Pakistan said on Thursday it will have to experience “transitional pains” after the International Monetary Fund agreed to a new $7 billion bailout to support its struggling economy.
The South Asian country’s economy has stabilized since coming close to default last summer, but it relies on IMF bailouts and loans from friendly countries to service its massive debt, which swallows half of its annual revenue.
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Finance Minister Mohammad Aurangzeb told local broadcaster Geo News: “There will be some transition pain, but if this is the last plan, we need to implement structural reforms.”
The IMF said in a statement that it would make “immediate disbursements” of about $1 billion.
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“The return to stability in Pakistan’s economy over the past year is very welcome,” Nathan Porter, head of the IMF’s Pakistan mission, told reporters on Thursday.
“The challenge now facing Pakistan is to move beyond this new sense of stability towards stronger and more sustainable growth, with the benefits shared more broadly and equally across society. ‘ he added.
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In July, Pakistan agreed to a deal that would be its 24th IMF payment since 1958 in exchange for unpopular reforms, including cutting electricity subsidies and widening its chronically low tax base.
Speaking on the sidelines of the United Nations General Assembly in New York on Wednesday, Prime Minister Shehbaz Sharif said the agreement was made possible thanks to the “tremendous support” of Saudi Arabia, China and the United Arab Emirates.
“At the final stage (of the negotiations), the IMF’s terms were relevant to China,” he told reporters shortly before the agreement was announced. “We are truly grateful to the Chinese government for their support and reinforcement during this period.” .
Aurangzeb had said last month that Pakistan was negotiating a $12 billion loan review from bilateral financial institutions.
The amount consists of $5 billion from Saudi Arabia, $4 billion from China and $3 billion from the UAE over a period of three to five years.
Mr Porter said all three countries had “provided significant loan guarantees” beyond their commitments to roll over $12 billion of existing loans.
Pakistan’s stock exchange briefly hit a new high on the news, but stalled in subsequent trading.
terrifying vulnerability
Qaiser Bengali, a Pakistani economist, said the deal would “help pay down the debt for now, but nothing more.”
“The only economic reform we need is higher taxes. We are not cutting government spending,” he told AFP.
At the end of 2023, Pakistan, long locked in a cycle of intertwined political and economic crises, had accumulated more than $250 billion in debt, equivalent to 74% of its GDP, according to the IMF.
Approximately 40% of its debt is owed to external creditors in foreign currencies. The single largest foreign creditor is China and Chinese commercial banks, with just under $30 billion, followed by the World Bank with more than $20 billion, according to the report.
Last year, the country teetered on the brink of default as its economy withered amid political turmoil following devastating monsoon floods in 2022, decades of misgovernment and a global economic downturn.
It was saved by last-minute loans from friendly countries and an IMF bailout.
Islamabad has been working with IMF officials for months to release the latest loan conditional on reforms such as raising household costs and ruthless tax hikes to rescue an energy sector in permanent crisis. fought for a long time.
In the country of more than 240 million people, where most jobs are in the informal sector, only 5.2 million people filed income tax returns in 2022.
The IMF said Pakistan had “taken important steps to restore economic stability through consistent reforms”. However, he warned that “despite this progress, Pakistan’s vulnerabilities and structural challenges remain formidable.”
“A difficult business environment, weak governance and an oversized role of the state hinder investment, and investment volumes remain very low compared to peers,” it added.
