Alwaght- Grappled with waves of political unrest, Pakistan has been stricken by a serious economic crisis challenging living conditions of the citizens, to an extent that the government has resorted to borrowing from international organizations and also asks for foreign aids.
After months of negotiations between Islamabad and the International Monetary Fund (IMF) for a loan, the two sides struck a deal, granting a go-ahead to a credit package. The IMP will give the country $3 billion in a course of 9 months. In the first step, $1.2 billion will be paid. Next package will be $1.8 billion for November and February to be paid after a re-evaluation of meeting the conditions of the creditors. The country should steadfastly commit to the policies of the IMF after receiving the loan.
“Pakistan’s economic reform program aims to support immediate efforts to stabilize the economy and guard against shocks while creating the space for social and development spending to help the people of Pakistan,” a statement of the IMF said. The $3 billion loan will help beef up the country's foreign currency reserves and contain the increasing crisis of balance of payments.
The program will focus on implementing the 2024 fiscal year budget to facilitate Pakistan's much-needed fiscal adjustment and ensure debt sustainability while protecting critical social spending. The IMF called on Islamabad to ensure tight monetary policy aimed at reducing inflation and further progress on structural reforms, particularly in the energy sector, governance of state-owned enterprises and climate resilience.
The loan, agreed upon after about 8 months, is the remainder of the $6.5 billion rescue package agreed with Islamabad in 2019 that expired in June 30. Earlier $2.5 billion was paid to government of Prime Minister Imran Khan, who was ousted by the parliament in April last year. It is said that the IMF loan will bring about boost to prospects of direct foreign investments and short-term relief.
Though the sum is inadequate for improving the ruined economy of Pakistan, the country's officials see it a substantial progress. Welcoming the announcement by the IMF, Pakistan’s PM Shehbaz Sharif said the approval of the loan is a major step forward in Islamabad's efforts to achieve economic stability and will strengthen Pakistan's economic position to overcome immediate to medium-term economic challenges. It gives the next government fiscal space to chart the way forward.
Also, Pakistan's Deputy Foreign Minister Assad Majid Khan emphasized that this agreement provides the stability that Pakistan desperately needs concerning its fiscal deficit and foreign reserves.
Islamabad is hopeful that this agreement will allow the government to take necessary economic measures for economic relief to people.
Islamabad's necessary measures for receiving the loan
Under its bid for the loan, Pakistan took some economic measures like increasing the taxes by $750 million, cutting energy and export subsidies, raising the fuel prices, and also increasing the interest rate to 22 percent.
Additionally, in order to win the IMF’s green light, Pakistan asked the UAE and Saudi Arabia to deposit billions of dollars in the country's central bank to stabilize the price of its national currency rupee and increase its foreign reserves. Saudi Arabia announced that it will provide $2 billion in financial aids to Pakistan, and the UAE pledged to provide $1 billion. These Arab deposits brought Pakistan's foreign exchange reserves up to $7.5 billion, convincing the IMF to pay the $3 billion.
Since the first contacts between Pakistan and the IMF about 70 years ago, Islamabad made 22 loan bids, something showing that crisis has constantly been hitting the country. Pakistan joined the IMF in July 1950 and its first loan, received in 1958, was $25 million. Then the borrowed sums for various reasons increased until they reached $7.6 billion in 2008 under Prime Minister Yousaf Raza Gillani.
A review of history of their bilateral relations makes it clear that each time Islamabad headed to the IMF as the last resort, the latter set conditions for paying the loan. Dealing with structural weakness, improving fiscal discipline, and ensuring sustainable growth are conditions the IMF has always set to Islamabad. But driven by a fear of losing popularity, various governments of Pakistan rarely commit to these conditions. This lack of commitment made the IMF hesitate to give new loans or restructure the previous loans.
During the negotiations of the past months, the IMF asked Pakistan to provide guarantees for foreign financing from friendly countries and multilateral partners for financing and filling balance of payment gaps.
No clear prospects awaiting Pakistan
Despite the fact that the $3 billion provides a kind of breathing space to mobilize financial aids from the friendly countries and also multilateral creditors and gives the opportunity to the ailing Pakistani economy to provide the conditions for an improvement, experts warn that the country is far away from the settling the structural problems that in the past led to failure to pay off the debts.
Some analysts warn that this is a temporary solution and will not help the economy in the long run unless Pakistan can implement the serious and large-scale reforms needed to tackle issues such as heavy reliance on costly fuel imports. Now, the agricultural sector is struggling with water and energy shortages, public welfare is suffering from underinvestment, and the political structure is suffering from corrupt political elite, and all these problems need solutions.
In addition, the government is now facing $25 billion in debt repayments this fiscal year, which it will likely struggle to pay off without more help from lenders such as China and Saudi Arabia, as well as another bailout from the IMF.
The country is currently suffering from severe financial problems despite reaching an initial agreement with the IMF. It is in a fragile and worse economic situation that has affected all sections of the society.
Pakistan is a country of 220 million population and a GDP of $376 billion. Its economy has been dealing with financial mismanagement for years, and after the global energy crisis caused by Ukraine war and the catastrophic floods that affected lives of millions in the country, it teetered on the brink.
The 2022 floods, which at one point covered one-third of the country, displaced 8 million people and damaged more than 2 million homes, and caused more than $30 billion in economic damage, foisting heavy costs on the government.
Islamabad also modified hard currency price driven by FX market prices, leading to record high inflation of 38 percent in May. Reports suggest that the country has never seen such an economic crisis since its independence from the British colonization in 1947.
Reports from international investment banks before the agreement with the IMF indicated Pakistan's imminent bankruptcy and inability to pay its debt. The situation is so dire that experts believe that the parties of the ruling coalition want to leave the coalition before the elections so as not to pay the price for consequence of dire economic straits.
Pakistan also suffers from crisis in balance of payments as it strikes to pay off its huge debts amid tense political atmosphere. The inflation has surged and ruppee exchange rate dropped unprecedentedly while the country is seeking ways to pay for its imports and this is leading to collapse of the industrial production. The aggravation of poverty and cutting the job outlook have even increased the wave of migration, and according to government statistics, in 2022, 750,000 people have migrated from this country.
It is often said in the Pakistani media that the country no longer needs the help of the West and its institutions, or is no longer dependent on it as it was in the past decades, and now mainly relies on its economic position and investments from its ally China, but the economic situation gives a catastrophic picture, and the past experience has proven that it takes years and even decades to beat this crisis.
The Chinese invest in Pakistan for their own interests and not just because Pakistan is an emerging ally, an continuation of the economic instability in addition to losing the trust of the IMF will lead to investor frustration, and consequent outflow of capital will negatively impact opportunities of international cooperation with Pakistan and can even more seriously and unprecedentedly aggravate the financial crisis. Pakistan's economic conditions are so chaotic that it has a long way to settle its crisis and very likely the next government will face trouble paying off their IMF debts.