The International Monetary Fund (IMF) said Wednesday it had reached a staff-level agreement with Pakistan, which if approved by its board, will pay off $1.1 billion for the indebted South Asian economy also saddled with a balance of payment crisis.
The funds are the final tranche of a $3 billion last-gasp rescue package Pakistan had secured last summer, which averted a sovereign debt default. Islamabad is also seeking another long-term bailout.
"The IMF team has reached a staff-level agreement with the Pakistani authorities on the second and final review of Pakistan's stabilization program," the IMF said in a statement.
"This agreement is subject to approval by the IMF's Executive Board," it added. The agreement expires on April 11 and while Pakistan has yet to be added to the IMF's executive board's calendar, officials say board approval is expected sometime in April.
The deal comes after the IMF mission held five days of talks with Pakistani officials to review the fiscal consolidation benchmarks set for the loan.
"Pakistan's economic and financial position has improved in the months since the first review, with growth and confidence continuing to recover on the back of prudent policy management and the resumption of inflows from multilateral and bilateral partners," the IMF said.
However, growth is expected to be modest this year and inflation remains well above target, as Pakistan needs more policy reforms to address its "economic vulnerabilities," the lender added.
Most Pakistan dollar bonds traded higher on Wednesday.
The 2027-maturing bond was up 0.25 cents at 83.957 cents on the dollar while the 2025 bond was up 0.21 cents at 92.023 cents on the dollar.
New agreement
The IMF said Pakistan had expressed interest in another bailout during the review talks, with discussions on a medium-term program expected to start in the next few months.
Prime Minister Shehbaz Sharif told his ministers on Wednesday that Pakistan needed a new IMF loan, adding that increasing the tax base was mandatory to gaining this deal.
The government has not officially stated the size of the additional funding it is seeking. Bloomberg reported in February that Pakistan planned to ask for a loan of at least $6 billion.
Ahead of the stand-by arrangement, Pakistan had to meet IMF conditions including revising its budget and raising interest rates, as well as generating revenues through more taxes and hiking electricity and gas prices.
The IMF said the government was committed to these measures and called for broadening the tax base as well as adjusting power and gas tariffs.
Economist Sakib Sheerani said the new long-term agreement would likely trigger more conditions from the IMF.
"While successful completion of the SBA improves the country's chances of securing a follow-up program, the next arrangement is likely to be substantially different than the current one – focusing more on deeper structural conditionality such as the public sector wage and pension bill," he said.