Pakistan’s race to restart a stalled International Monetary Fund loan program took a positive turn as the country made a dramatic final attempt to appease the lender less than a week before the facility ends.

After days of talks with the IMF, the South Asian nation agreed to change its budget for the next fiscal year, pledging to raise taxes and cut expenses in a bid to cut its fiscal deficit. The fund had earlier raised objections to Pakistan’s spending plan, saying it was insufficient to meet the conditions of the bailout.

The latest measures turn the tables in Pakistan’s favor after a long impasse, increasing the chances the embattled nation will be able to avoid a sovereign default for now. The IMF’s $6.7 billion bailout package is due to expire Friday, with about $2.7 billion in loans yet to be given the green light.

Pakistan will “be able to secure the program now,” said Ammar Habib Khan, chief risk officer at Karandaaz Pakistan, an Islamabad-based nonprofit that works to increase financial inclusion by helping smaller companies access credit. “Unless, of course, something else breaks.”

Restarting the loans would provide a moment of respite for a nation that’s been battling multiple crises and edging closer to economic collapse this year. Record inflation is making it harder for people to buy fuel and put food on the table, foreign reserves are dwindling and debt payments loom. And the country has been wracked by political turmoil as the military cracked down on opposition leader Imran Khan, a popular former cricket star, in a move that damaged his hopes of returning as prime minister.

The IMF hasn’t publicly commented on Pakistan’s decision to change its budget. The fund didn’t respond to an email seeking comment.

The IMF loans are crucial as the South Asian nation faces about $23 billion of external debt payments for the fiscal year starting July, more than six times its foreign-exchange reserves. Pakistan has a $1.6 billion debt payment coming due in July, including a $1 billion Chinese deposit that is typically rolled over, the Dawn newspaper reported earlier this month, citing data from an official that it didn’t identify.

At the same time, the nation’s dollar stockpile has shrunk almost 60% in the past 12 months to $3.5 billion as of mid-June.

“Without the IMF, it would be difficult for Pakistan to avoid a default given their very limited reserves and large external debt service ahead,” said Eng Tat Low, an emerging-market sovereign analyst at Columbia Threadneedle Investments in Singapore.

Pakistan’s benchmark stock index rose as much as 2.5% on Monday, heading for the biggest gain in five months.

The “market has rallied hard after a long time because of the strong rumors that Pakistan has clinched the IMF deal post the alterations to the budget,” said Ahfaz Mustafa, chief executive officer of Ismail Iqbal Securities Pvt., a local brokerage.

The rupee was little changed. The currency has lost more than 20% this year after a devaluation in January, among the worst performers in the world.

The extra yield investors demand to hold Pakistan’s dollar bonds over US Treasuries climbed above 35 percentage points to near a record last week.

While the weekend’s developments may help Pakistan reach a deal with the IMF, they may also come at a cost to Prime Minister Shehbaz Sharif and his government. Higher taxes may hurt the administration’s already-low approval ratings at a crucial time in the runup to elections that must be held by October. That may further bolster the popularity of former premier Khan, who has been calling for early polls as he challenges the military’s influence in politics.

“Additional taxes on an already taxed formal segment would have unintended consequences,” Karandaaz Pakistan’s Khan said. But in the interim, they “may be helpful in unlocking access to the liquidity available through the IMF program.”

Aid has been on hold since November as the IMF and the government remained at loggerheads over issues such as the financing gap and taxes. The IMF has asked Pakistan to raise $6 billion in external financing while Pakistan had lined up $4 billion as of early June.

It also asked the nation to restore proper foreign-exchange market functioning. While the rupee has been stable since then, the gap between the interbank and the retail market has narrowed.

Sharif’s government took the latest steps even after repeatedly saying it had fulfilled the IMF’s conditions. Officials had already increased taxes and energy prices and allowed the currency to weaken.

Still, even if Pakistan succeeds in restarting the IMF loans, it will only provide a temporary respite given its large external debt and the limited size of the remaining loans. Finance Minister Ishaq Dar has said the new government formed after elections will need to decide on securing more IMF aid.

“If Pakistan is able to walk this tightrope then it may be able to avoid defaulting before elections, but afterwards a reprofiling of its external obligations will be required,” said Patrick Curran, a senior economist at Tellimer based in Portland, Maine, who visited the nation last week. Pakistan will ultimately “have to rely on the goodwill of bilateral partners.”

--With assistance from Muneeza Naqvi.

Author: Karl Lester M. Yap and Faseeh Mangi