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Pakistan has agreed a $3 billion short-term financing deal with the IMF after months of tense negotiations, offering respite to the crisis-hit economy as the government struggles to avoid a possible default.
The IMF announced on Thursday that it had reached a staff-level, or preliminary, agreement with Prime Minister Shehbaz Sharif’s government for nine months of financing under a so-called stand-by arrangement. According to the IMF announcement, the deal must be finalized by the board of the fund, and its approval is expected by mid-July.
Pakistan has been plunged into one of its worst economic crises, with analysts warning that it is at risk of defaulting on its debt without IMF help. Foreign reserves fell to $3.5 billion, enough for less than a month’s worth of imports, while inflation rose to 38 percent.
While Pakistan already had a bailout agreement with the IMF in 2019, the multilateral lender has refused to release funds since last year, as it clashed with Islamabad over economic policy. The deal was set to expire on Friday, with about a third of the $6.5 billion in funding still unpaid.
The breakthrough comes after Pakistan unveiled a series of tax hikes in the budget this month for the fiscal year starting in July. It also reduced energy subsidies and removed many currency and import restrictions.
Pakistani markets were closed on Friday, but some analysts welcomed news of the deal. “This new program is much better than we expected. There was a lot of uncertainty about what would happen after June,” said Mohammad Sohail, chief executive of Karachi-based brokerage Topline Securities. “Now this $3 billion and nine months of funding will certainly help restore investor confidence.”
The IMF urged Pakistan to adopt measures to broaden the tax base, liberalize the economy and free up resources for development spending.
But Sharif’s government has long resisted such moves, arguing that they would prove too harsh and politically intolerable given the fragile economic conditions. National elections are due in October and Sharif is expected to face a tough race against opposition leader and former prime minister Imran Khan.
But economists have warned that the IMF deal will not solve Pakistan’s systemic economic problems. Activity slowed sharply, leading to blackouts, shortages of vital imports, and increased poverty.
The government faces about $25 billion in debt repayments in the fiscal year starting in July, which analysts say would be difficult to meet without additional financial support from creditors such as China and Saudi Arabia and another IMF program.
Last month, Islamabad asked Beijing to exceed repayments on $2.3 billion worth of commercial and government loans by providing new funds.
Some critics have argued that the economy needs much deeper reforms than those proposed. Pakistan, which has had 23 IMF programs in its history, including Friday’s plan, has long been trapped in growth-limiting boom cycles.
“Over the past three decades, IMF support has failed to achieve tangible reforms,” said Abid Hasan, a former World Bank adviser in Islamabad. “The IMF programs were more like a band-aid.”