Farhan Bokhari in Islamabad
Pakistan and IMF negotiators have reached an agreement on a $6bn loan for the country, the finance ministry said last night.
Speaking on state-run Pakistan Television, Abdul Hafeez Shaikh, head of the finance ministry, said: “We have reached an agreement with the IMF staff for $6bn for the next three years. There will be adjustments involved but we will try to make certain that the extent of pain on low-income people is minimal.”
The agreement is yet to be formally confirmed by the IMF’s management and its executive board. But senior Pakistani officials told the FT that the staff level deal announced on Sunday was the most important element in negotiating a new loan. “The foundation has now been laid for an agreement,” said one.
The IMF announced the move on its website. “Pakistan is facing a challenging economic environment, with lacklustre growth, elevated inflation, high indebtedness and a weak external position,” it said.
The south Asian country has faced an economic crisis over the past year, during which its external foreign currency reserves sunk to the equivalent of less than two months of imports.
Imran Khan, prime minister, who came to power last year, has faced opposition criticism for delaying an approach to the fund for more than nine months after taking office, hoping that the country could receive financial support from allies such as Saudi Arabia, the UAE and China.
However, in spite of support from the three countries to boost liquid reserves, confidence in Pakistan’s economy remains weak. Last month, Asad Umar resigned as finance minister, and his portfolio was taken over by Mr Shaikh. Mr Umar was considered to have delayed an approach to the fund, instead relying on friendly countries to help.
Economists told the FT that the fund was insisting on a free-floating mechanism for the exchange rate of the rupee, which has devalued by about 34 per cent since late 2017.
The IMF’s announcement appeared to suggest Pakistan had conceded to the demand.
“A market-determined exchange rate will help the functioning of the financial sector and contribute to a better resource allocation in the economy. The authorities are committed to strengthening the State Bank of Pakistan’s operational independence and mandate,” the IMF’s announcement said.
The Karachi-based president of one Pakistani bank warned that a further steep devaluation of the rupee could potentially unleash an opposition backlash against Mr Khan’s government. “The effects of already-taken-place devaluation are very bad. More would be terrible for this government,” he said.
Mr Khan already faces mounting opposition over his choice of Reza Baqir, a respected former IMF official, to become the new central bank governor after his predecessor was forced to resign.
A senior government official told the FT that Mr Shaikh’s decision to go on state-controlled news rather than face Pakistan’s independent media suggested “this agreement with the IMF is not going to be an easy sell”.
The IMF’s team left Pakistan earlier on Sunday, leaving details of the draft agreement to be released in a press statement.