On August 29, the International Monetary Fund (IMF) released another $1.1 billion in remaining funds to Pakistan, following the seventh and eighth joint review of the extended financial facilities provided to the country. The $6 billion rescue plan agreed in 2019 was conditional on an IMF loan at the market-defined exchange rate and the rebuilding of official reserves in order to reduce public debt, ensure financial growth, and increase per capita income in the country. The fund facility, which has been extended until June 2023, is the 23rd IMF program that Pakistan has received in its 75 years of existence.
The latest plan was agreed upon after Pakistan ended the 2021-22 fiscal year with a $17.4 billion current account deficit, six times the deficit at the end of the previous fiscal year. This indicates the ominous continuation of the permanent crisis in the balance of payments in the country. In July, the rupee plunged to an all-time low against the US dollar, as the Pakistani currency lost more than a third of its value in the first seven months of 2022. The weekend before the IMF extended funds last month, the State Bank of Pakistan (SBP) reserves ) fell to $7.69 billion – the lowest level since July 2019, just over a month of import cover. The 27.26 percent inflation rate seen in August was the highest in 49 years.
IMF money, accompanied by a commitment to economic reform, paves the way for financing from elsewhere. The Asian Development Bank, which cut its growth forecast for Pakistan from 4.5 percent in April to 3.5 percent this month, is expected to provide a $1.5 billion loan to the country, albeit at a 2 percent interest rate. Besides the last tranche of the International Monetary Fund, the UAE also announced an investment of $1 billion, while Saudi Arabia confirmed the extension of its $3 billion deposit with the Social Investment Bank, and another $3 billion for the commercial sector is scheduled to come from Qatar.
However, in nearly a month since the IMF plan was announced, Pakistan has yet to receive any of these payments. Pressure remains on the country’s depleted reserves, which in turn has pushed the Pakistani rupee to all-time lows from which it has recovered over the past month.
While financing will eventually materialize, despite the sword of default looming over Pakistan’s economy, the country continues to uphold the outdated rules of the financial game by repeating the vicious and recurring cycle of IMF bailouts, external loans, Partial repayment of debt.
“Anyone who takes responsibility for the government comes to us immediately and asks us to arrange a trip to the United States or Saudi Arabia to look for loans immediately,” said Shamshad Ahmed, a former Pakistani foreign minister and representative to the United Nations. diplomat.
I wish the rulers knew the basics of economics: a loan is not a capital, but a liability. And the IMF loan to countries like ours is designed to trap us in endless debt by order of the United States.
Echoing accusations of an IMF “debt trap” for Pakistan, China is often accused of the same, usually from the other side. 30 percent of Islamabad’s total debt is owed to Beijing, as the faltering China-Pakistan Economic Corridor contributes much to Pakistan’s financial predicament through skewed loan agreements. However, the economic chaos in Pakistan is not the exclusive making of foreign powers.
“No one forces us at gunpoint to ask for loans from them. We go to them because of our failures. The IMF is not asking us to hoard imports but not to focus on exports,” said economist Farooq Saleem, economic advisor to Pakistan’s former TTI government.
Pakistan ended the previous fiscal year with a huge trade deficit of $48.7 billion, indicating a 57 percent increase in 12 months, with an import bill of $80.5 billion and exports of $31.8 billion.
“Unfortunately, the entirety of [government’s] “The focus is on import substitution,” Salim said. They have placed limits on imports, rather than boosting exports, rather than learning from countries where this policy has failed: India, Argentina, Mexico, Zimbabwe, and many others. [The large part of] What we import has no substitute: How do you replace fuel, coal or LNG? “
Pakistan’s many financial demons roam beyond the realm of economics: from the powerful military, whose fiscal credits devour the budget while its masochistic security policies crush the investment climate, to the corrupt political elite underinvested in the country’s financial well-being. In this shrinking space, those at the helm of the economy are being tasked with waving the wand that will somehow unleash export-led financial growth.
Given that more than half of Pakistan’s already inadequate tax collection is devoured through debt servicing, successive governments have been handed a similar, albeit similarly shunned, pamphlet of financial remedies. It spans the gamut from reforms in state-owned companies and distribution companies, to renovations in the debt-laden circular energy sector. Many have also urged decentralization along with the energetic push of the rapidly booming IT industry – led by the country’s tech-savvy youth – to drive the economy’s export drive.
“For that you need a regular supply of electricity, and competitive internet speeds,” Slim noted. The energy sector, like any sector in which the government is involved, has been destroyed. Large-scale deregulation and privatization are needed.”
However, any functional economy, especially one that seeks a huge leap in foreign direct investment, needs stability to create a favorable climate. In addition to Pakistan’s worrying relationship with jihadist groups, a complete lack of political stability has driven investors away from the country. The IMF programs sum it up best, with Pakistan’s political leadership vacillating between absolute support for the plans and hostile condemnations of them, depending on whether they are in the government or the opposition.
“There is severe political polarization in our country,” former Finance Minister Salman Shah told The Diplomat. “There has to be a unanimous acceptance that programs like the IMF plan affect the masses, since there is an increase in taxes and the removal of subsidies. The opposition at the time is exploiting economic crises for its own political gain.”
Political polarization in Pakistan, whose three largest parties currently have leading governments in separate provinces and in the center, has been best illustrated by the efforts of the PTI-led government of Khyber Pakhtunkhwa to jeopardize an IMF agreement in August, far from siding with the central government. on a national financial need.
Our institutions, our politicians, our bureaucracy, they are all short-sighted and do not have the ability to focus on long-term policies. Shah said that each government focuses on its own mandate and staying in power.
Amid blunt political populism, the PML-N-led central government decided to replace outgoing Finance Minister Muftah Ismail with veteran Ishaq Dar, who led the Finance Ministry in 1998-1999 and then 2013-17. The arrival of Dar from self-exile on Monday, after five years marred by graft issues, is likely to signal a resurgence of aggressive efforts to invent an artificial exchange rate, even as the US Federal Reserve raises interest rates, thus attracting a host of global nations. south currency. For example, the Pakistani rupee began to gain, which was reflected in the bullish stock market.
While the ambitions of the three governments that preceded the current system sought an unprecedented completion of elected terms, along with fiscal policies that could give them a chance for re-election, the current government that came to power in April aims to unleash its entire populist repertoire in The few months she had before the elections scheduled for 2023.
That could mean the inevitable rollback of the terms of the fiscal restructuring that the International Monetary Fund has set for these months, including overturning tax policies and scrapping the market-determined exchange rate – in effect, dumping all available financial resources at the upcoming elections.
This, in turn, will likely mean that the next government will seek to launch the 24th IMF program in 2024 – regardless of who wins next year’s elections.