Pakistan’s economy could get temporary relief for its ballooning foreign debt as the IMF and Islamabad forge a new stand-by arrangement worth $3 billion. The move, which will require approval by the IMF board in July, follows a months-long delay and comes amid fears of a debt default as the government struggles to keep inflation under control.
The agreement, which is to last for nine months, will be the first tranche under a revamped program that the Fund launched in 2019. The new pact replaces an earlier one set to expire on Friday. It aims to prevent the South Asian country from sliding into an international financial crisis, with inflation backbreakingly high and foreign reserves barely sufficient for a month of controlled imports.
It is expected to bring the country up to its previous target of 7.4 percent GDP growth this year and reduce the current account deficit to below 3 percent in 2023-24. To achieve those goals, the IMF will push Pakistan to boost its pitifully low tax base, end tax exemptions for the export sector, and hike artificially low petrol, electricity, and gas prices designed to help low-income families. Rejecting those conditions would have political consequences, but so too might agreeing to them and risking a catastrophic collapse in Pakistan’s finances.
A successful deal with the IMF would help Pakistan unlock new financing commitments from its West Asian and Chinese partners. It has already received a $3.3 billion package from Saudi Arabia and a similar amount from China. But it remains difficult for Pakistan to access the sovereign bond market because of a credit downgrade. A new IMF deal would allow the country to seek both existing rollovers and new loans needed to avoid a full-blown financial meltdown.
The IMF will likely focus on Pakistan’s weak economic fundamentals, including a widening trade deficit, an inefficient banking system, and volatile commodity prices. It will also want the country to pursue structural reforms such as greater fiscal discipline, a market-determined exchange rate, and measures to promote climate resilience and improve the business environment. The Fund will also encourage Pakistan to prioritize debt restructuring and work on strengthening governance. That might include curbing the use of offshore tax havens.
