Pakistan's economy got breathing space as the government and the International Monetary Fund (IMF) reached a staff-level agreement to revive the $6 bailout package initially signed in 2019. The agreement -- the approval of which is still pending from the IMF's executive board -- has averted the risk of immediate default amid fast depleting foreign exchange reserves.

With the exponential rise in the import bills and unable to get money from bilateral allies like Saudi Arabia and the United Arab Emirates (UAE), Pakistan was left with only one option, the IMF, to avoid a Sri Lanka-like fate.

To boost its reserves, Pakistan will be eligible for the immediate disbursement of $1.18 billion once the IMF board approves the staff-level agreement. Significantly, the IMF will consider increasing the Extended Fund Facilities (EFF) to $7 billion from the original $6 billion till June 2023. 

The deal came after the government took several measures, including drastically hiking fuel prices, withdrawing subsidies, reducing fiscal deficit by cutting expenditure and increasing tax rates.

IMF deal and conditionalities

The deal will also let the government seek funds from other bilateral sources like Saudi Arabia and the UAE as they had conditioned their further assistance upon Pakistan's ability to get into the IMF programme.

For long, the repeated borrowing from Gulf partners has allowed Pakistan to avoid what experts say are deeply needed structural reforms and an end to populist measures, which only contributed to further deterioration of its economy over the years.

The IMF statement on Thursday said: "High international prices and a delayed policy action worsened Pakistan's fiscal and external positions in FY22, led to significant exchange rate depreciation, and eroded foreign reserves."

For Islamabad, the IMF said, the priority should be to stabilize the economy through the steadfast implementation of the recently approved budget for FY23, continued adherence to a market-determined exchange rate, and a proactive and prudent monetary policy.

Populism over economics

Successive governments in Pakistan have developed this tendency of tweaking their long-term fiscal goals for short-term political goals, which proved detrimental to the overall health of the economy.

For instance, weeks before the ouster of the Imran Khan government, the fuel prices were drastically reduced -- contrary to all-time high prices at the time in the international market -- which not only burdened the economy but also made the road tough for the incoming Sharif government.

The issue of circular debt in the power sector, caused by high-subsidized electricity, has not been addressed by any government. This finally led to the closure of many of the country's power plants, built on the PPP models, this summer as the government failed to pay their dues, running into billions of dollars.

For Pakistan's political elites, it has become a cycle of securing loans from allies to fund its ever-ballooning deficit and again approaching the IMF when funds dry up. To break from this cycle, Pakistan needs to use this opportunity to make way for fundamental reforms, including in the power sector, through long-term goals. 

(The author is Research Associate, Society for Policy Studies, specialising in South Asian affairs. Views are personal.)