Will Pakistan’s IMF deal save the country’s economy?
It may help Pakistan’s economy but not improve the government’s popularity.
On Wednesday, the International Monetary Fund’s( IMF ) board of directors approved a $3 billion bailout program for Pakistan, which includes an immediate disbursement of approximately $1.2 billion to help stabilize the South Asian country’s economy.
Last month, Pakistan and the fund reached a staff-level agreement, securing a short-term deal with more funding than expected for the country of 230 million people facing an acute balance of payments crisis.
The bailout had been on hold since December when the IMF refused to release a critical $1.1 billion portion of the loan due to the country’s failure to comply with a 2019 agreement signed by the IMF and former Prime Minister Imran Khan.
The funds were released amid long-held fears that the country would default, providing much-needed relief to the incumbent government.
However, the agreement with the international lender imposes stringent spending and structural reforms, likely exacerbating economic hardship for many ordinary people.
Here’s what you should know:
Why was an IMF bailout required?
Pakistan’s economy has been in shambles, plagued by a balance-of-payments crisis as it attempted to service massive amounts of external debt and crushing inflation.
Before the bailout, the country’s foreign reserves were hovering around $4 billion, enough to cover a month’s worth of imports, thoughIMF prohibited some imports to save money.
Analysts estimate that the country will require at least $20 billion in the next two years to repay foreign loans with interest.
Earlier this year, the Pakistani rupee plummeted to a record low against the US dollar after an exchange cap was lifted as the cash-strapped country sought to access a vital IMF bailout.
According to Lahore-based economist Ali Khizr, “the currency and inflation could have gone out of control” had the government and IMF not reached this agreement.
“A lack of foreign exchange could have resulted in severe shortages of fuel, food, medicine, and other necessities.” Things will improve now, as the currency stabilizes and inflation gradually falls in the short to medium term,” Khizr predicted.
Moody’s downgraded Pakistan’s sovereign credit rating by two notches to ‘Caa3’ in February, citing the country’s increasingly fragile liquidity as “significantly raising default risks.” According to the Express Tribune, over 750,000 people will leave Pakistan in 2022, a threefold increase from the previous year.
What does the IMF want?
Since the IMF’s mission arrived in Pakistan in February, Islamabad has taken several steps, including revising its 2023-24 budget and raising its policy rate to 22 percent recently.
To meet the IMF’s fiscal adjustments, Pakistan was also required to raise more than 385 billion Pakistani rupees ($1.34 billion) in new taxes. According to the IMF, the central bank should remain proactive to reduce inflation and maintain a foreign exchange framework.
The adjustments have already contributed to an all-time high year-on-year inflation rate of 38 percent in May, the highest in Asia.
Meanwhile, the IMF talks have focused on energy reforms, which have accumulated nearly 3.6 trillion Pakistani rupees ($12.58 billion) in debt.
The IMF said it would like Pakistan to stick to its policies to overcome challenges, “particularly in the energy sector,” where it expects electricity prices to rise.
What was the reaction?
According to Prime Minister Shehbaz Sharif, the agreement is a “significant step forward” in his coalition government’s efforts to stabilize the economy and achieve macroeconomic stability.
“It strengthens Pakistan’s economic position to meet short- to medium-term economic challenges,” he said. Ishaq Dar, the country’s Finance Minister, stated that things were “moving in the right direction.”
Analysts believe that the IMF bailout will benefit Pakistan because it will encourage other international financial institutions to assist Islamabad in overcoming economic challenges.
The IMF loan was approved just one day after Saudi Arabia deposited $2 billion in Pakistan’s central bank. According to finance minister Dar, the UAE also deposited $1 billion into the central bank on Wednesday.
Pakistan’s sovereign dollar bonds rose on Thursday due to the IMF agreement.
What effect will the bailout have on the upcoming elections?
While the IMF bailout gives the country some breathing room to address its economic problems, it is still being determined whether the announcement will help Sharif and his PML-N party in the polls.
“This [bailout] will assist the government in regaining popularity lost due to high inflation and negative growth in the previous year.” This is good news for the government, according to economist Khizr.
“However, their popularity will remain low due to poor economic management and the erosion of purchasing power,” he added.
Since former Prime Minister Khan was deposed in an April 2022 vote of no confidence led by the Pakistan Democratic Movement (PDM) – a ruling coalition of more than a dozen parties, including Sharif’s PML-N – the country’s political crisis has worsened.
According to a March poll conducted by the polling firm Gallup, 62 percent of Pakistanis blame the PDM for the country’s economic woes.
Meanwhile, 61 percent of the 2,000 respondents approved of Khan, who has also won a majority of national and provincial by-elections held in the last year, cementing his popularity in the country.
However, Khan’s political future appears to be in jeopardy following the violent protests that erupted following his brief arrest on May 9, including attacks on military installations. Thousands of people have been detained, many without formal charges, and military courts have been established to try the alleged perpetrators.
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