In a significant development for Pakistan's economic recovery, the Executive Board of the International Monetary Fund (IMF) on Friday, May 09, approved two loan packages totalling $2.4 billion. The decision includes a $1 billion tranche under the Extended Fund Facility (EFF) and a newly sanctioned $1.4 billion under the Resilience and Sustainability Facility (RSF) aimed at addressing climate-related challenges.
According to Pakistani authorities, the approval follows successful negotiations and fulfilment of stringent IMF conditions. The new package was cleared despite objections raised by India, which reportedly questioned Pakistan's repeated reliance on IMF support. However, with only 2.7% of the IMF's voting rights, India's opposition was overruled by the broader board consensus.
Pakistan's Finance Minister Muhammad Aurangzeb and Finance Secretary Imdad Ullah Bosal played a key role in ensuring compliance with the programme requirements. Deputy Prime Minister Ishaq Dar also helped fulfil key conditions, including progress on implementing agricultural income taxes in Sindh and Balochistan.
The newly approved $1 billion tranche raises total disbursements under the EFF to $2.1 billion. The RSF facility, meanwhile, will be disbursed over the next 28 months. With the additional funding, Pakistan's official foreign exchange reserves are expected to rise to approximately $11 billion, supported further by stronger-than-expected remittance inflows despite significant debt repayments.
Prime Minister Shehbaz Sharif expressed satisfaction with the IMF's decision, calling it a reflection of Pakistan's improved fiscal performance. He criticized attempts to politicize the approval process, alluding to India's objections during the IMF board deliberations.
Officials emphasized that the approval is not a favour but a right under IMF membership, contingent upon meeting strict reform benchmarks. Among the conditions for the new RSF programme are the introduction of a carbon levy starting in July and higher water usage charges from next year.
The deal follows a staff-level agreement reached two months ago on the first review of the 37-month EFF and the new 28-month RSF programme. The IMF board approved the final agreement based on Pakistan's compliance with fiscal targets, adjustments to tax goals, a roadmap to streamline the Pakistan Sovereign Wealth Fund, and broader efforts to attract foreign investment.
Pakistan would continue fiscal consolidation to reduce public debt while creating space for social and development spending and reducing crowding out of private investment. Pakistan will also refrain from increasing current spending beyond that budgeted, indicating that no supplementary grants can be issued.
The IMF has projected Pakistan's economic growth for this fiscal year at 2.6%, but the inflation rate forecast has been reduced to 5.1%. For the next fiscal year, the IMF sees economic growth at 3% and inflation around 7.7%.
The IMF has acknowledged the economic stabilization but said that there were still risks to Pakistan's economy. Among the risks are potential macroeconomic policy slippagesdriven by pressures to ease policies, along with geopolitical shocks to commodity prices, tightening global financial conditions, or rising protectionism could undermine the hard-won macroeconomic stability.
The IMF's new climate facility is meant to scale up climate reform efforts to reduce vulnerabilities to natural disaster risks and to build climate resilience. In return for the loan, Pakistan has committed to strengthening public investment processes across all levels of government to prioritize projects that enhance disaster resilience, said Porter.
The government will also improve the efficiency of scarce water resource usage, including through better pricing mechanisms, he added.
It will enhance intergovernmental coordination on disaster financing; improve information architecture and disclosure of financial and corporate climate-related risks; and promote green mobility to mitigate significant pollution and adverse health impacts, said the IMF.
