The International Monetary Fund (IMF) on Thursday approved the long-awaited $7 billion Extended Fund Facility (EFF) for Pakistan. It subsequently released the first tranche of $1 billion as well.
Announcing the new loan programme, the global financing body said the loan will span 37 months (slightly over three years).
IMF noted that over the past year, when an emergency nine-month long Stand-by Arrangement (SBA) with Pakistan worth $3 billion had successfully concluded, Pakistan managed to achieve modest economic growth at a rate of 2.4%, while inflation had fallen significantly to single digits.
This improvement was largely driven by activities in the agricultural sector and the implementation of adequate fiscal and monetary policies, which helped keep the country's current account deficit under control. This had allowed the foreign exchange reserves to improve again, while the decline in inflation reflects an improvement in the internal and external conditions.
The IMF took note of the State Bank of Pakistan's (SBP) decision to cut its policy rate by 450 basis points since June, contributing to a recovery in foreign exchange reserves, adding that the federal fiscal budget presented in June 2024, outlined a robust economic roadmap.
It appreciated how Pakistan had continued implementing the policies agreed to and devised under the SBA signed during the fiscal year 2023-24. Through this, the IMF said Pakistan had undertaken critical steps to restore economic stability.
"While progress has been made, Pakistan must continue to implement appropriate reforms to avoid falling further behind other developing countries," the IMF warned, adding that Pakistan's weaknesses and problems remain serious.
The global lender, however, warned that Pakistan still faces several major economic challenges, including a difficult business environment, weak governance, excessive state intervention, and a limited tax base, which continue to hamper private investment.
With tax collection a major point of contention between Pakistan and the IMF in recent months since reaching the staff-level agreement in July, the lender pointed to how the country's narrow tax base makes it difficult to meet its fiscal sustainability goals as well as social and development expenditure.
Moreover, it pointed out that the government's current expenditure trajectory is not commensurate with its goals of ameliorating poverty, stressing that allocations and expenditures on health and education were insufficient. Moreover, it lamented that inadequate investment in infrastructure had restricted economic potential.
IMF emphasised that reforming public institutions and improving public service delivery remain among the key objectives of the loan agreement. A focus on infrastructure development, combating the effects of climate change, and securing continued financial support from development partners will also be crucial to the programme's success.
PM welcomes IMF approval
Prime Minister Shehbaz Sharif on Wednesday welcomed the decision of IMF's board to grant Pakistan a package worth $7 billion.
In a statement issued by the PM Office, Shehbaz said that the process for economic reforms was underway and after attaining economic stability, efforts would continue to achieve the goals of economic growth and development.
He said the boom in investment and business activities, which was the result of hard work by the government's economic team, was a welcoming sign.
"Besides notable diplomatic accomplishments, another significant achievement has been the surge in foreign remittances sent by Pakistani expatriates," the prime minister remarked.
He believed this could be the last programme with the IMF if Pakistan continued to progress economically.
PM Shehbaz thanked friendly countries, especially Saudi Arabia, China and the United Arab Emirates for extending their support concerning the IMF package.
Saudi Arabia, UAE, and China provided extra monetary support to Pakistan in the form of either extra cash or by rolling over heavy loans, which helped shore up critical external revenues for Pakistan to secure the IMF loan.