Friendly countries' help set to see boost after IMF bailout nod

ISLAMABAD/ WASHINGTON: The International Monetary Fund’s (IMF) Executive Board on Wednesday approved a $7 billion Extended Fund Facility (EFF) for Pakistan, with the first tranche of $1.1 billion likely to be released by September 30, 2024.

The interest rate on the loan is less than five percent, sources in the Ministry of Finance said adding, the IMF was expected to disburse the second instalment during this fiscal year.

Confirming the development, State Bank of Pakistan (SBP) Governor Jameel Ahmed said that Islamabad would receive the first tranche of $1.10 billion, adding the country has fulfilled all the demands of the global lender.

In July this year, Pakistan and the IMF reached an agreement on the 37-month loan programme, which Prime Minister Shehbaz Sharif hopes will be the country’s last.

The approval finally came following the confirmation of $12 billion in bilateral loans from Saudi Arabia, China and the UAE and the external financing of $2 billion.

According to insiders, Pakistan owes $5 billion to Saudi Arabia in the form of cash deposits. It must be noted that Pakistan also holds $4 billion in deposits from China and $3 billion from the UAE. Pakistan was required to secure external financing of $2 billion from bilateral and commercial lenders as a pre-requisite for the IMF board’s approval.

Later, the global lender identified an external financing gap of $2 to $2.5 billion and confirmation was secured from the kingdom in the shape of a Saudi oil facility as well as an ITFC facility of $400 million from IsDB and remaining from Standard Chartered Bank and other Middle East-based commercial banks, as per The News report.

Prime Minister Shehbaz Sharif has voiced his satisfaction over the development, reaffirming that the implementation of economic reforms was underway expeditiously. He told the media in New York that Pakistan had accepted all the IMF conditions — some of them quite tough.

He said that some of the conditions of the IMF were related to China, adding that Beijing again held hands and cooperated like in the past. The premier said his government had accepted the economic challenge to the country and now, with collective efforts of the government and all institutions, it has overcome those challenges.

In a statement issued from New York, the premier thanked the friendly countries, particularly Saudi Arabia, China and the United Arab Emirates (UAE) for extending support on the bailout package. He also thanked IMF Managing Director Kristalina Georgieva and her entire team.

PM Shehbaz said process for implementation of economic reforms is vigorously underway. “We will continue hard work with the same spirit for achieving target of economic development after economic stability.” He said a surge in business activities and investment in Pakistan was a testimony of the hard work of economic team.

Meanwhile, the Asian Development Bank (ADB) has maintained its forecast for Pakistan’s gross domestic product (GDP) growth at 2.8 percent and inflation at 15 percent for fiscal year 2025.

In its latest “Asian Development Outlook (ADO)” report, growth is likely to accelerate in fiscal year 2025 on the implementation of a comprehensive economic reform programme agreed with the IMF. “Pakistan’s economic prospects are closely tied to the steadfast and consistent implementation of policy reforms to stabilise the economy and rebuild fiscal and external buffers,” said ADB Country Director for Pakistan Yong Ye. “It is imperative that Pakistan continues to consolidate public finances, expand social spending and protection, reduce fiscal risks from state-owned enterprises, and improve the business environment to encourage growth led by the private sector.”

Pakistan’s economic outlook remains clouded by significant downside risks. The ADB cautioned that the country’s sizable external financing needs make it vulnerable to any shortfall in external inflows. Delays in disbursements from international partners could put pressure on the exchange rate and exacerbate sovereign debt vulnerabilities.

Pakistan’s vulnerability to climate-induced natural disasters, such as the devastating floods of 2022, further complicates its economic trajectory. Externally, the country also faces risks from geopolitical developments, including higher global food and oil prices and tighter financial conditions. On the upside, improved global financial conditions and lower commodity prices could reduce fiscal vulnerabilities and allow for faster accumulation of external reserves.

Pakistan’s inflation rate slowed to 23.4 percent in FY2024, largely due to lower food inflation stemming from improved agricultural production. The ADB projects inflation to moderate to 15 percent in FY2025, driven by tighter monetary policies and more stable global commodity prices. Inflation had already decreased substantially from 28 percent at the beginning of 2024 to 11 percent in July.

The State Bank of Pakistan has committed to maintaining a tight monetary stance, targeting medium-term inflation between five to seven percent. However, inflation is expected to rise temporarily due to fiscal measures in the FY2025 budget, such as higher sales taxes and adjustments to energy tariffs aimed at cost recovery.

The current account deficit is expected to remain moderate, increasing to one percent of GDP in FY2025. This rise will be driven by a widening trade deficit as imports grow more rapidly than exports, due to a recovery in domestic activity and better availability of imported inputs. Nevertheless, higher remittances and improved prospects for multilateral financing are expected to bolster reserves, increasing import cover to 2.1 months by the end of FY2025.

The government aims to achieve a primary surplus over the medium term to reduce public debt to sustainable levels. The ADB noted that the IMF’s EFF programme targets a primary surplus of one percent of GDP in FY2025, with the goal of bringing the debt-to-GDP ratio down over time. However, interest payments are projected to remain elevated at 7.9 percent of GDP in FY2025, comprising 57 percent of federal current expenditures.

To mitigate these pressures, the government plans a robust revenue mobilisation effort, targeting tax measures equal to three percent of GDP over the EFF period. The FY2025 budget has already implemented tax measures equal to 1.5 percent of GDP, raising the projected tax revenue to 11.2 percent of GDP by the end of the fiscal year.

Public debt remains a significant challenge. Interest payments surged to 7.7 percent of GDP in FY2024, eating up 81 percent of tax revenue. This increase was driven by high debt levels, elevated interest rates and currency depreciation. In response, the government has cut development and current spending, although high interest payments continue to weigh on fiscal space.

The ADB expects private investment to rebound in FY2025, supported by improved macroeconomic conditions and easier access to foreign exchange. This recovery will benefit the manufacturing and services sectors. However, higher personal income taxes and efforts to limit public spending could constrain private and public consumption.

The report highlighted that Pakistan’s economic prospects hinge on the steadfast implementation of reforms. It emphasized the importance of consolidating public finances, reducing fiscal risks from state-owned enterprises (SOEs) and improving the business environment to foster private sector-led growth.

The FY2025 economic adjustment programme is expected to support growth by creating a more stable macroeconomic environment. However, agricultural growth may go slow due to higher gas prices and reduced fertiliser subsidies, adding further complexities to Pakistan’s economic challenges.

The bank noted that Pakistan’s economy expanded by 2.4 percent in fiscal year 2024, buoyed by increased consumption following the government’s economic stabilisation and reform measures. Looking ahead, the bank projects a modest improvement in GDP growth to 2.8 percent in FY2025, underpinned by a revival in private investment.

Pakistan’s economic recovery in FY2024 was fueled by higher domestic consumption, supported by increased agricultural income and robust remittances from overseas workers. The economy’s outlook is closely tied to the continuation and efficacy of ongoing economic reforms.

IMF EFF’s arrangement is expected to stabilise the economy by consolidating public finances, enhancing social protection, rebuilding foreign exchange reserves and reducing fiscal risks posed by SOEs.

The ADB highlighted that the new government has pledged to pursue necessary stabilisation and structural reforms. However, elevated political tensions and the risk of social unrest, triggered by declining real incomes, pose significant challenges to the reform agenda.

It stated that economic activity was boosted by fiscal discipline, a market-determined exchange rate, energy sector efficiency, climate resilience, and an improved business environment.