IMF Approves $3 Billion to Prevent Pakistan’s Default

Pakistan and the International Monetary Fund (IMF) have signed a $3 billion staff-level standby agreement. According to a press release issued by the IMF, the agreement is expected to be approved by its Executive Board in mid-July. This stand-by agreement will help Pakistan to stabilize its economy, which is currently under external pressure. Pakistan has taken several steps in the last few weeks to revive the IMF program. Apart from the decisions to collect additional taxes in the budget, Prime Minister Mr. Shehbaz Sharif also contacted the top officials of the IMF.
It is said in the press release, “IMF mission recognizes that Pakistan’s economy has been hit by multiple shocks, notably the effects of climate change and damage caused by floods”. The IMF has expressed hope that Pakistan will now be able to access loans from various other forums, which will help it move toward economic stability.

What is meant by a “Standby Agreement”?
Two IMF programs are very important in the context of Pakistan’s economic situation:
1. Standby Arrangement (SBA)
2. Extended Fund Facility (EFF)
According to the IMF website, a “standby arrangement” refers to addressing a country’s external financing needs through short-term financing. In this case, low-income countries are helped only if they overcome the difficulties that led to their need for funding. The tenure of this type of financing can be from 12 to 24 months but cannot exceed 36 months while the financing amount is paid back in three and a half and half years. The SBA is the IMF’s flagship program for developing economies. It is usually given to countries that need a loan to balance payments in a short period of time. Its interest rates are in line with the global market but are always lower than other private loans.
In contrast, the Executive Fund Facility (EFF) is a medium-term program aimed not only at the balance of payments but also focuses on reforming the country’s economic structure. The plan is for three years but can be extended up to one year while repayment is made over a period of four to ten years.
According to economists, the public will be burdened even after the restoration of the program. Pakistan and IMF negotiations include an increase in the price of electricity and a levy tax on petroleum products. Pakistan has already increased electricity and gas tariffs under the terms and conditions of the program while to fulfill additional financial targets government is going to impose more tax on the salary class of the country. With these excise rates, there will be a further intensification in the interest rate. The overall effect will appear as a more inflationary burden on the people who are currently suffering from high inflation rates. Pakistan has faced a high inflation rate of 38 percent in the recent past, which means people are already overtaxed.
EAT News conducted a general public survey regarding the current IMF deal and its consequences on common people in the different areas of the federal capital Islamabad.
Umer Khan is a 55-year-old watchman in the Karachi company area of Islamabad. When EAT News asked him about the current economic situation and loan installments taken from IMF, he replied, “I am an old man, who works as a watchman in the night in a local market. My life is rough and complicated. I came to know that an international organization is funding Pakistan in terms of loans. I am not a highly educated person so do not know the gimmicks of the economy but I know one thing, our government will not use this borrowed money for the welfare of the people of Pakistan. There are many loopholes in the system. I am afraid people will not get relief; sooner or later the government will impose more taxes to collect money to repay the loan installments”.
Mazhar Baloch belongs to a remote area of Pakistan, he came to Islamabad to earn a respectful life for himself and his family. He told EAT News, “I am a law graduate, currently I am attached to a local lawyer at the district level. I am earning hand-to-mouth. I have gone through the news that the IMF bailouts Pakistan and now there is no chance of default. Indeed, it is good news but I am worried about myself and my countrymen. I do not know how we will pay back this debt. Every government is taking loans from IMF, the local circular debt is also increasing. Ultimately, the government will impose more taxes on the natives. How the common people will survive in the future as they are already suffering due to high inflation”?
Maryam Khan, a young girl in her early 20s, she studying home economics at a private college in Islamabad. EAT News also took her version in this episode, she said “I am dependent on my family, and my father is responsible for our bread and butter. But since last year, my pocket money is shrinking constantly. It is difficult for my family to live a dignified life in these circumstances. My father was discussing this topic with my family elders that Pakistan is getting more loans from the IMF. When I was listening to the story, I was thinking, it is a poor country of poor people. More loans mean more inflation in the country, and everyone will suffer including me and my family too”.
Despite the International Monetary Fund (IMF) agreement, international rating agencies Moody’s and Fitch have expressed concerns over Pakistan’s economy. According to the rating agencies, Pakistan will need funding in addition to the IMF program for debt repayment and economic recovery. If the current account deficit increases again, IMF funding will be insufficient and Pakistan has to take some other solid steps to address the issues.