(Bloomberg) -- The International Monetary Fund will continue its dialogue and close engagement with Pakistan after constructive discussions about policies and reforms needed to unlock the nation’s loan, the lender said.

The Washington-based fund and Pakistan made “considerable progress” during a weeklong mission that ended on Wednesday, including on the need to continue to address high inflation and the elevated fiscal and current-account deficits, the IMF said in a statement.

The IMF said that the decision by Pakistan’s central bank to raise the target interest rate to 13.75% on Monday was a “welcome step,” but noted that on spending, the nation has deviated from policies agreed in the last loan review, partly reflecting fuel and power subsidies announced in February.

The fund’s team emphasized the urgency of “concrete policy actions,” including in the context of removing fuel and energy subsidies and the 2023 fiscal year budget, to meet program objectives.

Pakistan’s external bonds due in 2031 were up more than 1.5 cents on Wednesday to 64 cents on the dollar, while a sukuk note maturing in December rose. The extra yield investors demand to hold Pakistan bonds over US Treasuries narrowed by 60 basis points to 12.77 percentage points on Wednesday, according to JPMorgan Chase & Co. data, still lingering in distressed territory.

Pakistan and IMF have been negotiating over the remaining $3 billion from a loan program, which is needed to keep the economy afloat and avert a default for the second time in its history. The bailout program announced in 2019 has been suspended due to Islamabad’s failure to meet some loan conditions, including cutting energy subsidies.

High global commodity prices and rising imports further exacerbated economic troubles for the South Asian nation. Tackling Asia’s second-fastest inflation, the country’s central bank has raised rates by 675 basis points from the pandemic-era lows. Its currency has hit record lows while its foreign-exchange reserves of $10.2 billion cover less than two months of imports. 

Political uncertainty also looms large. Pakistan’s ousted premier Imran Khan plans to push ahead with protests to force early elections despite a government ban.

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