Pakistan and IMF reach deal for releasing $700m from $3bn bailout package

Islamabad, Pakistan – Pakistan and the International Monetary Fund (IMF) have reached a preliminary deal for the release of $700m from a $3bn bailout package after two weeks of talks with the global lender.

The IMF on Wednesday said it reached a staff-level agreement with Pakistan’s caretaker government on the first review of the $3bn fund.

“Upon approval [from IMF executive board], around $700m will become available bringing total disbursements under the programme to almost $1.9 billion,” IMF’s Pakistan mission chief Nathan Porter said in a statement.

The $700m fund is the second tranche of the bailout the IMF signed with Pakistan in June this year. The next month, the cash-strapped country – on the verge of default – received the first tranche of $1.2bn and was asked by the IMF to take a series of steps, including revising its budget and ending electricity and fuel subsidies.

After its two-week review of Pakistan’s economic situation that ended on Wednesday, the IMF in its statement said, “A nascent recovery is underway, buoyed by international partners’ support and signs of improved confidence.”

The statement added that inflation – which in May hit 38 percent, the highest in four decades, and is currently hovering at about 30 percent – is “expected to decline over the coming months amid receding supply constraints and modest demand”.

But the global lender cautioned the country’s economy was not out of the woods yet.

“Pakistan remains susceptible to significant external risks, including the intensification of geopolitical tensions, resurgent commodity prices, and the further tightening in global financial conditions. Efforts to build resilience need to continue,” it said.

Pakistan, home to 241 million people, has been facing financial and political instability for nearly two years. Its central bank’s foreign reserves depleted to less than $4bn, leaving just enough money for less than a month of import. It owes more than $20bn in external debt in the current fiscal year.

Meanwhile, the Pakistani rupee has lost more than 50 percent of its value against the dollar in a year.

Some analysts, however, say prudent policy decisions by the Pakistani government have improved macroeconomic fundamentals, such as inflation, which dropped to 27 percent in October.

Lahore-based economist Hina Shaikh told Al Jazeera the government has taken “bold steps” in accordance with the IMF requirements to “significantly increase” energy prices and ensure the value of the rupee is determined by market forces.

“If the government continues to meet the conditions of the IMF, it could pave the way for an elected government to negotiate for another package,” she said.

Khaqan Najeeb, former adviser to the Ministry of Finance, said Pakistan satisfying the IMF about its current economic policies was a good sign.

“It is now paramount that Pakistan stays with the IMF to meet its future external financing requirements. It is also pleasing to see the lender acknowledging the recent recovery in economy and hopeful of reduction in inflation in the coming months,” Najeeb told Al Jazeera.

With national elections scheduled in February, Shaikh said the announcement of the vote also adds “some stability” to the political situation.

“These tough measures and essential reforms were and are more likely to be rolled out during the caretaker set-up. An elected administration may hesitate to undertake difficult economic measures,” she said.