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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)
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