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(Bloomberg) — Pakistan reached an initial agreement with the International Monetary Fund to unlock about $1.2 billion from a $7 billion bailout program, as geopolitical risks from the conflict in the Middle East threaten to upend its economic recovery.
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The South Asian country is set to have access to about $1 billion under the global lender’s so-called Extended Fund Facility, and about $210 million under the climate-focused Resilience and Sustainability Facility, the IMF said in a statement late Friday. The loan disbursement is subject to approval by the IMF Executive Board.
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The latest tranche would bring total disbursements under the two arrangements to about $4.5 billion, it said.
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Pakistan’s “inflation and the current account balance remained contained, and external buffers continued to strengthen,” the Washington-based lender said. “The authorities remain committed to pursuing sound and prudent macroeconomic policies to preserve the recent gains in macro-financial stabilization.”
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Still, it cautioned that the war in the Middle East “casts a cloud over the outlook as volatile energy prices and tighter global financial conditions risk putting upward pressure on inflation and weigh on growth and the current account.”
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Pakistan needs funds to support its cash-starved economy that’s heavily dependent on imported fuel. Prime Minister Shehbaz Sharif announced a series of austerity measures earlier this month to curb government spending and save fuel as the war in Iran disrupts energy supplies.
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The central bank “remains committed to keeping inflation within its target range and stands ready to raise interest rates should price pressures intensify or inflation expectations rise, including from passthrough of recent volatility in global food and fuel prices,” the IMF said. “Exchange rate flexibility should continue to serve as the primary shock absorber, including against spillovers from the conflict in the Middle East.”
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Pakistan has carried out sweeping reforms in recent years under the IMF program to rebuild its foreign-exchange reserves and meet debt obligations, raising gas and electricity prices and imposing new taxes. But those steps have fueled public protests.
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—With assistance from Tooba Khan.
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