Pakistan Secures $3 Billion IMF Standby Arrangement to Avert Default

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Pakistan has successfully reached a staff-level agreement with the International Monetary Fund (IMF) on a $3 billion standby arrangement.

The decision came as a relief for the South Asian nation which has already been struggling with a severe balance of payments crisis and shaky foreign exchange reserves.

The deal is yet to be approved by the IMF board in July.

There is an already eight-month delay that has to provide a crucial lifeline to Pakistan.

The proposed funding is spread over nine months and stands higher than anticipated and builds upon the 2019 bailout package.

The country was awaiting the release of the remaining $2.5bn from a $6.5bn bailout package agreed in 2019, which expired on Friday

The details of this agreement and its potential impact on Pakistan's economy are given as under:

Addressing Pakistan's Economic Problems:

Pakistan is facing a challenging economic environment that is characterized by high inflation as well as declining foreign exchange reserves.

The country was at risk of defaulting on its debt with foreign assistance.

The IMF's standby arrangement offers a lifeline by providing financial support to stabilize the economy.

Recent challenges facing Pakistan's Economy:

Pakistan has endured significant challenges in recent times.

This includes commodity price hikes due to war in Ukraine as well as devastating floods caused by climate change.

These shocks, combined with policy missteps and constraints on the foreign exchange market, have stalled economic growth and fueled high inflation.

The country's efforts to reduce imports and narrow the trade deficit have not been sufficient to maintain healthy reserves. This led to acute liquidity conditions in the power sector.

The IMF Standby Arrangement and Policy Objectives:

The newly agreed upon $3 billion standby arrangement serves as a policy anchor.

This will also provide a framework for financial support from multilateral and bilateral partners.

Building upon the 2019 program, it aims to stabilize Pakistan's economy in the face of recent external challenges.

The funding will stabilize reserves and address liquidity issues in the power sector.

IMF Demands in Pakistan:

The IMF has emphasized the need for reforms in the energy sector, including addressing the accumulated debt.

These reforms are crucial to achieving climate resilience and improving the overall business climate in Pakistan.

• The agreement also requires:
• Fiscal discipline,
• A market-determined exchange rate, and
• Progress on various reforms.

IMF requirements and Fiscal Policy of Pakistan:

In order to meet the IMF's requirements, Pakistan has implemented a series of policy measures.

These include:

• Revisions to the budget,
• Taxation measures,
• Efforts to broaden the tax base, and
• Increase tax collection from undertaxed sectors.

The government has also taken steps to improve spending execution and ensure the budget is executed as planned.

These measures have contributed to an all-time high inflation rate, and they are seen as necessary to stabilize the economy and create a path toward fiscal sustainability.

Therefore, IMF has emphasized the importance of executing the budget as planned and resisting pressures for unbudgeted spending or tax exemptions.

IMF Deal and Future Prospects of Pakistan Economy:

The $3 billion funding secured through the IMF standby arrangement is majorly expected to restore investor confidence in Pakistan.

The agreement aims at providing a significant financial cushion for the country in order to help it to avert a potential debt default.

However, uncertainties remain regarding the post June 2023 scenario, as a new government is expected to come to power in early stage of new fiscal year.

Analysts, therefore highlighted the importance of continued policy implementation and the need for the new government to maintain the momentum of reforms and fiscal discipline.

In conclusion, we can say the IMF's staff-level agreement on a $3 billion standby arrangement is a significant development for Pakistan.

The funding will provide immediate support to stabilize the economy and address the country's pressing financial challenges.

Implementation of the agreed-upon policies and reforms will be crucial in overcoming the difficult economic situation and promoting long-term sustainable growth in Pakistan.

(Courtesy: Dawn, Al-Jazeera)