Pakistan said Thursday it would have to pass through "transitional pain" after the International Monetary Fund (IMF) approved a new relief package of $7 billion to bolster its faltering economy, struggling under high debt.
Although the South Asian nation's economy has stabilized since it came close to defaulting last summer, it depends on IMF bailouts and loans from friendly countries to service its huge debt, which swallows up half of its annual revenues.
"There will be transitional pain, but if we are to make it the last program, then we have to carry out structural reforms," Finance Minister Muhammad Aurangzeb told local broadcaster Geo News.
The three-year loan program "will require sound policies and reforms" to support Pakistan's ongoing efforts to strengthen its economy "and create conditions for a stronger, more inclusive, and resilient growth," the IMF said in an earlier statement.
In July, Pakistan agreed to the deal – its 24th IMF payout since 1958 – in exchange for unpopular reforms, including cutting back on power subsidies and widening its chronically low tax base.
Speaking on the sidelines of the United Nations General Assembly (UNGA) in New York on Wednesday, Prime Minister Shahbaz Sharif said the deal came through thanks to the "tremendous support" of Saudi Arabia, China and the United Arab Emirates (UAE).
"In the final phase (of negotiations), the IMF's conditions were related to China. The way the Chinese government supported and strengthened us during this time is something I am truly grateful for," he told reporters shortly before the deal was announced.
Last month, Aurangzeb had said Pakistan was negotiating a $12 billion loan reprofiling from bilateral lenders.
The amount comprised $5 billion from Saudi Arabia, $4 billion from China and $3 billion from the UAE for a three- to five-year period.
Reacting to the news, Pakistan's stock exchange opened on a positive note, reaching a new record high of 82,905.
'Formidable vulnerabilities'
At the end of 2023, Pakistan – long locked in a cycle of political and economic crises – had amassed a total debt of more than $250 billion, or 74% of gross domestic product (GDP), according to the IMF.
About 40% of its debt is owed to external creditors in foreign currencies. Its biggest single foreign creditor is China and Chinese commercial banks, at just under $30 billion, followed by the World Bank at more than $20 billion, according to the report.
Last year, Pakistan came to the brink of default as the economy shriveled amid political chaos following catastrophic 2022 monsoon floods, decades of mismanagement, and a global economic downturn.
It was saved by last-minute loans from friendly countries as well as an IMF rescue package, but its finances remain in dire straits, with high inflation and staggering public debts.
Islamabad wrangled for months with IMF officials about unlocking the new loan.
It came on the condition of far-reaching reforms, including hiking household bills to remedy a permanently crisis-stricken energy sector and raising pitiful tax takings.
In a nation of more than 240 million people where most jobs are in the informal sector, only 5.2 million filed income tax returns in 2022.
The IMF said Pakistan "has taken key steps to restore economic stability with consistent reforms." But "despite this progress, Pakistan's vulnerabilities and structural challenges remain formidable," it warned.
"A difficult business environment, weak governance, and an outsized role of the state hinder investment, which remains very low compared to peers," it added.