Pakistan clinched an initial approval from the International Monetary Fund for a $3 billion loan program, lowering the risk of a sovereign default. The nation’s dollar bonds rallied.
(Bloomberg) — Pakistan clinched an initial approval from the International Monetary Fund for a $3 billion loan program, lowering the risk of a sovereign default. The nation’s dollar bonds rallied.
The staff-level agreement is subject to approval by the IMF Executive Board, with its consideration expected by mid-July, the Washington-based lender said in a June 29 statement on its website. Pakistan is one of the biggest customers of the IMF with almost two dozen bailouts since the 1950s.
Pakistan stepped up efforts to meet IMF demands in recent days, including raising taxes, cutting spending, and increasing its key interest rate to a record. The IMF loans are crucial in helping the South Asian nation manage $23 billion of external debt payments for the fiscal year starting July, more than six times its foreign-exchange reserves.
“IMF support lifts the immediate risk of default and provides much needed liquidity to support an aggressive reform agenda,” said Brendan McKenna, strategist at Wells Fargo & Co. in New York. “I would expect Pakistan debt to rally in the short term and potentially have long-term value if the government demonstrates commitment to the IMF’s program targets.”
Pakistan dollar bonds due 2024 surged on Friday in Asian trading, with the notes climbing 2.6 cents to about 65 cents on the dollar. Local markets are shut for a holiday and will reopen on Tuesday.
The funds will help ease a dollar crunch and supply shortages in Pakistan, and lift the economy out of a crisis ahead of elections this year. The loan will also provide a framework for financing from multilateral and bilateral partners, the IMF said.
IMF Conditions
There is room for caution. Pakistan has had a tumultuous relationship with the IMF. The government also secured staff approval for a $1.1 billion loan in August, only to have it halted due to Islamabad’s failure to meet some conditions.
“It will be important that the budget is executed as planned, and the authorities resist pressures for unbudgeted spending or tax exemptions in the period ahead,” said mission chief Nathan Porter.
Steadfast policy implementation, including greater fiscal discipline, a market-determined exchange rate and further progress on reforms, particularly in the energy sector is key to overcome Pakistan’s current challenges, the IMF said.
Pakistan is the last of three South Asian countries to clinch IMF funding due to delays in delivering reforms and getting creditors to agree amid a political crisis.
Pakistan increased taxes and energy prices, and allowed its currency to weaken to meet the IMF’s key demands. The rupee has lost more than 20% this year after officials devalued the currency in January, among the worst performers in the world.
Pakistan’s dollar stockpile slid almost 60% in the past 12 months to $3.5 billion as of mid-June, restricting the nation’s ability to fund imports including raw materials, and forcing many factories to suspend operations.
The nine-month stand-by arrangement builds on the authorities’ efforts under Pakistan’s 2019 IMF-supported program which expires end-June.
(Updates with analyst comment in 4th paragraph.)
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