Pak gets a $3 bn lifeline — but some say the IMF’s terms may choke it instead

“The arrangement comes at a challenging economic juncture for Pakistan. A difficult external environment, devastating floods, and policy missteps have led to large fiscal and external deficits, rising inflation, and eroded reserve buffers” in the fiscal year 2023, the IMF said in a statement.

It was heartily welcomed by the government, with Prime Minister Shehbaz Sharif saying that the deal will “put the country on the path of sustainable economic growth”.

Alhamdulillah, I am pleased to announce that Pakistan has reached a Staff-Level Agreement with the IMF on a nine-month US$3 billion Stand-By Arrangement. This Arrangement will help strengthen Pakistan’s foreign exchange reserves, enable Pakistan to achieve economic stability, and…

— Shehbaz Sharif (@CMShehbaz) June 30, 2023

“The new Stand-By Arrangement (SBA) will support the authorities’ immediate efforts to stabilise the economy … [and] will also create space for social and development spending through improved domestic revenue mobilisation and careful spending execution”, the IMF said in a press release (available on imf.org) dated June 29.

The deal does not come under Pakistan’s Extended Fund Facility (EFF) programme, which the country entered in 2019, and which expired on Friday (June 30). As per IMF’s press statement, the SBA “builds on” efforts under the EFF.

So what does the deal entail?

The SBA will make available $3 billion to Pakistan, spread over nine months. A report in Dawn on June 28 had said Pakistan and the IMF were weighing a $2.5 billion stand-by agreement.

However, the deal comes with some major strings attached — issues which had previously been a sticking point in the negotiations between the IMF and Pakistan. In its press release, the IMF said it would be important that “the [Pakistani] authorities resist pressures for unbudgeted spending or tax exemptions in the period ahead”.

And what are some of the areas in which belt-tightening will be expected?

The IMF has mentioned Pakistan’s power sector. Electricity has historically been heavily subsidised for Pakistani consumers — and these are going to end with this deal.

The IMF has called for a “timely” rebasing of tariffs to ensure that costs are recovered, according to a Reuters report, which will mean that price hikes for consumers are inevitable, amidst already sky-high inflation.

Pakistan’s central bank will also have to remove import restrictions put in place to control external payments in the face of fast-depleting foreign exchange reserves, Reuters reported. Currently standing at just about $ 3.5 million, Pakistan’s forex reserves are barely enough to cover a month’s controlled imports as per Reuters.

“The SBP (State Bank of Pakistan) has withdrawn the guidance on import prioritisation and is committed to ensuring the full market determination of the exchange rate”, the IMF said.

Currently, there are multiple controls and exchange rate practices in different markets in Pakistan. The IMF has directed these to be eliminated, with a fully market-determined exchange rate even as the Pakistani Rupee has crashed to record lows in recent weeks.

Dar says IMF advice regarding budget unacceptable. Next day finance ministry says govt willing to change budget as IMF wants. What the hell is going on??? No wonder the economy looks like a train wreck!

— Asad Umar (@Asad_Umar) June 18, 2023

The deal is also likely to see further rate hikes by the central bank, with the IMF asking it to be “proactive” in curbing inflation which “particularly affects the most vulnerable”.

Earlier this month, the bank had paused its rate hike process, only to implement a 100 basis point off-cycle hike just days later on the demand of the IMF. Currently, the policy rate stands at 22 per cent, Reuters reported.

Finally, the deal comes with assurances from the Pakistan government that loss-making government enterprises will be dealt with, either through privatisation or through “stronger governance”.

But is $3 billion adequate to address Pakistan’s enormous financial crisis?

Despite the larger than expected IMF bailout, the agreement stressed that Pakistan will have to continue to mobilise multilateral and bilateral financial support, Reuters reported.

According to the Reuters report, Pakistan needs $22 billion to fund its external payment obligations, including international debt servicing, in the financial year 2024, which starts on Saturday, July 1, and ends on June 30, 2024.

The UAE and Saudi Arabia have pledged $3 billion in support to Pakistan, and the funds are expected to come in, now that the IMF deal has been reached. China, Pakistan’s largest creditor, is also expected to come to its aid with debt rollovers.

“In addition to generous climate-related pledges from the January 2023 Conference on Climate Resilient Pakistan held in Geneva, the authorities’ efforts have focused on obtaining new financing and securing the rollover of debt falling due” the IMF said, adding that the new SBA will provide a “policy anchor” to facilitate such financing.

What has been the reaction to this deal?

Markets were closed in Pakistan on Friday, but some analysts have welcomed the news, the Financial Times reported.

“This new program is far better than our expectations,” Mohammad Sohail, chief executive of Topline Securities brokerage in Karachi told the FT, adding that the funding will “definitely help restore some investor confidence”.

Foreign investors’ positive reaction on Pakistan IMF deal. Pakistan Eurobond up 10% plus in UK OTC market in morning trade. Short duration bonds rallying. Pak 2024 is now near 71 cents, while Pak 2025 is around 55 cents. These prices are up 70-80% since Oct 2022#imfpakistan #IMF…

— Mohammed Sohail (@sohailkarachi) June 30, 2023

Gareth Leather, a senior Asia economist at Capital Economics in London, told Reuters: “The agreement of a loan deal between Pakistan and the IMF should put the economy back on a more secure footing and limit the biggest downside risks.”

However, he added that “past experience suggests that the government will struggle to stick to the tough spending promises it has agreed to.”

Where do Pakistan’s domestic political compulsions come in?

This is the biggest uncertainty regarding the deal. The conditions that the IMF has imposed on Pakistan are tough and will require a degree of fiscal discipline previously unseen in the country. With a general election looming, the government will be under immense political pressure.

Leather told Reuters that even if Prime Minister Shehbaz Sharif is “committed to a deal, he could be out of office by the end of the year and replaced by someone less committed to the agreement”.

The current National Assembly of Pakistan will complete its term on August 12, with rules stipulating that a general election must be held within 60 days of this completion. This means that if the law is followed, Pakistan will see general elections by mid-October, leaving Sharif’s future as PM uncertain.

PTI leader Hammad Azhar tweeted that the deal “should be seen as nothing more than a breather for a few weeks”, adding that “before the PDM propaganda team paints this as a solution to all problems, it needs to be clear that our economy continues to be in a deep pit.”

آئی ایم ایف کے ساتھ ۹ ماہ کا سٹینڈ بائی معاہدہ کری شرائط کے ساتھ ہے۔ پی ڈی ایم سے 14 ماہ میں معاملات نہیں سنبھلے اب اس کی قیمت عوام مزید مہنگائی کی صورت میں ادا کرے گی۔ یہ معاہدہ الیکشن تک پاکستان کی معیشت کو دیوالیہ ہونے سے روک سکتا ہے لیکن معاشی چیلنجز کم نا ہوں گے۔ نئی منتخب…

— Hammad Azhar (@Hammad_Azhar) June 30, 2023

What about the non-political reaction in Pakistan?

Some economists have slammed the government for the impact the IMF’s strict conditions will have.

Dr Asma Hyder, Dean of the School of Economics and Social Sciences at the Institute of Business Administration, Karachi told Dawn, “Going to the IMF program was the only option to prevent Pakistan from defaulting”, but “the measures outlined in the agreement appear superficial and short-sighted, potentially exacerbating future economic instability.”

She added that “instead of celebrating the deal”, the country should prepare for an inevitable economic crisis not too far ahead.

Critics like Dr Hyder have argued that Pakistan’s economy needs much deeper reforms than those being proposed.

“Over the last three decades, IMF assistance has not been able to bring about tangible reforms,” Abid Hasan, a former World Bank adviser in Islamabad, told the FT. “IMF programmes have just been more of a band-aid.”

How did Pakistan get into this mess to begin with?

Pakistan’s economy has been teetering on the verge of collapse for quite some time. The floods of 2022, together with external economic shocks caused by the Russia-Ukraine War among other things, brought it to the brink.

In November 2022, the IMF decided to stop the disbursement of funds under the 2019 EFF. A pending payment of $1.18 billion was due, but stopped by the IMF due to the government’s unwillingness to meet certain demands, including assurances on increasing energy rates, imposing more taxes, and stopping artificial control over the exchange rate.

This brought Pakistan further to the edge of collapse, ushering in a forex crunch and record inflation that still continues.

After arguing for long that the IMF’s conditions would prove excessively harsh and politically fraught for Pakistan, Shehbaz Sharif’s government has finally agreed to the SBA literally at the eleventh hour.