Islamabad: The International Monetary Fund (IMF) has sanctioned a USD 7 billion bailout package for Pakistan, approving an immediate disbursement of USD 1.1 billion. This comes as part of efforts to support the country's economic recovery amid a deepening financial crisis.
The IMF's Executive Board met on Wednesday in Washington to finalise the agreement following Pakistan's commitment to reform its agricultural income tax, transfer fiscal responsibilities to provinces, and reduce subsidies. The bailout is structured under a 37-month Extended Fund Facility (EFF), marking Pakistan's 25th IMF program since 1958 and the sixth EFF.
Prime Minister Shehbaz Sharif emphasised that this would be Pakistan's final IMF bailout, echoing similar statements from the 24th program in 2023. He credited the successful negotiations to Deputy Prime Minister Ishaq Dar, Chief of Army Staff General Asim Munir, and the finance team, while acknowledging the need for provincial cooperation to fulfil the program's conditions.
Following the staff-level agreement reached on July 12, provincial governments, including Sindh and Balochistan, have endorsed a National Fiscal Pact, transferring key responsibilities such as health, education, and infrastructure to the provinces.
Despite this financial lifeline, the package does not address Pakistan's critical debt restructuring issues. The country's debt consumes 81 percent of its tax revenue, a significant factor in its economic difficulties. The new program focuses on macroeconomic stability, targeting improvements in public finance, foreign reserves, and the business environment.
To meet the IMF's stringent conditions, Pakistan raised additional taxes, increased electricity prices by up to 51 percent, and pledged transparency in its Sovereign Wealth Fund. The government also took out a historically expensive USD 600 million loan to secure the IMF board meeting.
This program introduces new fiscal challenges for the provinces, which now face nearly a dozen IMF-mandated conditions. By October 30, provincial governments are required to align agricultural income tax rates with federal rates, raising taxes from 12-15% to 45% by January 2025. Provinces are also barred from providing new subsidies for electricity and gas, and no new Special Economic Zones (SEZs) or Export Processing Zones (EPZs) can be established.
Under the new IMF framework, Pakistan must maintain a primary budget surplus equivalent to 4.2 percent of its GDP over the next three years. This condition will likely result in tighter government spending and increased tax burdens. The first target is to achieve a 1 percent surplus this fiscal year, with subsequent increases over the program's duration.
Pakistan is also prohibited from repaying USD 12.7 billion in debt to key lenders, including Saudi Arabia, China, and the UAE, during the program's period. This measure aims to sustain debt rollovers instead of repayment.
However, concerns remain regarding Pakistan's ability to implement the reforms required by the IMF. The Asian Development Bank (ADB) warned that political instability could hinder the government's ability to meet these commitments, further complicating its economic recovery efforts.
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