IMF deal comes through after eight months of will-they-won’t-they. What happens now? 

They say better late than never.  After more than eight months of delays, uncertainty, market confidence being shot, and the constant threat of default looming ominously by, Pakistan has reached a staff-level agreement with the International Monetary Fund (IMF).

The agreement means that Pakistan has averted the threat of default that has been hanging over the country like a dark cloud for over a year. 

For the past one week the federal government had been working in overdrive as it tried to clinch the long-delayed deal. In the days leading up to the Eid weekend, the prime minister met with the director of the IMF on the sidelines of an international moot, the government bulldozed an amended budget through parliament, the State Bank of Pakistan convened an emergency meeting of its Monetary Policy Committee, and the IMF released a statement expressing it satisfactions with the steps taken by Islamabad. 

The deliverance of the anxiously awaited agreement has caused a wave of relief within government circles as well as amongst the general public and the opposition. While the deal still needs the final nod of approval from the IMF’s board which will meet in July, it is expected that the much needed assistance from the fund will bolster market and industry confidence which has been at an all time low.  

The only question is, what happens now? 

Profit spoke to government officials, members of the opposition, market experts, and other sources to try and picture what the immediate future will look like. 

Safe until elections

The agreement clears up a lot of uncertainty that has been plaguing Pakistan. With forex reserves running out (the SBP only has a few weeks worth of import cover left), loan repayments to be made in the coming months, and an election to be held the failure to reach this agreement could have been catastrophic. 

The current deal is a $3 billion stand-by agreement that will last for a period of nine months and is higher than expected for Pakistan. With the $3 billion from the IMF secured, it has become clear that Pakistan will not default on its external debts. And since a stand-by agreement has been signed, any caretaker setup that comes in will not have to negotiate with the fund which would be beyond its jurisdiction. Pakistan can simply now call elections, select a caretaker setup, and let the next government negotiate a new programme with the fund. 

“The delay has been very damaging, but it is good that this deal has come through. It clears the looming uncertainty about what will happen when the country is in the hands of a caretaker set up and preparing for elections while the forex reserves are falling,” explains Khurram Hussain, former editor of Profit and a senior economic journalist. As Mr Hussain explains, the agreement has cleared the path and removed the uncertainty that was plaguing Pakistan in the short term.

Former finance minister and leader of the Reimagining Pakistan platform Miftah Ismail said that the agreement was a harbinger of good news and gave Pakistan a direction to move forward. “I think it’s wonderful news. This is the best insurance against default and gives us a way to move forward,” he told Profit.

What does the deal mean for Pakistan? 

It is worth remembering that the agreement struck between Pakistan and the fund is not in the original shape that it was supposed to be. Pakistan had entered into a $6.5 billion agreement with the IMF back in 2019 with the money due to be released in tranches with periodic reviews near each tranche. The last tranche had been successfully managed by former finance minister Miftah Ismail in August 2022, after which he was replaced by Senator Ishaq Dar. It was after this that things took a turn for the first and the next tranche of $1.1 billion became a bone of contention. 

Initially, Mr Dar tried to play hard to get until the threat of default swelled up, after which a team of the fund came to Pakistan in February this year but left without signing a staff level accord. The delays continue and the current programme expires today (the 30th of June) which is why a stand-by agreement has been signed. 

Armed with this, Pakistan can move on. In fact, the stand-by agreement could end up benefiting Pakistan more than if the regular deal had been struck. For starters it is worth $500 million more and suits the country’s election timeline. The nine month long agreement will carry us through a caretaker setup and elections and allow a new government to negotiate a new programme as it sees fit. 

“This is of course a very welcome step. Although we were unable to complete the 9th review we have managed to score relief in the interim. This clears out any doubts of default or restructuring in the near term and provides us with an excellent opportunity to make those structural changes that we all know about,” says Ahfaz Mustafa,  CEO at Ismail Iqbal Securities. 

The deal also means that foreign exchange from other lenders will be unlocked. “The new SBA will provide support to FX levels with a disbursement from the IMF and also unlocking lending from other global lenders,” says Amreen Soorani, head of research at JS Global. 

Welcome on all fronts 

The news of the staff level accord has spread throughout the country as a welcome development. Speaking to Profit, former KP finance minister and PTI stalwart Taimur Khan Jhagra said that the deal was welcome and no one from the opposition would be criticising it. 

“The deal is welcome. No one from our party is really criticising the deal or will do so the way they were criticised for going to the IMF. It is a very simple matter. We needed the IMF agreement to avoid default, and the cost of defaulting would be much higher than the cost of going to the IMF,” he tells us over the phone on Eid day.

“This really leads me to the final point. The IMF deal is something that no one should be upset about. The question is what we do after the IMF deal. Are we going to kick the can down the road or decide if we need a sustainable economic recovery? We have a habit of deferring economic pain without realising delaying the inevitable only makes it come back stronger.” 

There are also expectations that the agreement will result in better market results. According to Ahfaz Mustafa, the equity markets will take the development positively by the foreign exchange markets are harder to call. 

“The euro bonds will undoubtedly rally, the local debt market may wait to see if there are any prior actions needed in the interim such as an electricity price hike or any other inflationary steps. It is more tricky with the forex markets. There will be a strengthening effect due to the potential inflows but there will also be instant pressure to clear pending Imports and open imports in general so its best to let the market find its own equilibrium without intervening at all.”