The International Monetary Fund (IMF) has agreed to revive a bailout package for Pakistan, providing timely relief as the high global price of energy imports pushes the cash-strapped country to the brink of a payment crisis.
An IMF statement late Wednesday said its staff and Pakistani authorities had reached an agreement on policies under review of the global lender's Extended Fund Facility (EFF) Program for Islamabad. The staff-level agreement, if approved by the IMF board, will bring total disbursements under the program to about $4.2 billion.
Finance Minister Miftah Ismail said in a tweet that Pakistan "will soon receive" an initial tranche of $1.17 billion.
"Pakistan is at a challenging economic juncture. A difficult external environment combined with procyclical domestic policies fueled domestic demand to unsustainable levels," said Nathan Porter, who led the IMF team in weeks of negotiations with Islamabad.
"The resultant economic overheating led to large fiscal and external deficits in FY22, contributed to rising inflation, and eroded reserve buffers," Porter added.
The IMF statement noted that its board would also consider an extension of the EFF program until the end of June 2023, and whether to add nearly $1 billion.
Central bank foreign currency reserves have fallen around $9.7 billion, barely enough to cover a few weeks of imports. The rupee also dipped to historic lows against the U.S. dollar in recent weeks.
"The Agreement with the Fund has set the stage to bring country out of economic difficulties," Prime Minister Shehbaz Sharif said in a tweet.
The resumption of the IMF loan means Pakistan will have easier access to funds from other international lenders, including the World Bank and the Asian Development Bank.
Pakistan needs at least $41 billion in the next 12 months to repay debt and fund imports, according to a Bloomberg news agency report. In Pakistan, inflation is growing at the second-highest rate in Asia.
Analysts saw the deal as crucial for Sharif's coalition government, which came to power in April and is struggling to stabilize the economy at a time when Russia's invasion of Ukraine has led to an increase in fuel prices.
The Pakistani government has raised domestic fuel prices by more than 90 percent over the past month to meet IMF conditions for the revival of the bailout package. The politically unpopular move has drawn strong public criticism.
“The authorities should nonetheless stand ready to take any additional measures necessary to meet program objectives, given the elevated uncertainty in the global economy and financial markets,” said the IMF statement.
Late Thursday, in a televised address to the nation, Sharif announced a reduction of up to 15% in the fuel costs.
Sharif said his move was meant to pass on a drop in global prices to consumers and defend the earlier rise in prices.
"We had no other way. We had to take tough measures; however, oil prices are declining in global markets and … today we have got the chance to reduce the prices,” the prime minister added.
In 2019, the government of then-Prime Minister Imran Khan agreed to the $6 billion IMF program in a bid to avoid default on foreign debt repayments. The global lender has disbursed less than half of the amount.
Sharif led an opposition parliamentary no-confidence vote that ousted Khan from office in early April and paved the way for him to become the prime minister.
The new government has since withdrawn the unfunded subsidies that Khan gave to the oil and power sectors during his last days in office. It also imposed a levy on petroleum earlier this month that will further raise prices by about 70% within a month.
"After this agreement and the recent decline in international oil prices, God willing, we will now be able to provide relief to our people," Miftah tweeted Thursday.
Some information for this report came from Reuters.