On May 9, 2025, the International Monetary Fund (IMF) approved a $1 billion disbursement to Pakistan under its existing $7 billion Extended Fund Facility (EFF) program. This move came after a successful review of Pakistan’s economic reforms and fiscal measures, signaling international confidence in the country’s economic recovery efforts. In addition to the $1 billion under the EFF, the IMF also approved a $1.4 billion loan under the Resilience and Sustainability Facility (RSF), which is aimed at helping Pakistan address climate-related vulnerabilities.
This financial support is crucial for Pakistan, which has faced severe economic challenges over the past few years, including a balance of payments crisis, inflationary pressures, dwindling foreign reserves, and the economic fallout of political instability and climate-induced disasters. But before delving further into what this means for Pakistan, it’s important to understand what the IMF is and how its loans work.
What is the IMF?
The International Monetary Fund (IMF) is a global financial institution established in 1944 during the Bretton Woods Conference. It currently has 190 member countries. Its core purpose is to ensure the stability of the international monetary system the system of exchange rates and international payments that enables countries to transact with each other.
The IMF provides monetary support and policy advice to countries facing economic instability or balance of payments problems. It also conducts surveillance of the global economy, offers technical assistance, and facilitates international trade and economic growth.
How IMF Loans Work
IMF loans are not like traditional development loans aimed at infrastructure or poverty alleviation. Instead, they are designed to help countries stabilize their economies when they face serious financial crises. The IMF typically steps in when a country’s foreign exchange reserves are dangerously low, inflation is high, the local currency is depreciating rapidly, or when the country is unable to meet its external debt obligations.
Loans are disbursed under specific arrangements such as:
- Extended Fund Facility (EFF) – Focused on structural reforms, fiscal consolidation, and long-term economic stability.
- Stand-By Arrangements (SBA) – Intended for short-term economic crises.
- Resilience and Sustainability Facility (RSF) – Designed to help countries build climate resilience or manage pandemic risks.
These loans are not unconditional. Countries receiving IMF loans must agree to implement economic reforms. These reforms, known as “conditionalities,” often include austerity measures, subsidy cuts, tax reforms, currency devaluation, and central bank independence. While these measures aim to stabilize the economy, they can also result in short-term hardships for the population, such as increased inflation and reduced social spending.
The IMF does not offer grants; its loans must be repaid with interest, and the terms of repayment vary depending on the type of facility.
Pakistan’s Economic Struggles and IMF Support
Pakistan has faced a prolonged economic crisis marked by high inflation, political instability, and vulnerability to climate disasters such as the devastating floods of 2022. The country’s foreign exchange reserves fell to alarmingly low levels in 2023, threatening its ability to import essential goods such as fuel, medicine, and food.
In 2024, Pakistan entered into a $7 billion Extended Fund Facility with the IMF to stabilize its economy. This required Islamabad to undertake difficult reforms including reducing fuel and electricity subsidies, increasing tax revenue, and maintaining a market-determined exchange rate.
The recent approval of a $1 billion tranche indicates that Pakistan has met the IMF’s performance criteria. The funds will help stabilize the currency, support the budget, and boost investor confidence. More importantly, the IMF’s endorsement often opens the door for additional financing from other multilateral institutions like the World Bank and the Asian Development Bank, as well as from bilateral lenders.
In addition, the newly approved $1.4 billion under the Resilience and Sustainability Facility will assist Pakistan in tackling climate-related challenges, particularly in strengthening infrastructure to withstand floods and other natural disasters. This is critical, given the country’s ranking among the top 10 nations most vulnerable to climate change.
Political Tensions and India’s Objection
Interestingly, India abstained from voting on the IMF board’s approval of Pakistan’s disbursement. Citing concerns that the funds could be misused, particularly for state-sponsored cross-border activities, India voiced strong dissent. However, these objections did not influence the board’s decision.
Prime Minister Shehbaz Sharif responded firmly, stating that efforts to derail Pakistan’s IMF program had failed, and reaffirmed the government’s commitment to transparency and reform.
Looking Ahead
The IMF’s continued support is a lifeline for Pakistan’s fragile economy. However, the true challenge lies in sustaining economic reforms and ensuring that the benefits of stabilization are felt across the population and not misused for sponsoring terror related activities. While the IMF loans provide much-needed breathing room, long-term economic health will depend on sound governance, domestic resource mobilization, and investments in climate resilience and social protection. As Pakistan moves forward, its ability to manage external pressures while keeping domestic welfare intact will be the ultimate test of its economic recovery strategy.
Sources:
- https://www.hindustantimes.com/india-news/imf-approves-1-billion-disbursement-to-pakistan-says-pm-shehbaz-sharifs-office-101746811364379.html?utm_
- https://www.reuters.com/world/asia-pacific/pakistan-says-imf-clears-loan-review-frees-1-bln-2025-05-09/?utm_.
- https://indianexpress.com/article/business/imf-loan-tranche-pakistan-india-abstains-vote-strong-dissent-9993695/?utm_
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