Pakistan and the International Monetary Fund announced Sunday that they had reached a preliminary agreement on a $6 billion bailout for the country's emaciated, debt-ridden economy, a rescue that Prime Minister Imran Khan had opposed before taking office but has since reluctantly embraced.
Officials have described Pakistan's soaring current account deficit - a measure of the imbalance between imports and exports - as an existential crisis. The country is deep in debt to China, and its slowing economy is expected to contract even further this year.
Negotiations with the IMF on a bailout package had been underway since October. Pakistan has had an uneasy relationship with the lending body, and nationalist politicians often characterize it as a tool of U.S. dominance. Pakistan already owes the institution $5.8 billion from past bailouts, and has only once completed its past programs, reports New York Times.
"Pakistan is facing a challenging economic environment, with lacklustre growth, elevated inflation, high indebtedness, and a weak external position," Ernesto Ramirez Rigo, who led the IMF mission to Pakistan, said in a news release Sunday. "The authorities recognize the need to address these challenges, as well as to tackle the large informality in the economy, the low spending in human capital and poverty."
He added that the agreement was subject to approval by the IMF's executive board.Under the bailout package, Pakistan will have a market-determined exchange rate, which means that the Pakistani rupee is likely to undergo further devaluation. The interest rate will also be hiked up.
The upcoming budget "will aim for a primary deficit of 0.6% of GDP" Ramirez Rigo said, "supported by tax policy revenue mobilisation measures to eliminate exemptions, curtail special treatments and improve tax administration."
Pakistan has repeatedly struggled with generating tax revenue. Ramirez Rigo said the bailout package would try to improve public finances and reduce public debt "through tax policy and administrative reforms," and "ensure a more equal and transparent distribution of the tax burden."
He added that a plan for "cost-recovery in the energy sectors and state-owned enterprises" would help reduce "the quasi-fiscal deficit that drains scarce government resources."
Khan, who took office in August, was a vociferous critic of the IMF as an opposition politician, and during last year's election campaign he vowed not to turn to it for assistance. But he has been forced to break that pledge - even while promising a sweeping expansion of social welfare programs that would contradict the global body's insistence on austerity.
Among other belt-tightening moves, the bailout package is expected to lead to cuts in fuel subsidies, putting more burdens on a struggling population. The government has already cut some subsidies and taken other measures the IMF was expected to demand, like depreciating the currency and tightening fiscal and monetary policy. Such moves are likely to be a further drag on growth.
Khan's rivals have seized the chance to tie him to the pain that the bailout is likely to bring, referring to his government as PTIMF - a play on PTI, the initials of Khan's political party, and a reference to the fact that top members of his economic team have worked for the IMF in the past.
In the last stages of the bailout talks, Khan replaced almost all the top members of that team, most notably Asad Umar, a popular politician with a populist bent who was removed as finance minister last month.
Umar, who was involved in the IMF talks, has said that he was not prepared to inflict pain on the Pakistani people to meet the fund's requirements. He also opposes the privatization of state-run enterprises, something that the IMF often demands of countries that receive bailouts.
The new adviser to the prime minister on finance, Abdul Hafeez Shaikh, who has the powers of finance minister, has worked for both the IMF and the World Bank. Khan also recently appointed a former IMF employee, Dr Reza Baqir, as head of Pakistan's central bank.
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