ISLAMABAD, Pakistan—The International Monetary Fund agreed to a bailout of Pakistan, providing a financial lifeline as emerging markets strain under pressure from a global price shock rippling out from the war in Ukraine.
The IMF said in a statement late Wednesday it would provide Pakistan with $4 billion over the next year, starting with an initial $1.2 billion, once its board formally approves the agreement worked out with Pakistani officials over weeks of negotiations. Foreign-exchange reserves held by Pakistan’s central bank have depleted in recent weeks to cover less than two months’ worth of exports, largely closing off Pakistan’s prospects of tapping international financial markets.
The staff-level agreement with the IMF is key to the plan of the new government, which came to power in April, to stabilize the economy and avoid the fate of Sri Lanka, a fellow South Asian nation in financial meltdown. Sri Lanka, which approached the IMF late in its crisis, is now in talks for a bailout.
Pakistan’s reserves were left far short of foreign loan repayments due this year. Like other developing countries, Pakistan struggled to pay for fuel imports as the Russian invasion of Ukraine drove up the price of oil.
“Pakistan is at a challenging economic juncture. A difficult external environment combined with procyclical domestic policies fueled domestic demand to unsustainable levels,” said Nathan Porter, the IMF official who led the negotiations with Pakistan.
Key to the deal was Islamabad’s decision in June to end a $600-million-a-month subsidy, which cushioned gasoline prices for consumers, a painful political compromise for a new government. The IMF had said that subsidy was unsustainable and that the demand for gasoline would only be curbed once the public had to pay the market price.
Pakistan came close to default in recent weeks, said Pakistan’s finance minister,
“We’ve been willing to sacrifice our political capital to get this deal done,” Mr. Ismail said in an interview.
More important than the money itself is that it opens the door for other multilateral lenders like the World Bank and the Asian Development Bank, as well as bilateral loans from rich allies such as Saudi Arabia, Qatar and the United Arab Emirates, Pakistani officials say.
The annual rate of inflation hit 21% in June, driven by the soaring cost of transport and food, official figures show. The central bank raised the interest rate by 1.25 percentage points this month to 15%, the latest in a series of rate increases.
China, a close ally, already provided a $2.3 billion loan in June to shore up Pakistan’s foreign-currency reserves.
Write to Saeed Shah at email@example.com
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8