ISLAMABAD: Pakistan’s economy received a crucial boost as the State Bank of Pakistan (SBP) announced the receipt of approximately $1.03 billion (SDR 760 million) on Friday under the International Monetary Fund’s (IMF) $7 billion Extended Fund Facility (EFF) programme. These inflows will be reflected in the central bank’s liquid foreign exchange reserves, with updated figures set to be released on Thursday, October 3, 2024.
The IMF Executive Board approved a 37-month loan agreement on Wednesday. Prime Minister Shehbaz Sharif has expressed hope that this will be Pakistan’s last IMF programme, contingent on the implementation of strict conditions agreed upon in July. The IMF stressed the necessity for “sound policies and reforms” to enhance macroeconomic stability and tackle structural challenges, alongside continued robust financial support from Pakistan’s development and bilateral partners.
Pakistan’s economy has stabilised since it was on the brink of default last summer, largely due to IMF bailouts and loans from allied countries, which are essential to service its substantial debt, consuming half of its annual revenues. Finance Minister Muhammad Aurangzeb acknowledged the “transitional pain” but emphasised the need for structural reforms to ensure this is the final IMF programme.
IMF Pakistan mission chief Nathan Porter highlighted the return to economic stability over the past year. He outlined the challenge of progressing from this renewed stability to stronger, sustained growth that benefits society more broadly and evenly.
Prime Minister Shehbaz Sharif credited the successful deal to the “tremendous support” from Saudi Arabia, China, and the United Arab Emirates. During the final phase of negotiations, China’s support was particularly pivotal. Finance Minister Aurangzeb also revealed that Pakistan is negotiating a $12 billion loan reprofiling from these bilateral lenders, comprising $5 billion from Saudi Arabia, $4 billion from China, and $3 billion from the UAE over a three- to five-year period.
Despite the inflow of funds and financial assurances from key partners, Pakistani economist Kaiser Bengali cautioned that the deal would only address immediate debt obligations without addressing underlying economic issues. He criticised the focus on raising taxes without significant progress on reducing government expenditures.
Pakistan’s debt remains a significant concern, amounting to over $250 billion, or 74% of GDP, at the end of 2023. Around 40% of this debt is owed to external creditors, with China being the largest single foreign creditor at nearly $30 billion. The World Bank follows with over $20 billion in loans.
The IMF has stipulated reforms, including increasing household bills to address the energy sector crisis and improving tax collection. Despite a population of over 240 million, only 5.2 million individuals filed income tax returns in 2022. The IMF acknowledged the steps taken by Pakistan to restore economic stability but warned of the country’s significant vulnerabilities and structural challenges. It pointed to a difficult business environment, weak governance, and an outsized role of the state as obstacles to investment, which remains low compared to peer countries.
The IMF’s support and the accompanying reforms are crucial for Pakistan to navigate its economic challenges and work towards sustainable growth. However, the success of these efforts will depend on the effective implementation of the required structural reforms and continued international support.
