Pakistan is at a "challenging economic juncture," the IMF has warned, as the country's economy has been buffeted by adverse external conditions, due to spillovers from the war in Ukraine, and domestic challenges that have resulted in uneven and unbalanced growth.
The Executive Board of the International Monetary Fund (IMF) on Monday completed the combined 7th and 8th reviews of a loan facility for Pakistan, allowing immediate disbursement of USD 1.17 billion to the cash-strapped country.
While approving the much-needed bailout plan, after months of hectic efforts, including an unusual intervention by Pakistan Army chief Gen. Qamar Javed Bajwa, the Washington-based lender said, "Pakistan is at a challenging economic juncture."
"A difficult external environment combined with procyclical domestic policies fuelled domestic demand to unsustainable levels. The resultant economic overheating led to large fiscal and external deficits in FY22, contributed to rising inflation, and eroded reserve buffers," the IMF said in a statement.
The programme seeks to address domestic and external imbalances, and ensure fiscal discipline and debt sustainability, while protecting social spending, safeguarding monetary and financial stability, and maintaining a market-determined exchange rate and rebuilding external buffers, it said.
The IMF has also approved to increase the loan size to around USD 7 billion and extend it till June 2023.
"Pakistan's economy has been buffeted by adverse external conditions, due to spillovers from the war in Ukraine, and domestic challenges," Antoinette Sayeh, IMF deputy managing director and acting chair said in a statement on Monday.
Sayeh said Pakistan needs "steadfast implementation of corrective policies and reforms remain essential to regain macroeconomic stability, address imbalances and lay the foundation for inclusive and sustainable growth."
Pakistan and the IMF had signed the USD 6 billion deal in July 2019 but the programme was derailed in January 2020 and restored briefly in March last year before again going off the track in June.
The present government led by Prime Minister Sharif which assumed power in April this year after toppling Imran Khan's government began an effort to revive the programme.
The IMF's formal approval follows the completion of the USD 4 billion in bilateral financing from four friendly nations, including China and Saudi Arabia, and would pave the way for immediate disbursement of the loan.
In her statement, Sayeh said the Pakistani authorities' plan to achieve a small primary surplus in FY2023 is a welcome step to reduce fiscal and external pressures and build confidence.
Containing current spending and mobilising tax revenues are critical to create space for much-needed social protection and strengthen public debt sustainability, she said.
Efforts to strengthen the viability of the energy sector and reduce unsustainable losses, including by adhering to the scheduled increases in fuel levies and energy tariffs, are also essential.
Further efforts to reduce poverty and protect the most vulnerable by enhancing targeted transfers are important, especially in the current high-inflation environment, she said.
The tightening of monetary conditions through higher policy rates was a necessary step to contain inflation. Going forward, continued tight monetary policy would help to reduce inflation and help address external imbalances," the IMF deputy managing director said.
Maintaining proactive and data-driven monetary policy would support these objectives. At the same time, close oversight of the banking system and decisive action to address undercapitalised financial institutions would help to support financial stability.
Preserving a market-determined exchange rate remains crucial to absorb external shocks, maintain competitiveness, and rebuild international reserves, she said.
Accelerating structural reforms to strengthen governance, including of state-owned enterprises, and improve the business environment would support sustainable growth. Reforms that create a fair-and-level playing field for business, investment, and trade necessary for job creation and the development of a strong private sector are essential, Sayeh added in her statement.
Meanwhile, the Pakistani rupee surged against the US dollar on Tuesday during intra-day trade after the IMF's much-awaited bailout programme for the country. The rupee appreciated by 2.42 to 219.50 against the US dollar during intra-day trade in the interbank market, down from Monday's close of 221.92.
The loan approval comes as Pakistan's foreign exchange reserves stood at a paltry USD 13.5 billion, as of August 19 according to the State Bank of Pakistan. Inflation touched 45 per cent for August, according to government data.Earlier this month, New York-based rating agency S&P Global revised Pakistan's long-term ratings from 'stable' to 'negative' given the spiralling inflation and tighter global financial conditions.