NEW DELHI/ISLAMABAD (Financial Times) -- The IMF has approved a $6bn bailout package for Pakistan after Prime Minister Imran Khan's government unveiled an austerity budget and introduced painful reforms to secure the funding and address an economic crisis.
The bailout allows for an immediate disbursement of $1bn and should unlock about $38bn in investment from Pakistan's international partners, the IMF said in a statement.
Mr. Khan had to radically depart from his election promise of building an Islamic welfare state to stabilize the economy, which faces a balance of payments deficit caused by high imports, sluggish exports and a ballooning fiscal shortfall.
In return for IMF support, Mr. Khan's government has slashed costly government subsidies, allowed the rupee to slide to record lows, while pledging to increase tax revenue.
"Pakistan is facing significant economic challenges on the back of large fiscal and financial needs and weak and unbalanced growth," IMF first deputy managing director David Lipton said. "A flexible market-determined exchange rate and an adequately tight monetary policy will be key to correcting imbalances, rebuilding reserves, and keeping inflation low."
The program, described as Pakistan's toughest bailout package yet, is designed to address structural weaknesses in the economy, including a weak tax administration and inefficient state-owned enterprises.
In June, Pakistan unveiled its austerity budget, outlining an ambitious tax revenue target of Rs5.6tn ($35.4bn) -- an increase of more than 30 percent compared with last year -- to balance its Rs7tn budget.
"The big question now is how they are going to collect that revenue, their target is Herculean, it just doesn't seem realistic," said Asad Sayeed, a Karachi-based economist.
Economic growth is expected to fall to 2.4 percent in the coming financial year, according to the IMF. Yet if the economy stabilizes, analysts point out that creating growth momentum will be difficult, given Pakistan's weak manufacturing sector.
Big investments from China's global infrastructure project, the Belt and Road Initiative, have not sparked an economic boom. Mr. Khan's government has denied that Pakistan's mountain of debt is connected to the $62bn in Chinese deals.
"The IMF program focuses on consolidation," said Mohammad Suhail of Topline Securities in Karachi. "The objective is not the revival of growth. Policies such as targeting of tax evasion will weaken business confidence. The next one or two years will be very tough."
Mr. Khan had initially tried to avoid going to the fund, instead securing more than $9bn in bilateral loans from Saudi Arabia, United Arab Emirates and China. But with foreign exchange reserves able to cover only two months of imports and an unsustainable current-account deficit, he was left with no option.
The IMF announcement came in the same week that the U.S. labeled the Balochistan Liberation Army, which seeks independence for the southwestern province, as a terrorist group in a victory for Mr. Khan that suggested thawing ties between Islamabad and Washington.
U.S. President Donald Trump is set to host Mr. Khan this month in Washington, the first meeting between the two leaders.
The rupee gained 1 percent against the dollar on Thursday after the release of the IMF program. It has depreciated more than 50 percent since the end of 2017.