Pakistan secured a $6 billion bailout package with the IMF in 2019 after tough negotiations, but the payment of the approved $1.1 billion has been stalled since December. The reason for that has been differences over monetary policy and demands of donors and lenders to see structural reforms happen in the country before giving more funds to Pakistan.
What is Pakistan Agreeing to With the IMF?
On Friday, after IMF chiefs left Pakistan, the country's finance minister, Ishaq Dar, conducted a media briefing in which he said, "The prime minister has said we are committed … We will implement whatever has been agreed upon between our teams."
Dar said that the government has received the Memorandum of Economic and Financial Policies (MEFP) from the IMF. The MEFP is a vital document that describes all the conditions, steps and policy measures on the basis of which the two sides declare the staff-level agreement.
After the draft MEFP has been shared, the two sides negotiate the policy measures outlined in the document. Once these are finalized, a staff-level agreement is signed, which is then forwarded to the IMF's Executive Board in Washington for approval.
Some of the policies highlighted in the MEFP include:
Imposing taxes amounting to 170 billion Pakistani rupees ($627m) after approval from cabinet;
Implementing the agreed-upon energy reforms through the federal cabinet;
Rising petroleum development levy on diesel to Rs 50 per liter through two Rs 5 hikes on March 1 and April 1;
Minimizing untargeted subsidies in the gas and energy sectors;
Ensuring there is zero addition to the gas sector's circular debt.
Although the government is interpreting the MEFP as an important step toward receiving the IMF funding, some skeptics feel that the IMF's departure from Pakistan without finalizing the agreement points to large gaps that still remain to be bridged.
Moreover, even if the IMF and Pakistan reach an agreement, it will still take weeks, possibly months, before the funds are released. But time is running out for the country as federal reserves are enough just for a few weeks of imports.
History of IMF With Pakistan
Unlike development banks, the IMF does not lend money for specific projects. Instead, it provides financial support to countries hit by crises in order to create breathing room as the countries implement policies that restore economic stability and growth.
In the case of Pakistan, the $6 billion that it negotiated in 2019 was the twenty-third time in the country's history. The last tranche of $500 million was released in March 2021. The subsequent tranche meant to be paid later in the year was held back because of insufficient economic reforms.
Pakistan has been a member of the International Monetary Fund (IMF) since 1950. Due to the unpredictable nature of its economy and high dependence on imports, the IMF has provided loans to Pakistan for years, however, the impact of IMF loans has been widely debated.
Opponents of the fund argue that the loans enable member countries to choose reckless domestic economic policies knowing that, if needed, the IMF will bail them out. Some critics suggest that this safety net postpones needed reforms in countries and creates long-term dependency.
Furthermore, each country's economic situation is unique and carefully tailored solutions need to be put forth, however, the IMF applies uniform remedies which often act as a band-aid and not a cure to the ailment.
According to analysis by economist Lawrence McQuillan, "These standard, austere loan conditions reduce economic growth and deepen and prolong financial crises, creating severe hardships for the poorest people in borrowing countries and strengthening local opposition to the IMF."
Nevertheless, the IMF can be an indispensable asset to countries that suffer from external factors that contribute to financial crises, such as the COVID-19 pandemic.
Many countries were hit hard by the pandemic and the IMF responded with unprecedented financial assistance to help countries protect the most vulnerable and set the stage for economic recovery.
Severe Economic Slump
However, the financial crisis in Pakistan was primarily prompted by domestic factors and not so much by external factors. The country's fiscal and monetary policies have led to a large current account and fiscal deficits and high public debt levels.
The unprecedented loss of official reserves and a weak financial system have further created economic busts. On top of that, the political instability and weak institutions have further contributed to the ongoing crises.
The inflation went through the roof and, according to some analysts, Pakistanis are experiencing the most severe cost-of-living crisis in their lifetime.
Since April last year, official consumer price inflation has recorded a cumulative increase of 33% year-on-year. What it means is that if a Pakistani was earning Rs 100,000 a year ago, his or her nominal income has a purchasing power today of Rs 67,000.
The situation is made worse still by a wave of unemployment that is sweeping across the country, as business after business closes due to the economic slump.
It is no doubt that the monsoon floods that affected two-thirds of the country contributed as an external factor to the current economic crisis, but floods have occurred in the country before and considering the ongoing global climate change, they will happen again.
The question remains: Is Pakistan prepared to face climate catastrophes and deal with the economic crisis without the IMF?
At present there is a definitive confusion over what is going to happen, how the country will meet the IMF's demands and how the two sides will work out the differences in the next few days.
Meanwhile, Pakistan has only $2.9 billion in foreign reserves left, but owes more than $9 billion in principal and interest payments in the next few months. The country’s currency has plummeted to a historic low in value, closing at 269 rupees to the dollar on Sunday.
Pakistan’s enormous $14.5 billion debt in the energy sector is another disputed issue in the talks with the IMF.
There is no doubt that whatever the outcome of IMF talks, the effort required to put the economy back on track will bring significant hardship to the common Pakistani. Loan or no loan, Pakistan is facing a difficult choice: either it will default and dwindle into chaos or face a number of harsh measures that Prime Minister Shehbaz Sharif described as "beyond imagination."