Rebuilding foreign exchange reserves.

Reducing fiscal risks associated with state-owned enterprises.

Encouraging private sector-led growth by improving the business environment.

Pakistan’s government, however, has implemented unpopular measures, including hiking electricity rates by up to 51% and imposing a record Rs 1.8 trillion in new taxes, to meet IMF conditions. Furthermore, the government has committed to halting the establishment of new economic zones and eliminating tax incentives for existing zones by 2035.

Borrowing to Secure the IMF Deal

In its efforts to secure the IMF package, Pakistan also relied on loans from friendly nations like China, Saudi Arabia, and the United Arab Emirates. The country even borrowed $600 million, the most expensive loan in its history, to secure a date for the IMF board meeting.

Pakistan’s debt situation remains dire, with $12 billion rolled over by China, Saudi Arabia, and the UAE last month to prevent immediate default. Meanwhile, inflation peaked at 38% in May 2023, and the Pakistani rupee (PKR) has devalued by nearly 20% against the US dollar in the same period.

Finance Minister Warns of 'Transitional Pain'

Pakistan’s Finance Minister Muhammad Aurangzeb cautioned that the nation would experience “transitional pain” as it implements IMF-mandated reforms. Aurangzeb emphasized that lasting economic stability will require difficult adjustments, adding,

“If we want this to be the last IMF program, we must commit to structural reforms."

The IMF echoed this sentiment, stating that the three-year program is aimed at supporting Pakistan’s ongoing efforts to strengthen its economy, create conditions for inclusive growth, and improve resilience to economic shocks.

Challenges Ahead: High Inflation and Debt

Despite the loan approval, Pakistan’s economic challenges are far from over. The country is still reeling from catastrophic floods in 2022 and ongoing political turmoil. In June 2023, Pakistan came dangerously close to default as its foreign exchange reserves dwindled. The IMF's $3 billion disbursement last year provided temporary relief, but the expiration of the previous loan program on June 30, 2023 left Pakistan scrambling for fresh funds.

Conclusion: Can This Be Pakistan's Last IMF Loan?

While the IMF’s $7 billion loan will provide short-term relief, Pakistan’s path to economic stability hinges on its ability to implement difficult structural reforms. The nation’s reliance on external borrowing, along with high inflation and staggering public debts, raises questions about its ability to achieve long-term financial sustainability. However, with support from the IMF and friendly nations, there remains hope that Pakistan’s economy can return to a path of growth and resilience.

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