The International Monetary Fund’s board has given its approval to a significant bailout program of $3 billion for Pakistan. This move includes the immediate disbursement of approximately $1.2 billion, aimed at stabilizing the economy of this South Asian nation.
Last month, Pakistan and the IMF reached a staff-level agreement, securing a short-term pact that provided more funding than initially expected. This agreement was crucial for a country with a population of 230 million, which has been facing a severe balance of payments crisis. It is worth noting that the disbursement of the bailout was put on hold since December due to the IMF’s refusal to release a critical $1.1 billion portion of the loan. The reason behind this decision was Pakistan’s failure to comply with a 2019 agreement signed between the IMF and former Prime Minister Imran Khan.
The release of funds brings much-needed relief to the incumbent government, as it alleviates the longstanding fears of a potential default.
However, it is important to highlight that the agreement with the international lender also entails strict conditions regarding spending and the implementation of structural reforms. While these measures are aimed at addressing the country’s economic challenges, they are expected to bring further hardships to many individuals.
Why was the IMF bailout necessary?
Pakistan’s economy has been severely affected, grappling with a balance of payments crisis resulting from the burden of high levels of external debt and soaring inflation.
Before the bailout, the country’s foreign reserves were in a precarious state, standing at approximately $4 billion, which would have covered only a month’s worth of imports. To conserve foreign currency, Pakistan implemented restrictions on certain imports.
According to analysts, Pakistan requires a minimum of $20 billion within the next two years to repay its foreign loans along with the accompanying interest.
Earlier this year, the Pakistani rupee experienced a significant decline against the US dollar after the removal of an exchange cap. This measure was taken by the cash-strapped nation in its pursuit of unlocking the vital IMF bailout.
The IMF has emphasized the importance of Pakistan’s steadfast implementation of policies to overcome challenges, particularly in the energy sector. The institution expects an increase in electricity prices as part of the necessary reforms.