To support Pakistan’s foreign exchange reserves, which at $4.04 billion at present barely cover four weeks of controlled imports, the aid package includes $1 billion from the UAE.
With this funding, a significant barrier to receiving the eagerly anticipated bailout tranche from the International Monetary Fund is removed. (IMF).
The final installment of a $1.3 billion rollover loan from China was made available to Pakistan in addition to the UAE’s financial assistance.
The Industrial and Commercial Bank of China (ICBC) had already provided two installments of $500 million each in the first and third weeks of last month.
However, this only maintained a Chinese loan portfolio that runs into more than $27 billion, the highest single source of external debt for Pakistan.
Officials say that once Pakistan secures half of the $6 billion external financing gap for the current fiscal year through bilateral funding, the IMF will declare a staff-level agreement.
This would unlock flows from other multilateral lenders, including program loans from the World Bank and the IMF itself, in addition to some loans from commercial banks held up for lack of an IMF umbrella.
The external financing gap has hampered the signing of a staff-level agreement for more than two months, completing the ninth review of the IMF loan program that has been in limbo since October.
The agreement is to be followed by a meeting of the IMF’s executive board, disbursing about $1.2 billion.
Pakistan and the IMF agreed to a bailout package worth $6.5 billion in 2019, but Pakistan has repeatedly broken the terms. Only $3 billion has been released so far.
The government has already complied with other IMF requirements, including the payment of an additional Rs170 billion in taxes for the remainder of the current fiscal year and Rs500 billion through the following year, an increase of 300 basis points in the policy rate of the central bank to a record 21%, an unprecedented increase in electricity rates, including a permanent surcharge on honest consumers, to make up for mismanagement and governance crisis, and an increase of up to 124% in gas price
If this agreement is successfully completed, Pakistan will be eligible to receive 894 IMF statutory drawing rights (SDRs) with an estimated value of $1.2 billion.
Following the UAE’s confirmation of financial support, Pakistan’s dollar-denominated government bonds increased by more than two cents on Friday to reach their highest level in a month. The 2024 bond that will mature in dollars increased by 2.25 cents to reach 48.25.
Pakistan’s external debt decreased by about $4.5 billion during the current fiscal year despite financial assistance from the UAE and China because foreign commercial banks did not roll over their maturing loans due to the IMF impasse, despite the fact that such loan extensions had almost become routine.
The macroeconomic fundamentals and the confidence of external creditors, bondholders, and investors, however, are still being cast in doubt by the ongoing political and judicial crisis.
To push for a date for the agreement’s signing, Finance Minister Dar held separate virtual meetings earlier this week with the IMF’s deputy managing director and the director of its Middle East and Central Asia department.
The Ministry of Finance claims to have received assurances that the staff-level agreement “will be signed soon followed by the IMF board’s approval,” despite the Fund remaining mum about these engagements.
