Pakistan turns the corner as IMF board backs $3bn bailout

ISLAMABAD: The International Monetary Fund (IMF) Executive Board Wednesday approved $3 billion for Pakistan under nine-month Stand-by Arrangement (SBA) as a stopgap programme to avert default.

Soon after Pakistan securing $3 billion additional deposits from Kingdom of Saudi Arabia and United Arab Emirates (UAE), the IMF granted its assent to $3 billion bailout package, out of which $1.2 billion would be disbursed within next few days. The IMF has placed four major conditions including implementation of the budget for 2023-24, tightening of monetary policy, ensuring market-based exchange rate and further progress on structural reforms, particularly with regard to energy sector viability, SOE governance, and climate resilience.

Earlier, Pakistan received additional $1 billion deposits from the UAE as Prime Minister Shehbaz Sharif had visited the country in January last in which the UAE’s ruling highness had committed to providing $1 billion deposit, which now got materialised.

Pakistan had failed to complete the last IMF programme, known as Extended Fund Facility (EFF) and it could only accomplish eighth reviews out of total 11th reviews. Then both sides, the IMF and Pakistan, struck the SBA programme for nine months in order to avert default as Islamabad had to pay back $23 billion as external debt servicing in the current fiscal year.

The IMF Executive Board, which met in the Washington D.C, approved US$3 billion Stand-By Arrangement for Pakistan.

A release issued by IMF on Wednesday said that Pakistan’s economic reform programme aims to support immediate efforts to stabilise the economy and guard against shocks while creating the space for social and development spending to help the people of Pakistan.

Steadfast policy implementation will be critical for Pakistan and the success of the programme. This will require greater fiscal discipline, a market-determined exchange rate to absorb external pressures, and further progress on reforms related to the energy sector, climate resilience, and the business climate.

The Fund’s immediate disbursement will be SDR894 million (or about US$1.2 billion).

The IMF Executive Board approved a 9-month SBA for Pakistan for an amount of SDR2,250 million (about $3 billion, or 111 per cent of quota) to support the authorities’ economic stabilisation programme.

The arrangement comes at a challenging economic juncture for Pakistan. A difficult external environment, devastating floods, and policy missteps have led to large fiscal and external deficits, rising inflation, and eroded reserve buffers in FY23, added the release.

Pakistan’s new SBA-supported programme will provide a policy anchor for addressing domestic and external imbalances and a framework for financial support from multilateral and bilateral partners. The programme will focus on (1) implementation of the FY24 budget to facilitate Pakistan’s needed fiscal adjustment and ensure debt sustainability, while protecting critical social spending; (2) a return to a market-determined exchange rate and proper FX market functioning to absorb external shocks and eliminate FX shortages; (3) an appropriately tight monetary policy aimed at disinflation; and (4) further progress on structural reforms, particularly with regard to energy sector viability, SOE governance, and climate resilience.

The Executive Board’s approval allows for an immediate disbursement of SDR894 million (or about US$1.2 billion). The remaining amount will be phased over the programme’s duration, subject to two quarterly reviews.

Earlier, Pakistan received an additional $1 billion from the UAE, and its foreign exchange reserves jumped up by $3 billion, going up from $4.5 billion to $7.5 billion in just two days. The Kingdom of Saudi Arabia (KSA) and the UAE transferred $3 billion in the form of deposits to the State Bank of Pakistan (SBP) ahead of the IMF’s executive board meeting, taking place in Washington D.C for approving $3 billion Stand-by Arrangement (SBA). The foreign exchange reserves, held by the SBP, would touch $8.6 billion by the next week.

“Now all rumours of default have died naturally as all predictions failed. We have got confirmation today that the UAE have transferred $1 billion deposits in the State Bank of Pakistan. The Federal Reserves Bank, which is clearing house, gave confirmation that $1 billion deposits have reached the State Bank of Pakistan. Thus, it will help improve the foreign exchange reserves of the SBP by $1 billion,” Finance Minister Ishaq Dar announced in his televised address on Wednesday.

He said that Pakistan resumed the path of achieving progress and every coming day would yield much better results on the economic front, he added.

The KSA had deposited $2 billion in the SBP, said the minister and added so the reserves jumped up by $3 billion just in two days. Insha-Allah, the increased figure of SBP reserves will be reflected in the July 14 data, released by the central bank, he added. “I am thankful to the UAE leadership on behalf of PM Shehbaz Sharif, Chief of Army Staff Syed Asim Munir, whole Pakistani nation and myself as they always stood fast behind Pakistan in difficult juncture,” he added.

The UAE, he said, gave practical indication of its friendship with Pakistan through providing $1 billion deposits. He said when the PM had recently visited the UAE on his brief visit, it was reiterated that the Emirates would grant $1 billion in deposit very soon. The same kind of message was conveyed through the COAS so he also received the message from the PM and the COAS about fulfilment of $1 billion deposit, he added.

“Now the commitment has been materialised today as Pakistan received $1 billion in deposit,” he said and added that the foreign exchange reserves would touch the level of $14-$15 billion till end of July 2023.

He said the foreign exchange reserves position would touch $14-$15 billion, exactly the level on which PM Shehbaz Sharif had taken reins of the government in April 2022, adding that the government had paid out billions of dollar loans repayments without delay of a minute.

Separately, PM Shehbaz Sharif Wednesday said the approval of stand-by agreement (SBA) of $3 billion by the IMF Executive Board is a major step forward in the government’s efforts to stabilise the economy and achieve macroeconomic stability

“It bolsters Pakistan’s economic position to overcome immediate-to-medium term economic challenges, giving the next government the fiscal space to chart the way forward,” he said on his twitter account. He said the milestone, which was achieved against the heaviest of odds and against seemingly impossible deadline, could not have been possible without excellent team effort.

“I would commend Finance Minister Ishaq Dar and his team at the Ministry of Finance for their hard work,” he said. He said that his special thanks were also due to Kristalina Georgieva, managing director (MD) of the IMF, and her team for their support and cooperation.

Earlier, the PM said he was grateful to Mohamed Bin Zayed, president of the UAE for the deposit of one billion dollars with the State Bank of Pakistan. He said as a time-tested friend and brotherly country, the UAE always came forward to support Pakistan. “We deeply acknowledge this kind gesture and consider it critical to our efforts to stabilise the economy,” he added.