IMF Loan to Pakistan

General Studies Paper-2

Context: The Executive Board of the International Monetary Fund (IMF) decided to allow for “an immediate disbursement” of $1 billion (around Rs 8,500 crore) to Pakistan.

• This disbursal was done as part of IMF’s Extended Fund Facility (EFF) to Pakistan.

What is the Extended Fund Facility (EFF)?

• The Extended Fund Facility is a loan-based support mechanism provided by the IMF to countries that suffer from medium-term balance of payments problems, particularly due to structural deficiencies in their economies.
• Unlike short-term bailouts, the EFF is designed to assist countries in implementing structural reforms that take time to yield results.
• According to the IMF, EFF loans:
  • Offer longer repayment periods
  • Support reforms in fiscal governance, banking, taxation, etc.
  • Target countries with long-standing issues such as poor infrastructure, financial instability, or chronic budget deficits
• It is not financial aid or a grant—countries are expected to repay these funds along with agreed interest.

Resilience and Sustainability Facility (RSF)

• It provides affordable, long-term financing to support low- and vulnerable middle-income countries in implementing macro-critical reforms to address balance of payments risks, particularly those related to climate change and pandemic preparedness.
• It aims to strengthen macroeconomic resilience by supporting policy reforms that reduce these risks and enhance financial buffers.

Why does the IMF consider Pakistan for EFF Assistance?

• Despite its strategic ambitions, Pakistan’s economic fundamentals have steadily deteriorated over the past two decades.
• Stagnant GDP: Pakistan’s GDP in 2023 stood at $338 billion, lower than in 2017.
• Rising Inflation: Double-digit inflation for five consecutive years—culminating in 23.4% in 2024.
• Debt Dependence: Pakistan has availed 28 IMF loans in 35 years and borrowed from China, UAE, Saudi Arabia, Paris Club, Islamic Development Bank, and others.
• Weak Fundamentals: Low savings and investment, poor infrastructure, limited female workforce participation, and consistent fiscal mismanagement.
• According to the IMF, Pakistan’s recent efforts under the EFF have shown signs of progress:
  • Inflation dropped significantly to 0.3% in April 2025
  • Increase in foreign exchange reserves
  • Structural reforms like the Agricultural Income Tax and improved fiscal controls.

India’s Dissent: Strategic and Security Concerns

• India formally conveyed its strong objections to the IMF Board regarding the disbursement, highlighting two major concerns:
• Track Record of Misuse: India pointed to Pakistan’s poor utilization of previous IMF loans, often failing to implement promised reforms or misallocating funds.
• National Security Threats: Citing state-sponsored cross-border terrorism, India warned that the debt financing might be indirectly used to fund military or terror activities against India.
• While the IMF Executive Board does not allow member countries to vote “against” such proposals, India abstained from the decision as a diplomatic expression of protest.