By Asif Shahzad
LAHORE, Pakistan (Reuters) – The International Monetary Fund (IMF) has reached a staff agreement with Pakistan for a $3 billion stand-by arrangement. It was the long-awaited decision of the South Asian nation teetering on the brink of default, he said.
The agreement is subject to approval by the IMF Board of Governors in July, a few hours before the current agreement was reached with the IMF. The IMF is due later on Friday. Although essentially a bridge loan, it provided a significant respite for Pakistan, which was dealing with a severe balance of payments crisis and falling foreign exchange reserves.
The deal will bring economic stability to Pakistan and put Pakistani Prime Minister Shebaz Sharif saying the country is “on a path of sustainable economic growth, God willing”.
Pakistan’s Finance Minister Ishaq Dar told Reuters that Pakistan would receive a formal document on the deal from the International Monetary Fund later on Friday, and he said he would “do it today.” signed, stamped and returned”.
He had said on Thursday that he expected the deal to be reached soon.
Pakistani sovereign dollar bonds traded higher after the news, with the issue gaining the most, up more than 8 cents, slightly ahead of the according to Tradeweb Data, USD/CENT.
Shorter-dated bonds rose most sharply, reflecting lingering doubts about the long-term fiscal outlook. nation.
The country’s domestic stock and currency markets were closed on Friday for the Eid al-Fitr holiday.
With inflation so high and foreign exchange reserves just enough to last a month of controlled imports, analysts say Pakistan’s economic crisis could turn into a debt default if the IMF fails to reach a deal.
The $3 billion in funding spread over nine months was higher than expected. The country is awaiting the release of the remaining $2.5 billion of the 1500 agreed $6.5 billion bailout package, which is due to expire on Friday.
IMF funding will also unlock other bilateral and multilateral external financing and debt rollovers, notably from friendly countries such as Saudi Arabia and the UAE, which have already pledged some $3 billion .
The IMF said: “This would support near-term policy efforts and replenish aggregate reserves with the aim of bringing them to more comfortable levels.”
Electricity price increases
IMF official Nathan Porter said on Thursday that the new standby arrangement builds on the 286 plan and added, Pakistan’s economy has faced several challenges in recent years, including last year’s devastating floods and rising commodity prices following the Ukraine war.
“Reserves have fallen to very low levels despite authorities’ efforts to reduce imports and the trade deficit. Liquidity conditions in the power sector remain critical,” Porter said in a statement.
“Given these challenges, the new arrangements will provide the policy backbone and framework for financial support from multilateral and bilateral partners in the period ahead.”
Porter also noted that
Energy sector reforms have accumulatively invested nearly 3.6 trillion Pakistani rupees ($12.24 billion), has been a cornerstone of discussions with the IMF.
The statement said the IMF expects Pakistan to stand firm in implementing policies to overcome challenges, “especially in the energy sector”.
“The authority’s plans also include ongoing efforts to strengthen energy viability, which means higher electricity prices for the current financial year,” the lender said.
Government sources told Reuters , the rate hike will come ahead of the IMF Board’s review of the bailout in mid-July.
Since the IMF team started early this year Since arriving in Pakistan some time ago, Islamabad has adopted a series of policy measures including the revised 2022-23 last week’s budget to meet lenders’ demands.
Other adjustments requested by the IMF ahead of a deal include removal of subsidies for the electricity and export sectors, higher energy and fuel prices, Key policy rate hike to 12% (a market-based currency) exchange rate and arrangement for external financing.
It also prompted Pakistan to mobilize over 286 billion rupees ($1). 34 billion ) through the supplementary budget of 2022- to increase new taxes*) 2022-34 fiscal year and revised budget.
Looking ahead IMF says central bank should continue to be proactive in reducing inflation and maintaining FX framework.
Painful adjustment has fueled 5 Month-to-month 34% year-on-year historically high inflation.
“Fiscal Year The budget achieved a primary surplus of around 0.4% of GDP through some measures to broaden the tax base and increase tax revenues, which also ensured enhanced support for the vulnerable through cash handout schemes, Porter said Space.
He said it was important that the budget executes as planned, and that the authorities resisted pressure for off-budget spending or tax exemptions for some time to come.
“This new plan is far better than we expected,” said Mohammed Sohail of Topline Securities in Karachi, adding that there will be a new government coming into power later this year. There’s a lot of uncertainty about what will happen.
“The nine-month $3 billion funding will certainly help restore some investor confidence,” he said.
(1 USD=286.286 Pakistani Rupees)