In a much-awaited development, crisis-ridden Pakistan has successfully reached a staff-level agreement with the International Monetary Fund (IMF) for a substantial funding of $3 billion (£2.4 billion).
This breakthrough comes after a prolonged delay of eight months, exacerbating the South Asian nation’s worst economic crisis since gaining independence from Britain in 1947.
To bolster its chances of securing the deal, Pakistan’s central bank took the unprecedented step of raising its key interest rate to a record high of 22% on Monday.
This drastic measure highlights the gravity of the situation, as Pakistan’s economy was already reeling from years of financial mismanagement.
The country’s precarious state has been further exacerbated by a global energy crisis and the catastrophic floods that ravaged the nation last year.
Nathan Porter, the IMF’s mission chief for Pakistan, acknowledged the challenges faced by the country, stating, “The economy has faced several external shocks, such as the catastrophic floods in 2022 that impacted the lives of millions of Pakistanis, and an international commodity price spike in the wake of Russia’s war in Ukraine. As a result of these shocks, as well as some policy missteps, economic growth has stalled.”
While the staff-level agreement is a significant milestone, it still requires the approval of the IMF’s Executive Board, which is expected to review the agreement in the coming weeks.
Michael Kugelman, an expert from the US-based Wilson Center think tank, lauded the deal, stating, “This deal gives Pakistan the economic breathing room that it so badly needs.” However, he also raised the question of whether Pakistan can utilize this opportunity to transition from immediate relief to a long-term recovery.
Moody’s Analytics senior economist Katrina Ell emphasized that overcoming high inflation, limited foreign reserves, and macroeconomic instability will require sustained fiscal discipline and time. Pakistan’s annual inflation rate soared to an alarming record high of nearly 38% in May, further highlighting the urgency of stabilizing the country’s economic situation.
The $3 billion funding, which will be disbursed over a span of nine months, exceeds initial expectations. Pakistan had been awaiting the release of the remaining $2.5 billion from a $6.5 billion bailout package agreed upon in 2019, which expired last Friday. With this additional financial support, Pakistan aims to address its persistent economic challenges and stabilize its foreign exchange reserves, which recently dwindled to a level covering less than three weeks of imports.
In recent times, Pakistan has witnessed unsettling clashes between supporters of former Prime Minister Imran Khan and law enforcement agencies, unsettling financial markets. The arrest of Mr. Khan on corruption charges in May, later deemed illegal by the country’s Supreme Court, added to the political turbulence.
The Pakistan rupee has also experienced a sharp depreciation of approximately 40% against the US dollar over the past year, further exacerbating the economic woes facing the country.
Moreover, in an independent effort to aid Pakistan’s recovery from the devastating floods in 2022, donors from across the globe have pledged over $9 billion, though estimates suggest that more than $16 billion is needed to fully recuperate from the calamity.
In light of these recent developments, Pakistan remains poised to navigate its economic challenges with the hope that this IMF deal will provide a much-needed lifeline.
The nation’s ability to implement sustainable measures and embark on a path of long-term recovery will be crucial in reshaping its economic landscape.