Contrary to popular expectations that there might be no need to approach the IMF after all as the financial crisis has been averted, the Pakistan government has requested the Fund for an “economic recovery program”. As confirmed by Gerry Rice, Director Communication at the IMF, “Pakistan approached IMF in Indonesia for a fresh loan program in month of October.” Thus, it appears that going to the IMF never stopped being part of the plan.
Considering the state of the Pakistan economy, it does need corrective measures and does need IMF regulations as the current account deficit spiraled by 43 percent in the last fiscal year while the budget deficit is 6.6 percent of the economic output. Having plunged 42 percent, foreign reserves were hardly enough to provide import cover for two months.
Expected to range between six to eight billion dollars minimum, IMF support would help in carrying forward the long-term planning of the young government. Kicking off on a ‘technical level’ to formulate the previously mentioned policy, the talks with the IMF shall end on November 20 with the Pakistan government presenting an estimate of the loan package it requires. Traditionally, governments would secure a bailout without fixing the underlying issues and just hand over a worse economy every time a new party came into power.
This time round, the new government wants to fix the malaise and bring Pakistan out from its chronic financial woes. Therefore, the Pakistan government does want a reform agenda and IMF fiscal disciplines that can help boost exports
Financial woes and the IMF
This time round, the new government wants to fix the malaise and bring Pakistan out from its chronic financial woes. Therefore, the Pakistan government does want a reform agenda and IMF fiscal disciplines that can help boost exports, reduce the deficit and streamline the economy on a more sustainable pattern so that IMF bailouts are not required in the future. According to experts from the Center for Strategic and International Studies, “Pakistan represents a litmus test of all future cases in which the IMF, United States, China, and any emerging market country are all involved.”
Apparently, this could be an emerging pattern, which might not be restricted just to Pakistan in the future. Formulating a new policy to fix the problems with Pakistan’s economy, the IMF will carry out corrective measures and suggest structural reforms while the specific conditions of the bailout package will be finalized towards the end of the visit. Reviewing economic data from several sectors, the IMF team is expected to try and fix the power sector as it is responsible for a depletion in Pakistan’s growth by three percent yearly.
Another advantage is that once the IMF gets involved, other institutions such as the Asian Development Bank, World Bank also extend their co-operation and give credit rating approval. In fact, the ADB has already committed six billion dollars for financing infrastructure development in Pakistan for the next three years.
However, keeping in mind the IMF track record of introducing strict measures to regulate economies, it might alienate the lower strata of society from the ruling party in the very first 100 days. Devaluing the country’s currency, driving up the tax ratio and introducing budget cuts, these conditions usually curb imports to bring down the trade deficit as well.
Improving the economy
Consequently, the Pakistan government wishes to take a minimal loan instead of the $12 billion package offered by the IMF on easy terms. Wanting to negotiate with the IMF from an “improved position”, the government has been trying to stabilize the economy beforehand with help from friendly countries. Ostensibly, this was to avoid any conditions placed by the IMF that might be too intrusive, controlling or against the country’s broader national interest.
Requiring an urgent capital boost as foreign reserves held by the State Bank of Pakistan dipped below $8 billion in the last week of October, Prime Minister Imran Khan had recently travelled to Saudi Arabia where he secured a $6 billion aid package. Recently, he spent three days in China but no specific results have been announced and details would be available after further discussions in the coming weeks. As reported by media before the visit, if a sizable amount had been acquired from China, there might even have been no need to approach the IMF after all. But as it has turned out, the bailout is inevitable anyway and the only debatable aspect is the size of the economic package.
Avoiding maximum fallout from the IMF package as it would impact the poor most of all, Khan has done his level best to avoid a financial squeeze. Nevertheless, the IMF is likely to insist on reduced spending, further currency devaluations and an increase in interest rates. Such measures could ultimately prove to be a hurdle in Khan’s way and slow down implementation of his planned reforms. Assessing Pakistan’s prospects, Jean-Francois Fiorina from the Grenoble Ecole de Management has said that, “Pakistan is facing economic trouble and urgently needs to find extra funds,” adding that, “This is maybe the best solution at short-term but it could create a new bomb in the future.”
Sabena Siddiqui is a foreign affairs journalist and geopolitical analyst with special focus on the Belt and Road Initiative, CPEC and South Asia. She tweets @sabena_siddiqi.