By James Mackenzie
ISLAMABAD, July 3 (Reuters) - The International Monetary Fund Executive board gave formal approval on Wednesday to a three-year, $6 billion loan package for Pakistan to rein in mounting debts and stave off a looming balance of payments crisis.
Board approval will allow immediate disbursement of around $1 billion, with the remainder to be phased in over the period of the programme, subject to quarterly review, the IMF said in a brief statement.
It said a full statement would be released later on Wednesday.
Prime Minister Imran Khan came to power last August, inheriting an economy plagued with problems but he was initially deeply reluctant to turn to the IMF, which has provided more than 20 bailout packages to Pakistan over the decades.
However despite securing billions of dollars in loans from friendly countries including China, Saudi Arabia and the United Arab Emirates, mounting economic headwinds forced his government to turn to the fund.
With foreign exchange reserves shrinking to only $7.3 billion, less than the equivalent of two months' worth of imports, and the budget deficit set to top 7% of gross domestic product this year, Pakistan faces tough economic medicine to tackle problems that have been years in the making.
The $60 billion China Pakistan Economic Corridor, launched in 2015, had promised a new beginning. Its infrastructure projects were intended to become a new foundation for growth, but they also required heavy imports of capital equipment, widening the trade deficit.
According to IMF forecasts, growth is expected to slow to 2.8% in the current fiscal year to June 2020, down from 2.9% in the year just ended and 5.2% in 2018.
Under the IMF's terms, the government is expected to let the rupee currency fall to help correct an unsustainable current account deficit and make it industries more competitive, while trying to expand the tax base in a country where only 1% of the 208 million population file returns.
The central bank, which controls the currency, has slashed the rupee to historic lows against the dollar, but this has piled more pressure on households facing inflation running at almost 9%.
In addition, in a bid to cut public debt, the government has set ambitious tax and revenue plans, despite failing to meet the previous year's targets and hiked prices in the creaking energy sector, where mounting debt backlogs have acted as a growing drain on government resources.
The combined package of belt-tightening measures have prompted anger from opposition parties which say the government hesitated too long before turning to the fund and have pledged a campaign of protests this month.
(Reporting by James Mackenzie Editing by Hugh Lawson and Peter Graff)