Pakistan and IMF Agree on New $7 Billion Loan Deal

Pakistan and IMF Agree on New $7 Billion Loan Deal

WASHINGTON: Pakistan and the International Monetary Fund (IMF) have agreed on a three-year, $7 billion aid package, offering critical support to the financially troubled nation, the Washington-based institution announced on Friday.

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The new program, pending validation by the IMF’s Executive Board, aims to “cement macroeconomic stability and create conditions for stronger, more inclusive, and resilient growth.” This includes measures to strengthen fiscal and monetary policy, broaden the tax base, improve state-owned enterprises (SOE) management, improve competition, secure a level playing field for investment, develop human capital, and expand social protection through the Benazir Income Support Program (BISP).

“The Pakistani authorities and the IMF team have reached a staff-level agreement on a comprehensive program, endorsed by both federal and provincial governments, that could be supported by a 37-month Extended Fund Facility (EFF) amounting to SDR 5,320 million (approximately $7 billion at current exchange rates),” stated Secretary Railways Syed Mazhar Ali Shah during the meeting.

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Pakistan’s economy, troubled by chronic mismanagement, has been further strained by the COVID-19 pandemic, the Ukraine war, inflation, and severe flooding that affected a third of the country in 2022. With dwindling foreign currency reserves, Pakistan faced a debt crisis and turned to the IMF, securing its first emergency loan deal in summer 2023.

The latest bailout follows the government’s commitment to implement reforms, including efforts to broaden the tax base. The authorities plan to increase tax revenues by 1½% of GDP in FY25 and 3% of GDP over the program period. The recently approved FY25 budget targets a general government primary surplus of 1% of GDP.

Fairer direct and indirect taxation, incorporating net income from the retail, export, and agriculture sectors, will support revenue collection. The FY25 budget also allocates additional resources to expand social protection, including increased BISP generosity and coverage and enhanced spending on education and health.

Despite a population of over 240 million, only 5.2 million Pakistanis filed income tax returns in 2022. In the 2024-25 fiscal year, starting July 1, the government aims to raise nearly $46 billion in taxes, a 40% increase from the previous year. Pakistan’s tax authority recently blocked 210,000 SIM cards of non-compliant taxpayers as part of this effort.

Pakistan initiated discussions with the IMF for this new multi-billion dollar loan deal agreement, marking its 24th bailout in over six decades. The agreement is part of a broader economic reform program.

The World Bank warned in April that 10 million more Pakistanis could fall below the poverty line, where around 40% of the population already resides. Islamabad aims to reduce its fiscal deficit by 1.5% to 5.9% in the coming year, addressing another key IMF requirement.

The previous nine-month $3 billion IMF deal provided critical support but required unpopular austerity measures, including ending subsidies that cushioned consumer costs.

Recently, Pakistan’s current account balance has improved slightly, and inflation has begun to decrease. However, the country’s foreign debt remains high at $242 billion, with debt servicing consuming half of government income in 2024, according to the IMF. The fund anticipates 2% growth this year, with inflation expected to reach nearly 25% year-on-year before gradually decreasing in 2025 and 2026.

The IMF statement highlighted the need to restore energy sector viability, minimize fiscal risks through timely energy tariff adjustments, and implement cost-reducing reforms. It also stressed the importance of targeted subsidy reforms and replacing cross-subsidies with direct BISP support.

The program aims to promote private sector and export energy by improving the business environment and removing state distortions. This includes phasing out incentives for special economic zones, agricultural support prices, and associated subsidies, as well as refraining from new regulatory or tax-based incentives that could distort the investment landscape.

Additionally, the statement added that the authorities committed to advancing anti-corruption, governance, and translucency reforms, as well as gradually liberalizing trade policy.

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