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Pakistan’s New IMF Deal: A Temporary Relief Amid Unrelenting Crisis

GSP Pakistan

The jubilation over the recent Pakistan’s new IMF deal may be short-lived if it fails to carry out appropriate economic reforms aimed at addressing the protracted economic crisis.

The IMF’s USD 3 billion assistance to Pakistan, which is otherwise defaulting on repayment of external borrowings, under a new deal in its Stand-By arrangement (SBA) for nine months indicates that the crisis still persists. The main objective of the short-term financial assistance by the multilateral institution is to enable Islamabad to hold the election as quickly as possible and monitor the execution of the 2024 budget on the lines of agreed IMF conditions.

The SBA is likely to provide substantial relief to beleaguered country by effectively tackling the persistent threat of sovereign default and addressing the multitude of economic challenges the country is facing. The package also intends to enable Islamabad to meet IMF conditionality. These include the removal of remaining import restrictions which are necessary for revival of stalled industrial production, further reduction in energy subsidies and greater adherence to a market-determined exchange rate.

It is understandable that Pakistan is celebrating the USD 3 billion SBA funding, spread over nine months, because higher than expected IMF’s rescue package could save its economy from falling apart. The IMF assistance has come at a time when the Pak economy was sliding into an unfathomable abyss and darkness. The country was awaiting the release of the remaining USD 2.5 billion from a USD 6.5 billion bailout package agreed under Extended Fund Facility (EFF) in 2019, but it expired on June 30, 2023. However Islamabad needs to take note that doles – multilateral or bilateral – could not solve the multi-pronged economic problems facing the country without timely economic reforms in right earnest.

Economic analysts and commentators have warned that Pakistan still faces a tough road ahead.  The IMF has projected gross external financing needs at a whopping USD 91.536 billion over the next 3 years starting from FY 2023-24. If its fails to buoy its economy, Islamabad will have no other option but to go back for another IMF bailout package when current SBA expires in March 2024. The gross financing needs would be USD 28.409 billion during FY 2023-24 which is expected to rise up to USD 30.615 billion in FY 2024-25 and USD 32.514 billion in FY 2025-26. The economic crisis in Pakistan doesn’t appear to relent in near future.

If the current deal is implemented fully and honestly by Islamabad, it will help the incoming government to negotiate a better deal from development partners and multilateral financial institutions. This is crucial for raising funds for debt repayments and rollovers.  Like Sri Lanka, this could be the last chance for Pakistan as well.

Nathan Porter, IMF’s Mission Chief in Pakistan, after the announcement of SBA warned, “with the economy still burdened by so many entrenched structural flaws, there would be a level of vulnerability that makes it difficult to bring a full recovery”. Reforms in the energy sector, which has accumulated USD 12.58 billion in debt, has been a cornerstone of the IMF talks.

IMF’s remaining USD 2.5 billion tranche under EFF could be better for medium-term structural reforms for Pakistan, if the government had commitment for economic reforms.  The ninth review had been stalled since October last year due to differences between the Fund and Islamabad over policy actions, including external financing needs and a budget that meets programme goals. Pakistan earlier cleared eight of the 11 listed programme reviews.  The delay was already the longest since at least 2008.

According to an economist in Atlantic Council, the current loan period of 9 months for SBA is just sufficient to give a kick start to economic recovery after a new government assumes power through the successful conduct of elections.  Economist Uzair Younus, added that once elections are held, the new government will have some room to negotiate a fresh programme with the IMF only if the new package helps Islamabad in moving its economy away from the entrenched economic crisis.

Further, experts warn that it is not uncommon for agreements to be reached, but the IMF board is known to have held back approval for months. This happens when there are financing or debt-related problems, like in crisis-hit Lebanon or Sri Lanka. Pakistan falls into this category. The bottom line is that Pak economy is not performing. It is strangulated and has lost the confidence of the masses, especially the expatriates which is seen in its falling remittances.

Zulfikar Thaver, President of the Union of Small and Medium Enterprises (UNISAME) in Pakistan lamented, “we are borrowing new to pay old”.  Thaver pointed out the country’s excessive spending, rampant wastage in energy, food, delay in negotiations, and urged urgent need for debt restructuring in collaboration with experts.  He was quoting an energy audit of a factory and found 40% extra lights unnecessarily turned on.

The IMF seems to be aware of the ongoing political crisis affecting the democratic functioning of the government in the country. The Pakistan Business Forum spokesperson criticized the lack of Parliamentary democracy in the country, depriving the Parliament authority to question the government for its misdemeanors.  Under present circumstances in Pakistan, regaining the true spirit of Parliamentary democracy and ensuring constitutionally guaranteed media freedom are matters of concern.

Pakistan’s credit rating had suffered due to macroeconomic uncertainty. Major rating agencies had already cut Pakistan’s ratings earlier this year putting the country in uninvestible CCC level. In spite of USD 3 billion, international credit rating agencies Moody’s Investors Service and Fitch Ratings see lingering risks to Pakistan’s financing abilities in meeting its debt repayments for FY2023-24. The repayments are about seven times Pakistan’s foreign exchange reserves.  It all depends on Islamabad’s ability to mobilize additional financing for both debt repayment and economic recovery. Further, Islamabad’s commitment to continue implementing reforms will be tested as it continues to face a deep political uncertainty before as well as after its stipulated general elections sometime in October.

Pakistan now ranks fourth in the list of countries with the highest borrowings from the IMF with USD 7.4 billion following Argentina, ranked first, Egypt and Ukraine ranked 2nd and 3rd respectively.  Pakistan started taking loans from the IMF right after the Independence in 1947 and ever since the borrowing continued.  The IMF assistance provides only a short-term solution to member countries to meet emergency forex crisis. It recommends solutions for improving the economy or warns against deviation from the right path. Unlike the other three major IMF borrowers, Pakistan lacks resources, a clear developmental vision and capacity to bear the external shocks.

Success of the SBA would depend on the execution of the IMF programme by Islamabad, both before and after the elections. It will also decide Pakistan’s future abilities to borrow fresh and bigger loans. This is why the next few months are crucial for Islamabad as the world is closely monitoring how diligently Islamabad is executing the fiscal discipline and pushing reforms agenda while avoiding liquidity crunch.  For the time being,  political uncertainty and economic crisis is devastating the country and shattering the hopes of common man with spiraling inflation and shortages of basic needs including food, medicine and power.