Under the IMF deal, Pakistan has agreed to increase tax revenues through measures of 1 and a half per cent of GDP in FY25 and three per cent of GDP over the programme.

Pakistan and the International Monetary Fund (IMF) have agreed on a $7 billion aid package spread over more than three years to help the cash-strapped country deal with its chronic economic issues.

“Building on the economic stability achieved under the 2023 Stand-by Arrangement (SBA), IMF staff and the Pakistani authorities have reached a staff-level agreement on a 37-month Extended Fund Facility Arrangement (EFF) of about $7 billion,” the global lender said in an overnight statement, confirming the much-awaited deal subject to the approval by the IMF’s Executive Board.

The Washington-based lender further said the new programme aims to support the authorities’ efforts to cement macroeconomic stability and create conditions for stronger, more inclusive, and resilient growth in the cash-strapped country.

“This includes steps to strengthen fiscal and monetary policy and reforms to broaden the tax base, improve State Owned Enterprises’ (SOE) management, strengthen competition, secure a level playing field for investment, enhance human capital, and scale up social protection through increased generosity and coverage in the Benazir Income Support Programme (BISP),” it read.

The International Monetary Fund also stated that continued strong financial support from Pakistan’s development and bilateral partners would be critical for the programme to achieve its objectives.

An IMF team led by Nathan Porter, IMF’s Mission Chief to Pakistan, held discussions with the Pakistani side during the May 13-23, 2024, staff visit to Islamabad.

According to the statement, the new programme aims to capitalise on the hard-won macroeconomic stability achieved over the past year by furthering efforts to strengthen public finances, reduce inflation, rebuild external buffers and remove economic distortions to spur private sector-led growth.

About 10 million people at risk of slipping into poverty in Pakistan: World Bank

Under the deal, Pakistan has agreed to increase tax revenues through measures of 1 and a half per cent of GDP in FY25 and three per cent of GDP over the programme.

“Revenue collections will be supported by simpler and fairer direct and indirect taxation, including by bringing net income from the retail, export, and agriculture sectors properly into the tax system,” it said.

The statement said the federal and provincial governments agreed to re-balance spending activities, and at the same time, the provinces will take steps to increase their tax-collection efforts, including in sales tax on services and agricultural income tax.

The latest agreement is the country’s latest turn to the global lender for help in propping up its economy and dealing with its debts through big bailouts. Earlier this year, the IMF approved the immediate release of the final $1.1 billion tranche of a $3 billion bailout to Pakistan.

Finance Minister Muhammad Aurangzeb said the government planned to seek a long-term loan to help stabilise the economy after the end of that bailout package.

The deal was announced just two weeks after Pakistan approved a tax-laden budget for the 2024-25 fiscal year with the approval of the IMF.

Analysts said the new budget of about $68 billion — up from $50 billion in the last fiscal year — was aimed at qualifying for a long-term IMF loan of $6 billion to $8 billion to help stabilise the economy. Pakistan in 2023 nearly defaulted on the payment of foreign debts.