Cash-strapped Pakistan and the International Monetary Fund reached a three-year, $7 billion aid package deal, the Washington-based institution said on Friday, giving much-needed respite to the South Asian nation.
The new programme, which needs to be validated by the Fund's Executive Board, should enable Pakistan to "cement macroeconomic stability and create conditions for stronger, more inclusive and resilient growth," according to a statement.
Faced with chronic mismanagement, Pakistan's economy has found itself on the brink, challenged by the Covid-19 pandemic, the effects of the war in Ukraine and supply difficulties that fuelled inflation, as well as record flooding that affected a third of the country in 2022.
With its foreign currency reserves dwindling, Pakistan found itself in a debt crisis and was forced to turn to the IMF, obtaining its first emergency loan in the summer of 2023.
The latest bailout, coming to Pakistan in the form of loans, follows a commitment by the government to implement reforms, including a major effort to broaden the country's tax base.
In a nation of over 240 million people and where most jobs are in the informal sector, only 5.2 million filed income tax returns in 2022.
During the 2024-25 fiscal year which starts July 1, the Pakistan government aims to raise nearly $46 billion in taxes, a 40 percent increase from the previous year.
As part of the push, Pakistan's tax authority earlier this month blocked 210,000 SIM cards of users who have not filed tax returns in a bid to widen the revenue bracket.
The South Asian nation initiated discussions with IMF for the new multi-billion dollar loan agreement -- its 24th bailout in more than six decades -- to support its economic reform program.
While around 40 percent of the population already lives below the poverty line, the World Bank said in April it feared that 10 million additional Pakistanis would fall below this threshold.
Islamabad also aims to reduce its fiscal deficit by 1.5 percent to 5.9 percent in the coming year, heeding another key IMF demand.
The last loan -- a nine-month $3 billion IMF deal -- proved a lifeline.
But it came on condition of unpopular austerity measures, including an end to subsidies cushioning consumer costs.
In recent months, the current account balance has recovered slightly, high inflation is just starting to come down, but Pakistan's foreign debt remains very high at $242 billion.
Servicing it will still swallow up half of the government's income in 2024, according to the IMF.
The Fund also anticipates two percent growth this year, with inflation still expected to reach nearly 25 percent year-on-year, before gradually coming down in 2025 and 2026.
Following is the text of the IMF statement:
In response to a request by the Pakistani authorities, an International Monetary Fund (IMF) team led by Nathan Porter, IMF’s Mission Chief to Pakistan, held discussions during the May 13-23, 2024 staff visit to Islamabad and virtually thereafter on IMF support for the authorities’ medium-term policy and reform plans. At the end of the discussions, Mr. Porter issued the following statement:
“The Pakistani authorities and the IMF team have reached a staff-level agreement on a comprehensive program endorsed by the federal and provincial governments, that could be supported by a 37-month Extended Fund Arrangement (EFF) in the amount equivalent to SDR 5,320 million (or about US$7 billion at current exchange rates). This agreement is subject to approval by the IMF’s Executive Board and the timely confirmation of necessary financing assurances from Pakistan’s development and bilateral partners.
“The program aims to capitalize on the hard-won macroeconomic stability achieved over the past year by furthering efforts to strengthen public finances, reduce inflation, rebuild external buffers and remove economic distortions to spur private sector led growth. Key policy goals of the authorities’ program include:
“Sustainable public finances, through a gradual fiscal consolidation based on reforms to broaden the tax base and remove exemptions, while increasing resources for critical development and social spending. In this regard, the authorities plan to increase tax revenues through measures of 1½ percent of GDP in FY25 and 3 percent of GDP over the program. In particular, the recently approved FY25 budget targets an underlying general government primary surplus of 1 percent of GDP (2 percent in headline terms). 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. At the same time, the FY25 budget provides additional resources to expand social protection by increasing both the generosity and coverage of BISP, education, and health spending.
“A fairer balance of fiscal effort between the Federal and Provincial governments, which have agreed to rebalance spending activities in line with the 18th constitutional amendment through the signature of a National Fiscal Pact that devolves to provincial governments higher spending for education, health, social protection, and regional public infrastructure investment, enabling improved public service provision. At the same time, the provinces will take steps to increase their own tax-collection efforts, including in sales tax on services and agricultural income tax. On the latter, all provinces are committed to fully harmonizing their Agriculture Income Tax regimes through legislative changes with the federal personal and corporate income tax regimes and this will become effective from January 1, 2025.
“Reducing inflation, deepening access to financing, and building strong external buffers are key to development and resilience. Monetary policy will continue to be focused on supporting disinflation, which will help protect real incomes, especially for the most vulnerable. To buffer against shocks and build reserves, the State Bank of Pakistan (SBP) will maintain a flexible exchange rate and continue to improve the functioning of the foreign exchange market and the transparency around FX operations. On financial stability, the authorities plan to take measures to deepen access to financing, while strengthening financial institutions, addressing any undercapitalized banks, and upgrading their crisis management framework.
“Restoring energy sector viability and minimizing fiscal risks through the timely adjustment of energy tariffs, decisive cost-reducing reforms, and refraining from further unnecessary expansion of generation capacity. The authorities remain committed to undertaking targeted subsidy reforms and replace cross-subsidies to households with direct and targeted BISP support.
“Promoting private sector and export dynamism by improving the business environment, creating a level-playing field for all businesses, and removing state distortions. In this regard, the authorities are advancing efforts to improve SOE operations and management as well as privatization (with the highest priority given to the most profitable SOEs) and strengthening transparency and governance around the Pakistan Sovereign Wealth Fund and its operations. They are also phasing out incentives to Special Economic Zones, phasing out agricultural support prices and associated subsidies, and refraining from new regulatory or tax-based incentives, or any guaranteed return that could distort the investment landscape, including for projects channeled through the Special Investment Facilitation Council. The authorities have also committed to advance anti-corruption as well as governance and transparency reforms, and gradually liberalize trade policy.
“The IMF team is grateful to the Pakistani authorities, private sector, and development partners for their hospitality during the visit to Islamabad and fruitful discussions”.
Reporter Waqas Azeem/Agencies