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IMF, the life support for Pakistan


After many months of challenging negotiations with the International Monetary Funds (IMF) Pakistan reached to an agreement on a $6-billion bailout deal in May of 2019 that was tied to regular reviews of Pakistan’s economic policy and its growth performance by the IMF. As part of the agreement, in January 2020, the government was supposed to increase electricity rates and impose new taxes for the revenues growth and balancing of the budget, but on PM Imran Khan’s directives the increases were not implemented. This created a standoff between the IMF and Pakistan and because of this impediment, further negotiations between the parties were suspended. However, with the spread of the pandemic and to combat the economic meltdown of Pakistan’s economy, the IMF released a $500 million tranche, but additional funds release was stopped until further negotiations and compliance of the 2019 signed agreement. Since then, Pakistan has been in very tough negotiations with the IMF to get suspended, but desperately needed $1 billion tranche under the Extended Fund Facility (EFF) program.
Now, after a long and exhaustive discussions for several months with the IMF, Pakistan has finally agreed to accepting all the terms and conditions that the multilateral bank had proposed originally, along with the new additions, and as such an agreement has been finally reached on November 21, 2021. This is the 6th Review Agreement and as part of it, Pakistan will be getting a total of $6 billion as originally agreed upon between the parties in 2019. The agreement covers a broad range of policies and reforms that Pakistan must implement and show progress with full disclosures and transparency as part of the 39-month Extended Funds Facility program. With the release of the $1 billion tranche soon, Pakistan will have some breathing space and will be gaining some financial strength under the EFF program.
According to the agreement communique issued by the IMF on November 21, 2021, the outlined economic reforms will drive Pakistan to a sustainable and balanced growth path. Following are its major highlights:
= Financial accountability and transparency
= Complete autonomy of the central bank (State Bank of Pakistan; SBP)
= Increase in tax collections and revenues growth
= Hikes in power and energy prices
= External debt reduction
= Increase in foreign exchange reserves
= Market-determined exchange rate to restore competitiveness
= Carbon emissions (CO2 & GHG) reduction roadmap for meeting COP26’s NetZero targets
According to many Pakistani economist, this structure of the agreement will leave no freedom for Pakistan to decide on its on about its fiscal and monetary policies!
Since the current governor of the Central Bank (SBP), Dr. Reza Baqir, appointment was made on the IMF’s strong recommendations, IMF wants him to have full authority and independence from the government. This way, IMF will have better pulse and transparency about the economy, governance, transactions, appropriations, and financial assistance & payments to other donors. IMF and other multilateral donors and international banks have been raising concerns about CPEC related loans “debt trap” from China. By having SBP full autonomy and non-interference by the government will give them clearer picture about the internal workings of the central bank, particularly the transactions details. In addition to Dr. Baqir, there are other appointments, in the key position of the Finance Ministry and other institutions, made by the backing of the IMF.
Unlike most of the other developing economies, Pakistan is very unique as it continues to struggle at its multiple fronts at the same time, like the balance of payments, ballooning national debt (external & domestic), depletion of its foreign currency reserves and depreciation of its currency. All these elements create perfect conditions for the financial crisis that Pakistan goes through very often since its creation in 1947. According to the latest data, Pakistan carries about 87 percent debt against its GDP, one of the highest among its neighbors and the region. In 2020, total national debt was $234 billion. In the second quarter of this year, the external debt alone reached to over $122 billion, an all-time high! Additionally, incoherent fiscal and monetary policies, law & order, and political instability makes it much more challenging for Pakistan to attract the badly needed FDI for its economic growth, employment of the youths (skilled & non-skilled), value added exports for increasing its foreign reserves and avoiding the defaults on the balance of payments, but most importantly, to stopping its run to the IMF and other multilateral lenders for the bail outs.
Right after Imran Khan became the PM in 2018, just a year later in 2019, Pakistan ran into its solvency crisis related to servicing the foreign debt and was at the brink of its “bankruptcy” but was saved by the help from the brotherly friends (Saudi Arabia, UAE, and China) and timely release of $1 billion assistance from the IMF. The amount of the debt that the country has accumulated over the years is one of the major reasons for Pakistan to go to its never-ending balance of payments crisis, time, and time again. As a matter of fact, after each bailout, Pakistan never stops its craving for additional loans, wherever it can find them from! Additionally, due to failed economic policies of the OLD schools advisors and unwise monetary policies by the SBP, the vicious financial crises continue their impacts on the balance of payments and the free fall of the national currency. Thus, the history confirms that even after 70 years since joining, IMF still remains the “life support” for Pakistan!