The International Monetary Fund (IMF) agreed to revive a $6 billion bailout package for Pakistan after more than a month of discussions, providing a major relief to its struggling economy, though the government will need to push through with key reforms.
Pakistan and the IMF have reached a staff-level agreement for the loan review, the IMF said. The agreement involves the implementation of prior actions, notably on fiscal and institutional reforms, before final approval is given by the IMF’s executive board.
The agreement comes as the South Asian economy grapples with stubborn inflation, due in part to pent-up demand, high global commodity prices and rising imports. Pakistan’s central bank raised its key interest rate by more than expected last week.
Pakistan’s rupee rose by 1.2 per cent to 173.16 a dollar at 11.39am local time. Its dollar bonds also advanced with yield on bond due in 2031 falling 33 basis points, the most since it was issued in April.
“After an agonisingly long delay, Pakistan is finally back on track with its IMF programme,” said Nicholas Yap, an analyst at Nomura International (HK) who is overweight on Pakistan’s dollar bonds. “This should help to ease fundamental concerns on the country in light of the pressure on its current account and currency,” he added.
Investors fret seeing Pakistan so near, yet so far from IMF deal
Pakistan has been looking to reach an agreement with the IMF for more than a month. It still needs to pass amendments that gives the government less influence over the central bank and raise taxes before the final approval from the IMF.
The international lender will release about $1 billion in a loan installment that will help shore up Pakistan’s foreign exchange reserves and strengthen the rupee, which has weakened more than 14 per cent against the dollar in the past six months. Other global lenders such as the World Bank are also expected to release funds stuck since the IMF suspended the loan more than six months ago.
The resumption of the IMF bailout will help see Pakistan’s borrowing plans go through smoothly, including $3.5 billion in global bonds to meet funding needs. Until recently, the country was seeing the deficit in its current-account - the broadest measure of trade - widening beyond 6 per cent of gross domestic product as imports outpaced exports.
The central bank, as a result, has estimated that the deficit will “modestly exceed” its earlier forecast of 2-3 per cent of gross domestic product.
Pakistan’s economy expanded at a faster clip than anticipated as virus infections receded but risks have also emerged, including inflation, and that has prompted the central bank to impose multiple measures in the past few months to slow domestic demand. The IMF expects economic growth to reach or exceed 4% in current fiscal year, compared to the government estimate of close to 5 per cent.