London June 30 2023: A last minute bailout from the International Monetary Fund should help Pakistan avoid default this year. A staff-level agreement signed with the lender Friday suggests aid will finally materialize after months of delay.
But, even if it does, the country's debt troubles won't end there. More IMF aid will be needed in 2024.
Pakistan got initial approval from the IMF for a $3 billion loan program. The deal is still subject to board approval, which is expected by mid-July.
The money is likely to be delivered in tranches, so that the IMF can make sure Pakistan makes progress on fiscal consolidation and continues to allow the rupee to trade freely.
But chances seem high that the board will approve the funding because Pakistan in recent days has stepped up efforts to meet IMF demands. It's raised taxes, cut spending in its budget, and hiked its key interest rate to a record at an unplanned meeting.
If the IMF delivers the funds, they would likely unlock another $3 billion in loans pledged by Saudi Arabia and the UAE.
Together, the loans should allow the country to repay its debts through April 2024, assuming that the current account deficit for the fiscal year comes in below $4 billion as the central bank projects.
Including aid from the IMF and friendly nations, the country's dollar stockpile would total as much as $9.5 billion. This won't be enough to repay $8.7 billion in loans (net of rollovers) in the year starting July and also pay the country's import bills for the full fiscal year.
This means whoever is in power after elections in October will have to negotiate a new deal with the IMF.
Adherence to measures agreed with the IMF --including maintaining a flexible exchange rate and avoiding un-budgeted spending to woo voters before elections -- will likely be needed to secure another program next year.
"We have been expecting the aid to come. It should stabilize the economy and boost growth. We expect GDP to grow 2.5% in the fiscal year starting from July, up from 0.3% in the fiscal year through June 2023" says Bloomberg.
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