GS Paper - III

The International Monetary Fund (IMF) officially approved a $7 billion Extended Fund Facility (EFF) for Pakistan, two months after the agency had reached a staff-level agreement for the same with Islamabad.

Why does Pakistan need an IMF bailout?

• Poor governance and imprudent fiscal management has long plagued Pakistan.
• In 2022, Pakistan was still receiving funds from the 2019 EFF, when a severe economic crisis struck the nation — due to the impacts of the Covid-19 pandemic, Russia’s war with Ukraine, and the devastating floods that rocked Pakistan in August that year.
• Food and oil prices shot up, with Pakistan’s inflation rate peaking at 38% in May 2023. The Pakistani rupee (PKR) fell about 20% against the US dollar in 2023, while the country’s foreign exchange reserves dwindled to under $3 billion in early 2023.
• In July 2023, Pakistan secured a nine-month $3 billion Stand-By Arrangement (SBA) from the IMF.
• The country’s interim government worked to ensure the IMF’s conditions of “fiscal discipline, structural reforms and a return to market-determined exchange rate” were met.
• As of September 2024, Pakistan’s inflation rate stands at around 7.5%, its lowest in five years.
• The country’s forex reserves too stand at around $9 billion, supported by inflows from its allies China, Saudi Arabia and the UAE.
• But Pakistan still has an external debt of around $130 billion, of which it will need to pay $ 90 billion over the next three years.

What does the $7 billion package entail?

• An EFF is a financial assistance package offered by the IMF to countries facing severe balance of payments issues due to structural weaknesses that cannot be resolved in the short term.
• In theory, it is meant to help the borrowing country implement medium-term structural reforms.
• In Pakistan’s case, these include bolstering monetary and fiscal policies including tax reforms, strengthening competition, and rebuilding the forex reserves.
• In its press release in July this year, the IMF said that the EFF “aims to capitalise on the hard-won macroeconomic stability achieved over the past year by furthering efforts to strengthen public finances, reduce inflation, rebuild external buffers and remove economic distortions to spur private sector led growth.”
• The IMF will immediately make $1.1 billion available to borrow, according to Pakistan State Bank governor Jameel Ahmad.
• Notably, the package does not include plans to restructure the country’s external and internal debt, which according to Dawn, equalled around 81% of the previous fiscal year’s tax revenues.