(Bloomberg) -- Pakistan won final approval for the disbursement of about $700 million in aid from the International Monetary Fund, vital support for the embattled South Asian economy ahead of elections next month.

The IMF’s executive board approved the loan, the Washington-based lender said in a statement on Thursday. The nation’s dollar bonds rallied, posting the top five gains in emerging markets on Friday. The 2026 notes gained 1.5 cents to 71.6 cents on the dollar, extending Thursday’s 3.1 cent rally.

Pakistan’s performance under the program “has supported significant progress in stabilizing the economy,” Antoinette Sayeh, IMF deputy managing director, said in a statement posted on the website. “There are now tentative signs of activity picking-up and external pressures easing.”

Pakistan’s economy is expected to grow 2% in the fiscal year 2024 after contracting in the previous year, the IMF said. The nation’s dollar bonds delivered returns of over 90% last year as default risks eased following the IMF bailout, catapulting them into the top rankings in emerging markets. 

Elections

The IMF funds are critical for Pakistan to secure financing from other creditors like Saudi Arabia and will give a boost to Pakistan’s caretaker government under Prime Minister Anwaar-ul-Haq Kaka ahead of elections scheduled for February.

“So long as the caretaker government is able to maintain fiscal consolidation and continue to implement IMF-mandated reforms, front-end bonds should remain relatively well supported.” said Eng Tat Low, emerging-market sovereign analyst at Columbia Threadneedle Investments in Singapore.

Despite the aid, Pakistan remains under financial strain. The nine-month IMF program is set to end in March and Interim Finance Minister Shamshad Akhtar has already signaled the nation may need another loan from the IMF to support the economy. Pakistan has about $1 billion in dollar-denominated bonds due in April.

The IMF said Thursday that Pakistan needs a market-determined exchange rate to buffer external shocks, and a tight monetary stance to ensure that inflation returns to more moderate levels. The nation also needs to boost foreign reserves, the IMF said, with latest data showing reserves stood at $8.2 billion in early January. 

The rupee has stabilized in recent months after sliding to a record low in early September. The currency traded around 280 rupees per dollar on Thursday.

The IMF has now disbursed a total of about $1.9 billion under the program, it said. The approval came after the IMF executive board’s completion of the first review of the $3 billion Stand-By Arrangement program approved in July, and followed a staff-level agreement in November. 

--With assistance from Ezra Fieser.

(Updates pricing throughout, adds comment in 6th para)

©2024 Bloomberg L.P.