Why Pakistan badly needed IMF deal?

The International Monetary Fund has reached a staff-level agreement with Pakistan on a bigger-than-expected $3 billion Stand-By Arrangement (SBA), a last-minute rescue package for the country facing an acute balance-of-payments crisis.

Islamabad was racing against time to unlock $1.1 billion under the IMF's ninth review of a $6.5-billion Extended Fund Facility agreed upon in 2019. The programme was due to expire on June 30.

Also Read: Pakistan, IMF reach staff-level pact to release stalled funds

Here are some facts about the importance of unlocking the funds for the cash-strapped South Asian country of 230 million people and the challenges it has faced:

What is Pakistan getting

The nine-month SBA will release nearly $3 billion, or 111 per cent of Pakistan’s IMF quota, the lender said. The agreement is subject to approval by the IMF’s Executive Board, which is expected to consider the request by mid-July, it said.

Such approvals are generally granted once a staff-level deal is done.

The Pakistan government was expecting around $2.5 billion from the IMF, Reuters has reported.

Processes

Pakistan earlier cleared eight of the 11 listed programme reviews, with the ninth review pending since November last year. The delay was already the longest since at least 2008.

The ninth review had been stalled due to differences between the fund and Islamabad over policy actions, including external financing needs and a budget that meets programme goals.

Tough conditions

The initial draft of the 2023-2024 budget presented in parliament earlier this month failed to meet IMF expectations but was hurriedly revised to introduce new taxes and expenditure cuts.

The country's central bank also hiked the key rate by 100 basis points in an emergency meeting on Monday, barely two weeks after keeping the rate unchanged in a scheduled meeting.

Hole in finances

The government has earmarked $2.5 billion in external receipts from the IMF in its federal budget for FY24.

Pakistan needs upwards of $22 billion to service external debt, make interest payments, and finance its current account for FY24. Reserves, at $3.5 billion, are at a critical level, enough to cover barely one month of controlled imports.

Pakistan's credit rating has suffered due to macroeconomic uncertainty: Three key rating agencies recently cut Pakistan's ratings - Standard & Poor's rating for Pakistan stands at CCC+, Moody's at Caa3 and Fitch at CCC-.

Secondary benefits

A successful deal with the IMF could also help unlock credit from other financiers who are looking for a clean bill of health from the IMF for the ailing $350 billion economy. This includes raising money from the private market.

The country has received financing commitments from friendly countries Saudi Arabia and the United Arab Emirates of $3 billion, while China has granted rollovers on its debt payments due.

General elections are due by November and the latest deal could boost the government of Prime Minister Shehbaz Sharif.