The IMF and Pakistan have agreed to extend a stalled bailout package and increase the loan size to $8 billion

Pakistan and the IMF have agreed to extend the stalled bailout package by up to one year and increase the loan size to $8 billion, according to a media report on Sunday. This will provide breathing room for the new government led by Prime Minister Shehbaz Sharif.

According to The Express Tribune, the agreement was reached after crucial talks in Washington between Pakistan’s newly-appointed Finance Minister Miftah Ismail and IMF Deputy Managing Director Antoinette Sayeh.

The International Monetary Fund (IMF) has agreed to extend the program for another nine months to one year, as opposed to the original end date of September 2022, and to increase the loan size from $6 billion to $8 billion, according to the paper, citing sources. On Monday, the IMF is expected to issue a statement on the situation.

Dr. Aisha Ghaus Pasha, Pakistan’s Minister of State for Finance, outgoing State Bank Governor Dr. Reza Baqir, Finance Secretary Hamid Yaqoob Sheikh, and Naveed Kamran Baloch, Pakistan’s Executive Director to the World Bank, also attended the meeting with the IMF team.

Mr. Ismail was in Washington to renegotiate a $6 billion bailout package that had been put on hold by the previous Imran Khan administration.

The Pakistan Tehreek-e-Insaf government and the IMF have agreed to a $6 billion 39-month Extended Fund Facility (July 2019 to September 2022). However, the previous administration failed to keep its promises, and the program was stalled for the majority of the time because $3 billion remained unpaid.

Islamabad would have to agree on a budget strategy for the next fiscal year 2022-23 before taking Pakistan’s case to the IMF Board for approval, according to the sources. In addition, Prime Minister Sharif’s government would have to show that it would reverse some of the former regime’s wrongdoings in violation of the commitments it made to the IMF Board in January of this year.

Cash-strapped Pakistan is going through a period of political and economic uncertainty and staying in the IMF program for longer than the original period would help to clarify economic policies and calm the markets. The fund’s release would be a welcome antidote to the country’s ailing economy, which is facing dwindling foreign exchange reserves ($10.8 billion) and a current account deficit crisis.

An IMF mission will visit Pakistan likely from May 10 to give the extended program a final shape, according to sources, and will be led by Nathan Porter, the IMF’s new mission chief. Following the successful conclusion of talks, a senior Finance Ministry official predicted that both sides would reach a staff-level agreement.

Pakistan’s technical staff and the IMF’s technical staff will meet on Monday to assess the budget situation in light of the previous government’s “irresponsible” decisions. However, before formally obtaining IMF approval for expanding the program’s size and cash limit, the government must demonstrate that it is committed to making the necessary difficult policy decisions.

According to the sources, the IMF has asked Pakistan to withdraw fuel and electricity subsidies announced by former Prime Minister Mr. Khan on February 28 in “total disregard for fiscal prudence” and to “recover lost support” as a result of double-digit inflation in the country.

IMF asked Pakistan to remove subsidies on Petrol and Diesel

Last week, Finance Minister Ismail announced that the government was providing an Rs. 21 per liter subsidy on petrol and Rs 51.54 per liter subsidy on high-speed diesel, costing Pakistani taxpayers Rs. 68 billion in April alone. To resurrect the program, these subsidies would have to be removed.

The newly formed Shehbaz Sharif government, which took office this month, is also dealing with spiraling inflation and a stagnant economy.

In its most recent report on Pakistan, the IMF forecasts annual growth of 4%, compared to 4.8 percent estimated by the country’s central bank. Mr. Ismail said in his first press conference as the country’s Finance Minister on Wednesday that the IMF had presented a list of demands for the bailout package’s revival to be implemented.

Fuel subsidies are being phased out, the tax amnesty program is being phased out, power tariffs are being increased, and additional taxation measures are being implemented. Mr. Khan implemented fuel and power subsidies just days before he was deposed from power. A rollback would be a difficult task for the current administration, especially given Pakistan’s consumer inflation rate of 12.7 percent in March.

Ismail also met with the World Bank managing director in Washington, where the two discussed the possibility of unlocking about $1.8 billion in World Bank lending that had been stalled due to either the previous government’s failure to follow through on promises or bureaucratic snags, according to sources.

Ismail will travel to London after his meetings in Washington to meet with Pakistan Muslim League-Nawaz (PML-N) leader Nawaz Sharif. 

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