WASHINGTON: Cash-strapped Pakistan has achieved a significant milestone by reaching a staff-level agreement with the International Monetary Fund (IMF) for a three-year, $7 billion bailout program, the international money lender announced.
The IMF Executive Board must validate the new program, which aims to “cement macroeconomic stability and create conditions for stronger, more inclusive, and resilient growth,” according to an IMF statement.
The program includes measures to strengthen fiscal and monetary policy, reforms to broaden the tax base, improve the management of state-owned enterprises (SOEs), enhance competition, ensure a level playing field for investment, develop human capital, and scale up social protection through increased generosity and coverage in 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 the federal and provincial governments, which could be supported by a 37-month Extended Fund Arrangement (EFF) amounting to SDR 5,320 million (about $7 billion at current exchange rates),” the statement read.
Pakistan’s economy, plagued by chronic mismanagement, has been on the brink, challenged by the Covid-19 pandemic, the effects of the war in Ukraine, supply difficulties that fueled inflation, and record 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, obtaining its first emergency loan in the summer of 2023.
The latest bailout, in the form of loans, follows a government commitment to implement reforms, including a major effort to broaden the country’s tax base. The authorities plan to increase tax revenues through measures amounting to 1.5% of GDP in FY25 and 3% of GDP over the program’s duration.
The recently approved FY25 budget targets an underlying general government primary surplus of 1% of GDP (2% in headline terms). Revenue collections will be supported by simpler and fairer direct and indirect taxation, including bringing net income from the retail, export, and agriculture sectors into the tax system.
Additionally, the FY25 budget allocates more resources to expand social protection by increasing the generosity and coverage of BISP, education, and health spending.
In a nation of over 240 million people, where most jobs are in the informal sector, only 5.2 million filed income tax returns in 2022. During the 2024-25 fiscal year, which starts July 1, the Pakistan government aims to raise nearly $46 billion in taxes, a 40% increase from the previous year.
As part of this effort, Pakistan’s tax authority recently blocked 210,000 SIM cards of users who have not filed tax returns, aiming to widen the revenue base.
Pakistan initiated discussions with the IMF for the new multi-billion dollar loan agreement—its 24th bailout in over six decades—to support its economic reform program.
While around 40% of the population already lives below the poverty line, the World Bank warned in April that 10 million additional Pakistanis could fall below this threshold.
Islamabad also aims to reduce its fiscal deficit by 1.5% to 5.9% in the coming year, addressing another key IMF demand.
The previous loan—a nine-month $3 billion IMF deal—was a lifeline but came with unpopular austerity measures, including an end to subsidies cushioning consumer costs.
Recently, the current account balance has slightly recovered, and high inflation is just starting to decline, but Pakistan’s foreign debt remains very high at $242 billion. Servicing it will still consume half of the government’s income in 2024, according to the IMF.
The IMF anticipates 2% growth this year, with inflation expected to reach nearly 25% year-on-year before gradually decreasing in 2025 and 2026.
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