Pakistan and the International Monetary Fund (IMF) reached a staff-level agreement on a new 37-month Extended Fund Facility (EFF) worth USD 7 billion. This loan package aims to address Pakistan’s ongoing economic challenges and pave the way for sustainable growth.
Pakistan’s economy has been grappling with a multitude of issues in recent months. Rising global energy prices, coupled with a depreciating rupee, have fueled inflation, squeezing household budgets.
The country also faces a significant current account deficit, meaning it imports more goods and services than it exports. This has put pressure on its foreign exchange reserves.
EFF: Agreement between Pakistan and IMF
The IMF loan comes in the form of an Extended Fund Facility (EFF) program. Unlike a traditional loan with a single disbursement and a fixed repayment schedule, an EFF offers a line of credit that Pakistan can access over a longer period – in this case, 37 months. This provides Pakistan with greater flexibility in managing its financial resources.
The funds are typically disbursed in tranches, with each tranche contingent upon successful completion of program reviews conducted by the IMF. These reviews assess Pakistan’s progress on implementing the agreed-upon economic reforms.
If the IMF is satisfied with Pakistan’s performance, it will release the next tranche of the loan. This structure helps ensure that Pakistan remains committed to the reform program and that the funds are used effectively.
Reactions and Potential Impact
The news of the IMF agreement has been met with mixed reactions. Many economists see it as a positive development that will provide much-needed financial support.
“This agreement is a critical step towards stabilizing the economy,” said Dr. Ayesha Siddiqa, a prominent Pakistani economist. “The reforms are necessary, but they will be challenging to implement. The government will need to manage public expectations and ensure that the burden of adjustment is shared fairly.”
However, some critics worry that the IMF’s austerity measures could hurt the poorest and most vulnerable in society.
“The government needs to ensure that these reforms don’t come at the expense of the common people,” said Mr. Zafar Ali, a leader of a labor union. “We need to see concrete measures to protect social spending and ensure that the benefits of growth are widely shared.”
What Has Pakistan Agreed To?
Under the deal, Pakistan has agreed to increase tax revenues through measures of 1 and a half per cent of GDP in FY25 and three per cent of GDP over the programme.
“Revenue collections will be supported by simpler and fairer direct and indirect taxation, including by bringing net income from the retail, export, and agriculture sectors properly into the tax system,” it said.
The statement said the federal and provincial governments agreed to re-balance spending activities, and at the same time, the provinces will take steps to increase their tax-collection efforts, including in sales tax on services and agricultural income tax.
Pakistan and International Monetary Fund reach three-year $7 billion aid package deal, the Washington-based institution says, giving much-needed respite to the South Asian country pic.twitter.com/2ZLFZpsaMz
— TRT World Now (@TRTWorldNow) July 12, 2024
The latest agreement is the country’s latest turn to the global lender for help in propping up its economy and dealing with its debts through big bailouts.
Earlier this year, the IMF approved the immediate release of the final USD 1.1 billion tranche of a USD 3 billion bailout to Pakistan.
Loan: Sustainable Growth
While the IMF loan is a positive step, it is only a temporary solution. Pakistan’s long-term economic health will depend on its ability to achieve sustainable growth. This will require the government to focus on:
Pakistan needs to reduce its reliance on a few key exports and develop new industries. This could involve promoting investment in sectors like technology, tourism, and manufacturing.
Pakistan’s infrastructure is underdeveloped, which hampers business activity. Investing in roads, railways, and energy infrastructure is crucial for promoting growth.
A well-educated and skilled workforce is essential for a modern economy. The government needs to invest in education and training programs to equip young people with the skills they need to succeed in the global marketplace.
The IMF agreement presents an opportunity for Pakistan to embark on a path towards economic stability and long-term growth. The coming months will be crucial as Pakistan navigates the challenges and opportunities presented by this agreement.
