Why Pakistan needed another bailout from IMF, what this will entail

Why does Pakistan need an IMF bailout?

Poor governance and imprudent fiscal management has long plagued Pakistan.

In 2022, Pakistan was still receiving funds from the 2019 EFF, when a severe economic crisis struck the nation — due to the impacts of the Covid-19 pandemic, Russia’s war with Ukraine, and the devastating floods that rocked Pakistan in August that year.

In November 2022, the IMF decided to stop the disbursement of a pending $1.18 billion under the 2019 EFF 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. As a result, an already cash-strapped Pakistani economy was pushed to the brink.

Food and oil prices shot up, with Pakistan’s inflation rate peaking at 38% in May 2023. The Pakistani rupee (PKR) fell about 20% against the US dollar in 2023, while the country’s foreign exchange reserves dwindled to under $3 billion in early 2023.

In July 2023, Pakistan secured a nine-month $3 billion Stand-By Arrangement (SBA) from the IMF. The country’s interim government worked to ensure the IMF’s conditions of “fiscal discipline, structural reforms and a return to market-determined exchange rate” were met.

As of September 2024, Pakistan’s inflation rate stands at around 7.5%, its lowest in five years. The country’s forex reserves too stand at around $9 billion, supported by inflows from its allies China, Saudi Arabia and the UAE.

But Pakistan still has an external debt of around $130 billion, of which it will need to pay $ 90 billion over the next three years.

What does the $7 billion package entail?

An EFF is a financial assistance package offered by the IMF to countries facing severe balance of payments issues due to structural weaknesses that cannot be resolved in the short term.

In theory, it is meant to help the borrowing country implement medium-term structural reforms. In Pakistan’s case, these include bolstering monetary and fiscal policies including tax reforms, strengthening competition, and rebuilding the forex reserves.

In its press release in July this year, the IMF said that the EFF “aims to capitalise on the hard-won macroeconomic stability achieved over the past year by furthering efforts to strengthen public finances, reduce inflation, rebuild external buffers and remove economic distortions to spur private sector led growth.”

The IMF will immediately make $1.1 billion available to borrow, according to Pakistan State Bank governor Jameel Ahmad.

Notably, the package does not include plans to restructure the country’s external and internal debt, which according to Dawn, equalled around 81% of the previous fiscal year’s tax revenues.

What conditions did Pakistan have to meet to secure the funding?

The July press release alluded to the “timely confirmation of necessary financing assurances from Pakistan’s development and bilateral partners”. A key step was the rollover of the country’s $12 billion debt being approved by China, Saudi Arabia and the UAE. Additionally, earlier this month, the government took a $ 600 million loan from Standard Chartered Bank ahead of Wednesday’s meeting to approve the EFF package.

The EFF funding was conditional on Pakistan making sweeping tax reforms to widen its tax base. The government committed to this in its budget for the current fiscal year, and expects to collect up to $6.5 billion in additional taxes. Pakistan has also increased electricity prices by 51%. It hopes to generate 64% more revenue through non-tax sources like petroleum levies and electricity tariffs.

Additionally, the IMF mandated there be a balance in spending between Pakistan’s federal and provincial governments, with taxes being imposed on agriculture, and no new subsidies being introduced.

The IMF’s conditions have been labelled harsh by experts like Murtaza Syed, the former acting governor of the State Bank of Pakistan, who told the Financial Times that the EFF would only go to make things precarious and widen the debt-to-GDP ratio (which stands at 77% in July 2024). There is also concern about the lack of political support to meet the programme’s requirements.

Many have questioned whether the sweeping tax reforms that the move will require will indeed work. As the Dawn wrote in an editorial, “countries have improved their tax performance… [by] making their tax regimes equitable, fair and easier to comply with… the intent [of the tax reforms announced in the budget] seems to be to squeeze existing taxpayers to meet the revenue targets rather than broadening the net”.