Pakistan’s economic muddling and the IMF challenge

The falling rupee, depleting foreign exchange reserves, energy shortage, increasing fuel prices and a complicated external support highlight the contemporary economic crisis Pakistan is in. Will Islamabad find a way out?

Updated - June 25, 2022 08:54 pm IST

Published - June 23, 2022 10:57 pm IST

Activists display placards and shout slogans during a demonstration against inflation and fuel price hike in Karachi.

Activists display placards and shout slogans during a demonstration against inflation and fuel price hike in Karachi. | Photo Credit: AFP

The Pakistani rupee (PKR) has been falling continuously; from 150 in April 2021 to 213 against the dollar on 21 June, an all-time low. Pakistan’s foreign exchange reserves have been depleting during the last one year. According to State Bank of Pakistan data, from $17.2 billion in June 2021, the net reserves with the SBP have come down to $8.9 billion in June 2022.

The new government has already increased the fuel price — in late May and early June. Besides, the new budget has proposed resuming the petroleum development levy. This would mean increased oil and electricity prices, which has the potential to bring people to the streets. Earlier this month, citing “heightened external vulnerability risk” and the “ability to secure additional external financing,” the rating agency Moody’s downgraded Pakistan’s outlook to negative. 

The government-International Monetary Fund (IMF) talks have remained complicated.

Will the IMF bail out Pakistan?

The immediate future of Pakistan’s economy would depend on IMF resuming its support. Despite an intense discussion between the two, there has not been a breakthrough until now.

Pakistan’s relationship with the IMF has remained complicated. Though Islamabad has been negotiating with the IMF repeatedly, there has been an economic nationalism, mostly jingoistic, against approaching the IMF in recent years. Imran Khan, the former Prime Minister made statements and fuelled the sentiments against the IMF. After becoming the PM in 2018, he preferred approaching friendly countries (China and Saudi Arabia) and avoiding the IMF. The new government is now back to the IMF; it expects the IMF to release the payments, expand the support programme, and give a longer rope to repay.

The IMF is willing to support Pakistan but has some conditions regarding macroeconomic reforms. This was highlighted in the IMF statement after the last meeting in May 2022. The IMF wants Pakistan “to address high inflation and the elevated fiscal and current account deficits, while ensuring adequate protection for the most vulnerable.” The IMF would also not want any deviations from what has been agreed to, especially concerning fuel and power subsidies. Besides, the IMF wants Pakistan to be transparent about its debt situation, including what Islamabad owes to China, as a part of the China-Pakistan Economic Corridor (CPEC).

Subsidies are politically sensitive; with elections ahead, it would not be an easy decision. The new budget also has proposed resuming the petroleum tax levy. With the above, the new government expects that the IMF will consider resuming its package.

The IMF may agree to support after a few more promises by the government. But the relief may be less than what Pakistan would hope for. Without macroeconomic reforms, the IMF is less likely to expand its support programme, or provide a longer rope to Pakistan, that Islamabad wants.

Will Pakistan pursue macroeconomic reforms?

This has been a million-dollar question. Economists within Pakistan and elsewhere have been arguing for macroeconomic reforms, including the independence of financial institutions. It is a political question that the successive governments led by the Pakistan Peoples Party (2008-13), Pakistan Muslim League-N (2013-18) and Pakistan Tehreek-e-Insaf (2018-22) were unwilling to address. Instead, all governments continued to borrow from global institutions and friendly countries.

The budgets have remained populist; the economic governance declined due to corruption, lack of financial institutions’ independence, and the export decline. The subsidies in the energy sector — fuel, oil and electricity — remain high. With the present government led by the PML-N and PPP combine facing elections, they are less likely to take any further bold decisions. Successive governments, especially the previous one, would instead look for external bailouts and support from “friendly” countries.

Will “friendly countries” support Pakistan without preconditions?

Saudi Arabia and China have been supporting Pakistan. Immediately after becoming the Prime Minister, Shehbaz Sharif visited Saudi Arabia to secure a loan. In early May 2022, Riyadh agreed to provide $8 billion; in December 2021, Imran Khan secured a $3 billion support. A similar understanding was reached in October 2021. However, Riyadh’s support was not unconditional. An editorial in Dawn in November 2021 highlighted that Riyadh can ask Pakistan “to return the money at any time if the two countries have divergent views regarding their relationship or ties with a third country, or some other issue.”

China has been another significant source for Pakistan. Islamabad has been regularly seeking loans from China within and outside the CPEC projects. While the CPEC projects kept expanding and was projected as a panacea for Pakistan’s economic and energy problems, there are many questions over the hidden costs.. 

Pakistan also had to raise the security for the CPEC projects after a series of militant attacks from Dasu in Kohistan to the Confucius Institute in Karachi University. Pakistan has created a Special Security Division to provide security exclusively for the CPEC projects, increasing the cost further. A larger question is whether Pakistan would divert external aid to pay its debts to China? This has been one of the questions raised by the IMF, way back in 2018, and remains relevant even today.

During the latest Financial Action Task Force (FATF) meeting, there was an understanding that Pakistan has met its requirement. The FATF has agreed to explore the possibilities of removing Pakistan from the grey list.

However, when Pakistan was on the grey list, the IMF had been holding talks with Islamabad. The big two — China and Saudi Arabia — were not constrained by Pakistan’s listing in the FATF. So, the relaxation is less likely to open gates for big investments.

Will Pakistan go the Sri Lankan way?

The situation was similar in Sri Lanka — the falling value of rupee, declining foreign exchange reserves, differences with the IMF, and rising fuel prices. All of them led to public protests in Sri Lanka against the government. The economic and energy crises in Pakistan have not snowballed into a political storm as it had happened in Sri Lanka during April-May. Will there be one?

Politically, unlike in Sri Lanka, there is a coalition at the federal level; the main partners — the PML-N and the PPP — have a strong presence and control over the two big provinces, Punjab and Sindh.

To conclude, Pakistan’s economic and energy situation is serious and demands bold decisions. The situation will worsen in the short term before it gets better, but this has been Pakistan’s history in the last 75 years. With a relief from the IMF, after a protracted negotiation, a few band aids, and the U.S. intervention, Islamabad may muddle through this time as well, until the next crisis.

Prof D. Suba Chandran is Dean, School of Conflict and Security Studies at the National Institute of Advanced Studies (NIAS), Bengaluru.

Pakistan’s foreign exchange reserves have been depleting during the last one year and it has come down to $8.9 billion in June 2022.
The IMF is willing to support but it wants Pakistan “to address high inflation and the elevated fiscal and current account deficits, while ensuring adequate protection for the most vulnerable.”
Pakistan’s economic and energy situation is serious that demands bold decisions and the situation will worsen in the short term before it gets better, but this has been the nation’s history in the last 75 years. 
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