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The International Monetary Fund (IMF) said Wednesday that it has approved a $3 billion loan agreement for Pakistan, unlocking crucial funding for the troubled South Asian economy.

In a statement, the IMF said its executive board gave the green light to the nine-month standby arrangement, in order "to support the authorities' economic stabilisation program."

This follows a staff-level agreement between the fund and Pakistan announced last month, and the latest approval allows an immediate disbursement of around $1.2 billion.

The approval of Stand-by Agreement of $3 billion by the IMF's Executive Board a little while ago is a major step forward in the government's efforts to stabilise the economy and achieve macroeconomic stability. It bolsters Pakistan's economic position to overcome immediate- to…

— Shehbaz Sharif (@CMShehbaz)

Pakistan has suffered from a balance-of-payments crisis as it attempts to service crippling external debt amid a fraught political environment - following the removal of the country's former prime minister Imran Khan.

Inflation has rocketed, the rupee has reached a record low against the dollar and the country is struggling to afford imports, causing a severe decline in industrial output.

In a tweet, Pakistan's prime minister, Shehbaz Sharif, said the IMF's approval was "a major step forward" in the government's efforts to stabilize the economy and achieve macroeconomic stability.

"It bolsters Pakistan's economic position to overcome immediate- to medium-term economic challenges," giving authorities fiscal space to chart the way forward, he added.

Pakistan has brokered close to two dozen arrangements with the IMF, most of which have gone uncompleted.

In the days before the decision was approved, Pakistan received $3 billion in deposits from Saudi Arabia and the United Arab Emirates.

The money from the two Gulf countries boosted Pakistan's foreign reserves to $7.5 billion - more than double last week's account balance.