Pakistan and the International Monetary Fund (IMF) have reached a $5.3 billion initial bailout package on Thursday. The bailout package is aimed at improving Pakistan’s troubled economy and rapidly diminishing forex reserves.  Declan Walsh and Salman Masood of the New York Times report that the package will soothe Western fears about Pakistan’s flagging economy.

Pakistan

Pakistan To Implement Structural Reforms

IMF requires the south Asian country to implement several economic reforms that may not be very popular with Pakistanis. The deal will also give some breathing room to the newly appointed prime minister Nawaz Sharif, whose government is facing a big challenge of sheer energy crisis in the country.

IMF mission chief Jeffrey Franks and Pakistan’s finance minister Muhammad Ishaq Dar said at a press conference that the loan will be disbursed over the next three years. Pakistan has to repay the debt within 10 years after a grace period of four years. The loan will carry an interest rate of 3 percent. Finance minister Ishaq Dar wants the package to be increased to $7.3 billion, but that hasn’t been finalized yet.

A Bitter History

IMF and Pakistan have had a bitter history. The country’s previous government failed to repay the previous debt about six years ago, and Pakistan still owes $5 billion of that loan. However, Mr. Franks said that Nawaz Sharif government won’t be punished for the mistakes of the previous government. IMF and Pakistan’s previous government had agreed on structural reforms during the last bailout, but those reforms never happened.

The bailout package is yet to be approved by IMF board. Franks said the bill will be presented before the board in early September. Terms of the package require Pakistan to boost growth, bring down budget deficit, improve fiscal stability, increase the poor tax collection and reduce electricity shortages. As of June 21, Pakistan has $6.3 billion in forex reserves, that’s enough to cover only 1.5 months of imports. The country’s budget deficit spiked to about 9 percent last year. Mr. Franks said the electricity crisis has hampered the country’s growth potential.

Nawaz Sharif hasn’t been in favor of international financial help. Even during his election campaigns, Sharif favored economic autonomy. However, analysts say that the government has no other choice but to accept the package. Part of the package will be used to serve the existing IMF loans.