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Pakistan Pledges $7 Billion IMF Aid Deal Will Be Its Last

Men reach out to buy subsidized flour sacks from a truck in Karachi, Pakistan. (January 10, 2023). (Photo/Reuters)
Men reach out to buy subsidized flour sacks from a truck in Karachi, Pakistan. (January 10, 2023). (Photo/Reuters)
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Pakistan Pledges $7 Billion IMF Aid Deal Will Be Its Last

Men reach out to buy subsidized flour sacks from a truck in Karachi, Pakistan. (January 10, 2023). (Photo/Reuters)
Men reach out to buy subsidized flour sacks from a truck in Karachi, Pakistan. (January 10, 2023). (Photo/Reuters)

The International Monetary Fund has agreed to loan Pakistan $7 billion to bolster its faltering economy, with Islamabad pledging Saturday it would be the last time it relied on relief from the Washington-based lender.
The South Asian nation agreed to the deal -- its 24th IMF payout since 1958 -- in exchange for unpopular reforms, including widening its chronically low tax base, AFP said.
Pakistan last year came to the brink of default as the economy shriveled amid political chaos following catastrophic 2022 monsoon floods and decades of mismanagement, as well as 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.
"This program should be considered the last program," Prime Minister Shehbaz Sharif told ministers and revenue officials in Islamabad. "We should tax those who are not being taxed."
- Dealing with a downturn -
Islamabad wrangled for months with IMF officials to unlock the new loan announced Friday, which will be paid out over three years subject to approval by the organization's Executive Board.
It came on condition of far-reaching reforms including hiking household bills to remedy a permanently crisis-stricken energy sector and uplifting pitiful tax takings.
In a nation of over 240 million people and where most jobs are in the informal sector, only 5.2 million filed income tax returns in 2022.
During the 2024-25 fiscal year that started at the beginning of July, the government aims to raise nearly $46 billion in taxes, a 40 percent increase from the previous year.
More unusual methods have seen the tax authority block 210,000 SIM cards of mobile users who have not filed tax returns in a bid to widen the revenue bracket.
Under the deal "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", IMF Pakistan Mission Chief Nathan Porter said in a statement.
Islamabad also aims to reduce its fiscal deficit by 1.5 percent to 5.9 percent in the coming year, heeding another key IMF demand.
The IMF said the loan and its conditions should allow Pakistan to "cement macroeconomic stability and create conditions for stronger, more inclusive and resilient growth".
But Pakistan's public debt remains huge at $242 billion, and servicing it will still swallow up half of the government's income in 2024, according to the IMF.
Analysts have criticized Islamabad's measures as surface-level reforms aimed at courting the IMF without addressing underlying problems.
 

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Japan’s Economy Rebounds Strongly on Consumption Boost, Backs Case for More Rate Hikes

People look at the city's skyline from the Bunkyo Civic Center Observation Deck in Tokyo on August 14, 2024. (AFP)
People look at the city's skyline from the Bunkyo Civic Center Observation Deck in Tokyo on August 14, 2024. (AFP)
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Japan’s Economy Rebounds Strongly on Consumption Boost, Backs Case for More Rate Hikes

People look at the city's skyline from the Bunkyo Civic Center Observation Deck in Tokyo on August 14, 2024. (AFP)
People look at the city's skyline from the Bunkyo Civic Center Observation Deck in Tokyo on August 14, 2024. (AFP)

Japan's economy expanded by a much faster-than-expected annualized 3.1% in the second quarter, rebounding from a slump at the start of the year thanks to a strong rise in consumption and backing the case for another near-term interest rate hike.

The Bank of Japan had forecast that a solid economic recovery will help inflation sustainably hit its 2% target, and justify raising interest rates further after it hiked them last month in its continued quest to exit years of massive monetary stimulus.

The increase in gross domestic product (GDP) compared with a median market forecast for a 2.1% gain, and followed an upwardly revised 2.3% contraction in the first quarter, government data showed on Thursday. The reading translates into a quarterly rise of 0.8%, beating a 0.5% increase expected by economists in the Reuters' poll.

"The results are simply positive overall, with signs for a pick-up in private consumption backed by real wage growth," said Kazutaka Maeda, an economist at Meiji Yasuda Research Institute.

"It supports the BOJ's view and bodes well for further rate hikes, although the central bank would remain cautious as the last rate increase had caused a sharp spike in the yen."

Private consumption, which accounts for more than half of the economic output, rose 1.0%, compared with forecast for a 0.5% increase and the first gain in five quarters.

Private consumption has been a soft spot in the economy, which has stuttered over the past year as households struggle with rising living costs, blamed in part on higher import prices due to the weak yen.

POST-KISHIDA CHALLENGE

Public discontent over rising living costs was one of the factors that prompted Japan's Prime Minister Fumio Kishida to announce he would resign next month.

Kishida's replacement could call a snap election in the fall if the approval rating is high, said Kengo Tanahashi, economist at Nomura Securities, adding that the BOJ is unlikely to opt for an additional rate hike during that period.

"We believe that the BOJ will raise interest rates one more time in October or December, but the possibility of a rate hike in October has decreased considerably in light of Prime Minister Kishida's decision not to run for office," Tanahashi said.

The government expects the economy will continue to recover gradually as the spring wage talks were strong this year and the minimum income will be raised in October, economy minister Yoshitaka Shindo said in a statement.

Striking a note of caution, Shindo said Japan must pay close attention to economic-downturn risks overseas and market volatility, as investor concerns grow of a possible US recession that sparked last week's rout in global financial markets.

The Nikkei share average finished the morning trading up 1.01%, mainly buoyed by Wall Street's gains overnight, while the Japanese yen was little changed around 147.38 to the dollar after the data.

CONSUMPTION RECOVERY

An influx of tourism has also helped boost retail sales in Japan. Fast Retailing, owner of clothing brand Uniqlo, highlighted strength of the domestic market in its most recent earnings, lifted by a surge in duty-free sales.

Spending by tourists is expected to reach 8 trillion yen ($54.74 billion) this year, according to the government, which sees tourism as an important growth driver in an economy long hobbled by an ageing population.

Capital spending, a key driver of private demand-led growth, rose 0.9% in the second quarter, matching a median market forecast in a Reuters poll. Business investment might come under pressure in the months ahead as exporters face global demand pressure.

External demand, or exports minus imports, knocked 0.1 point off growth, the data showed.

The BOJ raised interest rates last month and detailed a plan to taper its huge bond buying in another step toward phasing out its massive monetary stimulus.

Japan is a global outlier in raising rates as most major central banks, including the US Federal Reserve, have begun to ease policy or are moving in that direction.

The first rise in consumption in more than a year "should encourage the Bank of Japan to press ahead with another rate hike later this year," said Marcel Thieliant, head of Asia-Pacific at Capital Economics.