Pakistan has secured a new $7 billion loan deal with the International Monetary Fund (IMF). The agreement was announced by the IMF on Friday. This marks Pakistan’s latest effort to stabilize its economy and address its debts.
The country has long struggled with economic challenges, including tax revenue shortfalls and massive debts. Earlier this year, the IMF approved the release of the final $1.1 billion tranche of a previous loan to Pakistan. Finance Minister Muhammad Aurangzeb indicated that the government plans to seek a long-term loan to further stabilize the economy.
The new loan agreement is set to last for 37 months. It aims to strengthen fiscal and monetary policy while implementing reforms. “The program aims to capitalize on the hard-won macroeconomic stability achieved over the past year,” said Nathan Porter, the IMF’s mission chief to Pakistan.
The agreement is subject to approval by the IMF’s executive board. Last month, Pakistan’s new budget was introduced in parliament. It proposed an increase of up to 25% in the salaries of government employees.
It also set an ambitious target for tax collection.
Pakistan’s $7 billion IMF loan approved
The finance minister expressed the goal of collecting 13 trillion rupees ($44 billion) in taxes.
This represents a 40% increase compared to the current fiscal year. Currently, only about 5 million people in Pakistan pay taxes. Analysts have noted that the new budget aims at qualifying for a long-term IMF loan of $6 billion to $8 billion.
This loan would help stabilize the economy. Pakistan nearly defaulted on the payment of foreign debts earlier in 2023. Global rating agency Moody’s stated that the new agreement “improves funding prospects, but the ability to sustain reforms is key to easing liquidity risks.
Moody’s explained that the program will provide credible sources of financing from the IMF.
It will also catalyze funding from other bilateral and multilateral partners to meet Pakistan’s external financing needs. However, the agency cautioned that the government’s ability to sustain reform implementation will be crucial. This will facilitate a durable easing of government liquidity risks.
The program includes “far-reaching reforms,” such as measures to broaden the tax base, remove exemptions, and make timely adjustments to energy tariffs. Moody’s acknowledged that social tensions, driven by the high cost of living, could challenge reform implementation. The agency emphasized that Pakistan is susceptible to “policy slippages,” and that weak governance and high social tensions can hinder the government’s ability to advance reforms effectively.
