Pakistan Secures $7 Billion Aid Deal with IMF

Pakistan and the International Monetary Fund (IMF) have agreed on a three-year, $7 billion aid package to bolster the country’s economic stability and promote growth. Announced on Friday, the Washington-based institution noted that the agreement awaits approval from the IMF’s Executive Board.

The new program aims to solidify Pakistan’s macroeconomic stability and create conditions for stronger, more inclusive, and resilient growth. “The program aims to capitalize on the hard-won macroeconomic stability achieved over the past year by furthering efforts to strengthen public finances, reduce inflation, rebuild external buffers, and remove economic distortions to spur private sector-led growth,” said Nathan Porter, the IMF’s mission chief to Pakistan.

A critical component of the agreement involves increasing Pakistan’s tax revenues. Authorities plan to boost revenues by 1.5% of GDP in FY25 and 3% over the program duration. This will be achieved through simplified and fairer taxation, integrating net income from the retail, export, and agriculture sectors into the tax system.

Federal and provincial governments have committed to rebalancing spending in line with the 18th Constitutional Amendment by signing a ‘National Fiscal Pact’. This pact will devolve responsibilities for education, health, social protection, and regional public infrastructure investment to provincial governments. Additionally, provinces have pledged to harmonize their Agriculture Income Tax regimes with federal and corporate income tax laws, starting January 1, 2025.

The agreement also addresses the power sector, with plans to enhance its viability and reduce losses through timely tariff adjustments and necessary reforms. The government will avoid further unnecessary expansion of generation capacity. Moreover, targeted subsidy reforms are planned, replacing cross-subsidies with direct support through the Benazir Income Support Program (BISP).

Pakistan aims to reduce its fiscal deficit by 1.5% to 5.9% in the coming year, meeting another key IMF demand. This follows a previous nine-month, $3 billion IMF deal that required unpopular austerity measures, including the removal of consumer cost subsidies.

Although recent months have seen slight improvements in Pakistan’s current account balance and a reduction in high inflation, the country’s foreign debt remains substantial at $242 billion. Debt servicing is expected to consume half of the government’s income in 2024, according to the IMF.

Despite these challenges, the IMF projects Pakistan’s economy to grow by 2% this year, with inflation expected to reach nearly 25% year-on-year before gradually decreasing in 2025 and 2026.

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