Pakistan said on Thursday it would have to go through “transitional pain” after the International Monetary Fund agreed to a new $7 billion aid package to shore up its faltering economy.
Although the South Asian nation’s economy has stabilized since it came close to bankruptcy last summer, it depends on IMF bailouts and loans from friendly countries to service its massive debt, which swallows up half of its annual his income.
“There will be transitional pain, but if we want to make it the last programme, then we have to carry out structural reforms,” Finance Minister Muhammad Aurangzeb told local broadcaster Geo News.
The IMF said in a statement that it would issue an “immediate disbursement” of about $1 billion.
“This past year has seen a very welcome return to economic stability in Pakistan,” the IMF’s chief of mission in Pakistan, Nathan Porter, told reporters on Thursday.
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“The challenge now facing Pakistan is to move beyond this renewed sense of stability and towards stronger and sustainable development, with its benefits shared more widely and evenly across society,” he added.
Pakistan agreed to the deal in July — its 24th payment from the IMF since 1958 — in exchange for unpopular reforms, including cutting electricity subsidies and broadening its chronically low tax base.
Speaking on the sidelines of the United Nations General Assembly in New York on Wednesday, Prime Minister Shehbaz Sharif said the deal was reached thanks to the “tremendous support” of Saudi Arabia, China and the United Arab Emirates.
“In the final phase (of negotiations), the terms of the IMF were related to China. The way the Chinese government supported us and strengthened us during this period is something I am really grateful for,” he told reporters shortly before the agreement is announced.
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Last month, Aurangzeb had said Pakistan was negotiating a $12 billion loan, which it would redefine from bilateral lenders.
The amount included $5 billion from Saudi Arabia, $4 billion from China and $3 billion from the UAE over a period of three to five years.
Porter said all three countries “provided significant funding assurances,” beyond those pledges to roll over $12 billion in existing loans.
Reacting to the news, Pakistan’s stock market briefly touched a new record high before losing ground in later trade.
“Awesome” vulnerabilities
Qaiser Bengali, a Pakistani economist, said the deal “will help us pay our immediate debts, but nothing more.”
“The only economic reforms we are asked to implement are more taxes. There is no progress in reducing government spending,” he told AFP.
By the end of 2023, Pakistan — long locked in a cycle of overlapping political and economic crises — had accumulated a total debt of more than $250 billion, or 74 percent of GDP, according to the IMF.
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About 40% of its debt is owed to external creditors in foreign currencies. Its biggest foreign creditor is China and Chinese commercial banks, with just under $30 billion, followed by the World Bank with more than $20 billion, according to the report.
Last year the country teetered on the brink of bankruptcy as the economy shrank amid political chaos following devastating 2022 monsoon floods and decades of mismanagement, as well as a global economic downturn.
It was saved by last-minute loans from friendly countries as well as an IMF bailout.
Islamabad has been wrangling for months with IMF officials to unlock the latest loan, which was conditional on reforms including hiking household bills to fix a permanently crisis-hit energy sector and boosting dismal tax collections.
In a nation of more than 240 million people where most jobs are in the informal sector, only 5.2 million filed income tax returns in 2022.
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The IMF said Pakistan “has taken key steps to restore economic stability with consistent reforms”. However, “despite this progress, Pakistan’s vulnerabilities and structural challenges remain formidable,” he warned.
“A difficult business environment, weak governance and the large role of the state hinder investment, which remains very low compared to peers,” he added.
Source: AFP