Pakistan clinches crucial $3 billion IMF bailout hours before deadline
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[June 30, 2023]
By Asif Shahzad
LAHORE, Pakistan (Reuters) -The International Monetary Fund (IMF) has
reached a staff-level pact with Pakistan on a $3 billion stand-by
arrangement, the lender said, a decision long awaited by the South Asian
nation which is teetering on the brink of default.
The deal, subject to approval by the IMF board in July, came hours
before the current agreement with the IMF expires later on Friday.
Although essentially a bridge loan, it offers much respite to Pakistan,
which is battling an acute balance of payments crisis and falling
foreign exchange reserves.
The agreement will enable Pakistan to achieve economic stability, and
put the country "on the path of sustainable economic growth, God
willing," Prime Minister Shehbaz Sharif said.
Pakistan will receive formal documents on the deal later on Friday from
the IMF, Finance Minister Ishaq Dar told Reuters, which he said he would
"sign, seal and return by tonight."
He had said on Thursday the deal was expected any time soon.
Pakistan's sovereign dollar bonds were trading higher after the
announcement, with the 2024 issue enjoying the biggest gains, up more
than 8 cents at just above 70 cents in the dollar, according to Tradeweb
data.
The gains were most pronounced in shorter-dated bonds, reflecting
lingering scepticism over the longer-term fiscal outlook for the
country.
The country's domestic stock and currency markets were closed on Friday
due to Eid festival holidays.
With sky-high inflation and foreign exchange reserves barely enough to
cover one month of controlled imports, analysts say Pakistan's economic
crisis could have spiralled into a debt default in the absence of an IMF
deal.
The $3 billion funding, spread over nine months, is higher than
expected. The country was awaiting the release of the remaining $2.5
billion from a $6.5 billion bailout package agreed in 2019, which
expires on Friday.
The IMF funding will also unlock other bilateral and multilateral
external financing and debt rollovers, particularly from friendly
countries like Saudi Arabia and the UAE, which have already pledged
around $3 billion.
"This will support near-term policy efforts and replenish gross
reserves, with the aim of bringing them to more comfortable levels," the
IMF said.
POWER PRICE HIKES
The new stand-by arrangement builds on the 2019 programme, IMF official
Nathan Porter said on Thursday, adding that Pakistan's economy had faced
several challenges in recent times, including devastating floods last
year and commodity price hikes following the war in Ukraine.
"Despite the authorities' efforts to reduce imports and the trade
deficit, reserves have declined to very low levels. Liquidity conditions
in the power sector also remain acute," Porter said in a statement.
"Given these challenges, the new arrangement would provide a policy
anchor and a framework for financial support from multilateral and
bilateral partners in the period ahead."
Porter also pointed out the power sector's buildup of arrears and
frequent power outages.
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People wait their turn to get fuel at a
petrol station, in Karachi, Pakistan June 2, 2022. REUTERS/Akhtar
Soomro/File Photo
Reforms in the energy sector, which has accumulated nearly 3.6
trillion Pakistani rupees ($12.58 billion) in debt, has been a
cornerstone of the discussions with the IMF.
The IMF would want steadfast policy implementation by Pakistan to
overcome challenges, "particularly in the energy sector," the
statement said.
"The authorities' programme also includes ongoing efforts to
strengthen the viability of the energy sector (including through a
timely FY24 annual rebasing)," the lender said, which means a rise
in electricity tariffs in the fiscal year.
Government sources told Reuters that the hike will come ahead of the
IMF board review of the bailout in mid-July.
PAINFUL REFORMS
Islamabad has taken a slew of policy measures since an IMF team
arrived in Pakistan earlier this year, including a revised 2023-24
budget last week to meet the lender's demands.
Other adjustments demanded by the IMF before clinching the deal
included reversing subsidies in power and export sectors, hikes in
energy and fuel prices, jacking up the key policy rate to 22%, a
market-based currency exchange rate and arranging for external
financing.
It also got Pakistan to raise over 385 billion rupee ($1.34 billion)
in new taxation through a supplementary budget for the 2022-23
fiscal year and the revised budget for 2023-24.
Going forward, the IMF said, the central bank should remain
pro-active to reduce inflation and maintain a foreign exchange
framework.
The painful adjustments have already fuelled all time high inflation
of 38% year-on-year in May.
"The FY24 budget advances a primary surplus of around 0.4 percent of
GDP by taking some steps to broaden the tax base and increase tax
collection from under-taxed sectors," Porter said, adding it also
ensured space to strengthen support for the vulnerable through a
cash handout programme.
He said it will be important that the budget is executed as planned,
and authorities resist pressures for unbudgeted spending or tax
exemptions in the period ahead.
"This new programme is far better than our expectations," said
Mohammed Sohail of Topline Securities in Karachi, adding there were
a lot of uncertainties on what would happen after a new government
comes to power later in the year.
"This funding of 3 billion dollars and for 9 months will definitely
help restore some investor confidence," he said.
($1 = 286.1500 Pakistani rupees)
(Reporting by Jahnavi Nidumolu and Asif Shahzad; Additional
Reporting by Gibran Peshimam and Ariba Shahid; Writing by Shivam
Patel and Asif Shahzad; Editing by Clarence Fernandez, Himani Sarkar
and Raju Gopalakrishnan)
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