July 11, 2023: In the pursuit of economic transformation, Pakistan has turned the tide through its IMF Funding Agreement, charting a path towards stability. Read ahead to learn more!
Pakistan, a country in crisis, has reached an agreement with the International Monetary Fund (IMF) to receive $3 billion (around 2454.69 crores INR) in funding.
However, this agreement still needs approval from the IMF's board, and there has been an eight-month delay in reaching this point.
What is IMF? And what does it do?
The International Monetary Fund (IMF) is an international organization that aims to works towards the growth and prosperity its member countries, which currently, are 190 member countries.
Simply explained:
The International Monetary Fund (IMF) is like a bank for countries. It helps countries that are having trouble with their money, like if they don't have enough money to pay for the things they need, or if they're having trouble paying their bills.
Just like a person can borrow money from a bank, a country can borrow money from the IMF. But in return for the loan, the IMF asks the country to make some changes to the way it manages its money. This might mean cutting back on spending, collecting more taxes, or making it easier for businesses to trade with other countries.
The IMF also helps countries talk to each other about their money problems and work together to find solutions. And, just like a bank, the IMF makes sure that countries are using the money they borrow in a responsible way, so that they can pay it back and get their money problems under control.
So, in a nutshell, the IMF helps countries manage their money better so they can grow and thrive.
The IMF is headquartered in Washington, D.C.
Pakistan is currently facing its most severe economic crisis since gaining independence from Britain in 1947. In order to secure this funding agreement, Pakistan's central bank has raised its main interest rate to a historically high level of 22%.
The country's economy was already struggling due to years of financial mismanagement, but it has been further impacted by a global energy crisis.
Read more background:
According to Nathan Porter, the International Monetary Fund's representative for Pakistan, the country has experienced major challenges to its economy. These include devastating floods in 2022 that affected millions of people and a sharp increase in global commodity prices due to Russia's war in Ukraine.
These external shocks, combined with some policy mistakes, have led to a halt in economic growth.
The IMF's Executive Board, which approves such agreements, is expected to review and approve the deal in the next few weeks. This agreement would provide Pakistan with much-needed economic relief, according to Michael Kugelman from the Wilson Center think tank in the United States. However, the key question is whether Pakistan can use this opportunity to shift from immediate relief to long-term recovery.
A significant power outage has affected most of Pakistan, while a fuel crisis has forced malls to close earlier than usual. These events, along with high inflation, limited foreign reserves, and a lack of macroeconomic stability, will require time and consistent fiscal discipline to overcome, as explained by Katrina Ell, a senior economist at Moody's Analytics. Fiscal discipline refers to the practice of maintaining strict control over government spending and ensuring that revenue and expenditures are managed responsibly.
The funding provided by the IMF will amount to $3 billion (around 2454.69 crores INR) spread over nine months, which is higher than anticipated.
Pakistan has been waiting for the release of $2.5 billion (around 2045.835 crores INR) from a financial support package they agreed on in 2019. However, the deadline for receiving this money has now passed. Pakistan has been facing difficulties in trying to stabilise its economy. This year, their foreign exchange reserves, which are the funds they hold in other countries' currencies, dropped to a very low level. In fact, these reserves are now only enough to cover less than three weeks' worth of the things Pakistan imports from other countries.
In the past year, the value of the Pakistani rupee has fallen by around 40% compared to the US dollar.
On a separate note, donors from around the world have pledged more than $9 billion(around 7364.916 crores INR) to help Pakistan recover from the severe floods that occurred in 2022. It was estimated that the country needed more than $16billion (approximately 13093.168 crores INR) to recover from the disaster.