On Sunday, the International Monetary Fund (IMF) agreed in principle to support Pakistan with a loan of $6 billion, to be disbursed over 39 months. The agreement was reached at the end of two weeks of discussion and dialogue between Pakistani officials and an IMF mission that was in Islamabad from April 29 to May 11. The disbursements will commence after formal approval by the Fund’s management and its Executive Board.
What is the political context of Pakistan’s bailout deal with the Fund?
This is the IMF’s 13th bailout package for Pakistan in the last three decades. While Pakistan’s economy typically witnesses a boom-bust cycle, over the last 10 years, its need for financial support from the IMF has coincided with the completion of a particular government’s term.
The backsliding of Pakistan’s economy over the past year has been swift, but it has not surprised many. A sharp depreciation in the Pakistani rupee and high fiscal deficits have resulted in higher inflation, which acts like a tax on the common man, and hurts the poor the most. Foreign exchange reserves have remained low — below $10 billion for all weeks except three since the Pakistan Tehreek-e-Insaf won the elections, and Imran Khan was sworn in as Prime Minister on August 18, 2018.
IMF loans almost always come with tough conditions, and it will be difficult for Khan to sell the bailout politically. Khan has expressed himself against seeking financial support from the Fund in the past, and in the run-up to last year’s elections, he criticised the bailouts accepted by governments led by the Pakistan People’s Party and the Pakistan Muslim League (N).
In September 2013, within three months of being elected, the Nawaz Sharif government accepted a $6.6 billion loan from the Fund, to be disbursed over three years. Earlier, within a year of the PPP’s Yousaf Raza Gillani taking charge as the Prime Minister in March 2008, the IMF extended a $7.6 billion loan to Pakistan, to be disbursed over 23 months.
Despite the reservations he has had in the past, Imran Khan had little choice but to negotiate with the IMF.
And what are the economic conditions in which Pakistan entered into negotiations with the Fund?
The size of Pakistan’s economy is $313 billion, and it has averaged a growth of about 3.5% annually over the last 12 years. After growing at a healthy 5.2% in FY 2018 (July 1, 2017 to June 30, 2018), Pakistan’s real GDP growth is estimated to sharply power down to 3.4% in FY 2019, according to the World Bank. In 2019-20, the Bank expects the economy to slow further to 2.7%.
Inflation has more than doubled since the last year; it ruled at 8.8% in April this year ahead of Ramzan. In the last financial year, average Consumer Price Inflation was 3.9%.
The country also stares at a twin deficit problem, with both its fiscal and current account deficits set to worsen in FY 2019. From 6.6% of GDP in FY 2018, the fiscal deficit, or excess of government expenditure over its revenues, may breach the 7% of GDP mark in FY 2019. The current account deficit, or excess of spending on imports over exports, is expected to remain high at 5.5% of GDP in this fiscal, albeit slightly lower than 6.1% of GDP in FY 2018.
The Pakistani rupee has been devalued multiple times since December 2017, and has lost almost 35% in the last 18 months.
So, how urgent was this bailout for Pakistan?
After coming to power, Khan has reached out to Saudi Arabia, the United Arab Emirates (UAE), and China for help. Riyadh pledged $3 billion in balance of payments support in October last year, and the UAE supported Pakistan with another $3 billion in December. In February this year, China extended $3.5 billion in loans and grants to bolster Pakistan’s forex reserves.
But all this has not helped in addressing the problem, which requires medium-term structural overhaul. For the week ended May 3, 2019, the net forex reserves with the State Bank of Pakistan, the country’s central bank, were $8.98 billion, more than a billion dollars less than the $10.23 billion available with it on August 17, 2018 — the day before Khan became PM.
These forex reserves are enough to finance only about two months of imports. Pakistan’s imports in FY 2018 were $56 billion. Low forex reserves dent the confidence that the world has in a country’s ability to meet its external obligations.
What kind of conditions has the IMF put on Pakistan?
The bailout conditions that the Fund imposes are part of difficult structural reforms required to put an economy on a sustained growth path. As the IMF management proceeds with formally approving Pakistan’s bailout, it will closely watch for signals to rein in the deficit in the budget for the next year.
“The forthcoming budget for FY2019/20 is a first critical step in the authorities’ fiscal strategy,” the IMF said in a statement issued May 12 after reaching an agreement to extend the $6 billion loan to Pakistan. Broadly, the IMF will expect the government to expand the tax base, do away with exemptions, and curtail special treatments, given that just about a million people out of the 208 million in Pakistan pay taxes. It will call for spending cuts and levying of user charges in the energy sector, and reducing subsidies.
The IMF will also expect Pakistan to let the rupee ‘float’ — that is, allow its value to be market-determined — and the State Bank of Pakistan to further increase policy rates to bring inflation under control.
Is all of this expected to work?
Pakistan’s record in sticking to agreements with the IMF is not encouraging. It has often failed to meet conditions such as curtailing spending and selling government stake in state-owned enterprises. IMF data suggest that Pakistan did not withdraw the entire amount originally agreed upon in the earlier bailouts. The last bailout of $6.6 billion in 2013 was, however, fully received by 2016. Pakistan needs to take bold steps to fix its economy and, as it moves in that direction, ensure that its poor do not suffer from the austerity measures that are put in place.