Pakistan, currently grappling with a severe economic crisis, has reached a staff-level agreement with the International Monetary Fund (IMF) for a much-needed $3 billion (£2.4 billion) funding package. The deal, however, awaits approval from the IMF’s board, following an eight-month delay.
The South Asian nation is facing its most severe economic challenges since gaining independence from Britain in 1947. In an effort to secure the agreement, Pakistan’s central bank raised its main interest rate to an all-time high of 22% on Monday. The country’s economy, already struggling due to years of financial mismanagement, has been further battered by a global energy crisis and the devastating floods that struck the nation last year.
Nathan Porter, the IMF’s mission chief for Pakistan, acknowledged the impact of these external shocks, stating, “The economy has faced several external shocks such as the catastrophic floods in 2022 that impacted the lives of millions of Pakistanis and an international commodity price spike in the wake of Russia’s war in Ukraine. As a result of these shocks, as well as some policy missteps, economic growth has stalled.”
Typically, once agreements are reached at the staff level, they are granted by the IMF’s Executive Board. The board is expected to consider Pakistan’s agreement in the coming weeks. Michael Kugelman from the US-based Wilson Center think tank noted, “This deal gives Pakistan the economic breathing room that it so badly needs. The question is if it can use this IMF deal as an opportunity to pivot from immediate relief to a long-term recovery.”
However, Katrina Ell, a senior economist at Moody’s Analytics, cautioned that high inflation, limited foreign reserves, and a lack of macroeconomic stability will require sustained fiscal discipline and time to overcome. Pakistan’s annual inflation rate reached a record high of nearly 38% in May.
The $3 billion funding, to be disbursed over a period of nine months, is higher than initially expected. Pakistan was awaiting the release of the remaining $2.5 billion from a $6.5 billion bailout package agreed upon in 2019, which expired on Friday. With a population exceeding 230 million, the country has been struggling for years to stabilize its economy. This year, its foreign exchange reserves dropped to a level covering less than three weeks of imports.
Financial markets have been further rattled by deadly clashes between supporters of former Prime Minister Imran Khan and the police. Khan’s arrest on corruption charges in May, later deemed illegal by the country’s Supreme Court, added to the volatility. Over the past year, the Pakistan rupee has depreciated by approximately 40% against the US dollar.
In a separate development, international donors have pledged over $9 billion to assist Pakistan in recovering from the devastating floods of 2022. However, estimates indicate that the country requires over $16 billion to fully recover from the disaster.
