IMF’s deal will be crucial in stabilizing the deteriorating economy and lessening the financial gap. GDP has ceased to increase in Pakistan, with growth projected to be just 0.29 percent for the fiscal year ending June 30. The major causes of current financial instability are global energy crisis, recent catastrophic floods, corruption and political turmoil within the country. Over the past 30 years, Pakistan has periodically sought assistance from the IMF as a result of trade deficit, significant borrowing to fund government spending, and substandard debt management. Additionally, inflation has been rapidly increasing and hit a record high of 38% in May. The middle and lower middle class, in particular, are suffering from the skyrocketing price of necessities.

In the end of June, the country’s foreign exchange reserves have decreased to just $3.5 billion,  three weeks’ worth of imports, despite the country’s currency falling to historic lows in respect to the US dollar this year. Pakistan’s economic crisis would be temporarily alleviated by new IMF funds, which would also make it possible for top foreign creditors to provide more funding, improve the prospects for foreign direct investment, and prevent a debt default. Although the agreement would enable Pakistan to take a step back from the edge, it won’t permanently resolve the nation’s economic issues. They will not be seriously challenged by changes in policy.

After months of inconclusive negotiations, Pakistan and the International Monetary Fund (IMF) finally be closed a standby agreement. According to experts, the arrangement should be seen as an interim relief which buys Pakistan the time and capabilities that are required to bring its economic state back from the brink of default. Besides, Islamabad has taken action to meet IMF demands needed to release $1.1 billion in assistance under a ongoing assistance package set to expire at the end of this week. In order to reduce the country’s severe fiscal deficit, the new budget is sought to be amended to increase taxes by $750 million.

All import restrictions will also be lifted in order to reduce the country’s equally terrible current account deficit. The Central Bank of Pakistan increased interest rates to a record-high 22 percent, an increase of more than 12 per cent since April 2022. The actions are meant to lessen demand and relieve pressure on Pakistan’s foreign reserves, which at the moment are barely enough to support a month’s worth of imports. In addition to, Pakistan has also struck a 3-billion-dollar standby deal with IMF via staff level agreement that will act as breather for the cash stripped country. It is a short-term arrangement that will address Pakistan’s immediate needs, not to have debt default, and ill provide a limited breathing space.

To fill the financing gap on its external account, Pakistan needs almost 23 billion dollars, that is huge. Pakistan’s needs to do much more to establish its economy on strong footing than simply looking out for bailout package at the end of every fiscal year. It needs to bring serious structural reforms within the framework of country which can address Pakistan’s perennial financial crisis on durable basis. Successive governments have been living beyond their means, failed to raise taxes, to match the expenditures with economic reserves of the country, they have been borrowing instead of finding means to raise exports that has led to huge financial gap in trade and current account deficit. The root of Pakistan’s financial crisis is fiscal crisis, unless Pakistan is able to deal with it there is no way out of this existing economic turmoil.

Pakistan’s government has reached out to global monetary institution for more than two dozen times. This IMF bailout package, primarily, address two immediate issues, former is the ability to conduct elections and the later is protection from defaulting. However, there is another core benefit, IMF’s grant will act as certificate for the country to get loans from middle eastern, oil rich, countries. The country will witness stability in the currency, stock market and positive sentiments of business community for trade, internally.  The current government may go for short term sweetener for bringing ease for consumers to gain public support that will be detrimental and counterproductive in the long term.

Months of political chaos in Pakistan has scared off potential foreign investors that has inimical effect on Pakistan’s deteriorating exchange reserves and foreign direct investment has plunged to the all-time low. Furthermore, conditions defined by IMF for this staff level standby agreement are tough, and will have direct impact on population owing to the fact that Pakistan is an import-oriented country.

To fix the economy in the long term, Pakistan, needs to take critical measure that involve halting lavish spending by the government, taking business community into confidence to reach targeted tax collection, ensuring stable, liberal and consistent business environment to attract Foreign Direct Investment (FDI). Until and unless expenditures don’t go down and revenue doesn’t jack up, the crisis will keep looming. One of the reasons for the low tax collection is cash-based economy, measures to digitalize economy are crucial to expand the net tax collection. To expand the net tax, the country also needs to fix bleeding state owned enterprises extending from airlines to railways, thus by bringing key structural reforms. Furthermore, lack of conducive environment, political and policy instability create obstructionist environment for economic growth. IMF has given a brief relief but the incumbent government needs to work very hard.