In a statement, the IMF said the three-year program should help Pakistan rebuild its reserves and prevent a crisis in the balance of payments.
IMF loans generally come with conditions for economic reform and should encourage other donors to step in with more funds.
Top finance ministry officials in Pakistan announced the Fund’s approval of a package in August, pending the board’s decision and Pakistan’s progress on fiscal reforms.
The new loan will arrive just in time. As of August, the central bank had only about $5 billion left in foreign currency reserves, enough to cover less than five weeks of imports.
The Asian Development Bank, one of Pakistan’s major lenders, estimates that Pakistan needs $6 billion to $9 billion to meet its obligations, including about $5 billion in outstanding debt on an earlier $11 billion IMF loan package.
Pakistan averted a balance of payments crisis in 2008 by securing the $11 billion IMF loan. This was suspended two years ago after economic and reform targets were missed.
This time around, the government had to fulfill certain conditions set by the IMF before the loan could be approved, including slashing costly subsidies on electricity and sending out notices to 10,000 delinquent taxpayers.
Pakistan has one of the lowest tax-to-GDP ratios in the world. The IMF wants it to do more to tackle rampant tax evasion by the wealthy elite.
Pakistan gets $540 million immediately, and the rest will be disbursed after regular reviews of the program, the Fund said.