IMF-Pakistan reach $3 billion bailout: How will this help nation?

Pakistan and the IMF have reached a $3 billion bailout deal. The agreement, subject to approval by the IMF board in July, comes after an eight-month delay and offers some respite to Pakistan, which is battling an acute balance of payments crisis and falling foreign exchange reserves. IMF official Nathan Porter said, “I am pleased to announce that the IMF team has reached a staff-level agreement with the Pakistani authorities on a nine-month standby arrangement in the amount of around $3 billion.” Let’s take a closer look at how the deal will help Pakistan: Politicians praise deal The $3 billion funding, spread over nine months, is higher than expected for Pakistan. The country was awaiting the release of the remaining $2.5 billion from a $6.5 billion bailout package agreed in 2019, which expired 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.

“Praise be to God,” finance minister Ishaq Dar tweeted after the deal was announced early on Friday.

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 new stand-by arrangement builds on the 2019 programme, IMF official Nathan Porter said in a statement 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.” 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 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. What do experts say? That Pakistan finally has some space to manoeuvre. “This deal gives Pakistan the economic breathing room that it so badly needs,” Michael Kugelman of the US-based Wilson Center think tank told the BBC. “The question is if it can use this IMF deal as an opportunity to pivot from immediate relief to a long-term recovery,” he added. But Katrina Ell, a senior economist at Moody’s Analytics, added: “High inflation coupled with limited foreign reserves and lacking macroeconomic stability take time and sustained fiscal discipline to overcome.” [caption id=“attachment_12536902” align=“alignnone” width=“640”] Represenational image.[/caption] Bloomberg quoted Brendan McKenna, strategist at Wells Fargo & Co. in New York, as saying, “IMF support lifts the immediate risk of default and provides much-needed liquidity to support an aggressive reform agenda.” “I would expect Pakistan debt to rally in the short term and potentially have long-term value if the government demonstrates commitment to the IMF’s program targets,” she added. Bank of Punjab Chief Executive Officer (CEO) Zafar Masud told Reuters: “It’s important to see how much of the 3bn is being disbursed upfront and what conditionalities are attached to the remaining tranches. “Our target shall be that the next IMF programme should be the last one and it would be a great opportunity to correct our fiscal account once and for all.” Arif Habib Ltd CEO Shahid Habib termed the development as a “major positive” and said it will “reduce risks and uncertainties and serve as a source of comfort to investors and lenders”. “It will also allow access to funding from other multilateral and bilateral partners which is essential given Pakistan has about $9bn of debt repayments including $4bn of sovereign rollovers until December,” he added. Overseas Investors Chamber of Commerce and Industries Chief Executive and General Secretary Abdul Aleem said, “We see it as a significant supportive move which was long awaited to remove the perpetual uncertainty in the economic landscape of the country. “While the State Bank had managed the delicate situation remarkably well but certainly the hard measures dented the confidence of investors and reputation of the country as a destination for new foreign direct investment.” Topline Securities CEO Mohammed Sohail told commented, “This new programme is far better than our expectations. There were a lot of uncertainties on what will happen after June 2023 as there will be a new government coming to power.” Noting that the funding will “definitely help restore some investor confidence”, he said, “The newly elected government, likely by Nov/Dec, will have some time to evaluate the economic situation and decide on the way forward (bigger IMF loan with or without debt restructuring/reprofiling).” Sakib Sherani, Macro Economic Insights founder and chief executive, told Reuters, “It’s clear the EFF has ended unsuccessfully. The SBA gives a temporary lifeline to this government and the new one post-elections.

“The successor government will have to negotiate a fresh, longer-term arrangement with the Fund.”

Gareth Leather, a senior Asia economist at Capital Economics in London, told Reuters: “The agreement of a loan deal between Pakistan and the IMF should put the economy back on a more secure footing and limit the biggest downside risks. “However, past experience suggests that the government will struggle to stick to the tough spending promises it has agreed to. There is a strong risk that Pakistan reneges on the deal once the immediate crisis has passed.” He termed the upcoming general elections as “one obvious trigger”, cautioning that even if Shehbaz is “committed to a deal, he could be out of office by the end of the year and replaced by someone less committed to the agreement”. But some argue more is needed. As former World Bank advisor Abid Hasan pointed out to Financial Times, “Over the last three decades, IMF assistance has not been able to bring about tangible reforms.” “IMF programmes have just been more of a band-aid.” With inputs from agencies Read all the  Latest News,  Trending News,  Cricket News,  Bollywood News, India News and  Entertainment News here. Follow us on  Facebook,  Twitter and  Instagram.