[Islamabad] The International Monetary Fund has recommended that Pakistan take internal measures to address its economic crisis in order to be eligible for additional IMF financing.
A $1.1 billion loan is on the line, but Pakistan may have to agree to the IMF’s terms to access it – increasing the general sales tax by one percentage point to 18%, imposing the general sales tax on oil products, and accelerating the process of privatization, among other conditions. Talks between the IMF and Pakistan are ongoing and will continue until Feb. 9.
The talks, which are taking place in Islamabad, are being led by IMF Mission Chief to Pakistan Nathan Porter and Pakistani Finance Minister Ishaq Dar. The talks will inform the future of the IMF’s Extended Fund Facility program in Pakistan, which is being reviewed for the ninth time since its introduction in 2019.
According to an IMF press release, the Extended Fund Facility program “aims to support Pakistan’s policies to help the economic recovery from the COVID-19 pandemic, ensure macroeconomic and debt sustainability, and advance structural reforms to lay the foundations for strong, job-rich, and long-lasting growth that benefits all Pakistanis.”
During the initial Extended Fund Facility talks in 2019, the IMF Executive Board approved a $6 billion loan to be paid over 39 months. The loan was later topped up by an additional $1 billion.
The board’s initial decision allowed for an immediate disbursement of about $500 million. By August 2022, the IMF had disbursed a total of about $3.9 billion.
The IMF support was contingent on Pakistan reshaping its economy. Specifically, the IMF called on Pakistan to end subsidies on petroleum products, increase electricity prices, and increase tax rates for salaried workers and industry. After Pakistan failed to implement these changes, the IMF suspended the program in September 2022.
Pakistan faces economic crisis, needs the money
Pakistan is facing an economic crisis, and it desperately needs the $1.1 billion loan that the IMF may release if it decides to resume the program. With the disbursement of that $1.1 billion, $1.4 billion would remain in the bailout program, which is set to end in June 2023.
A senior official from the Finance Ministry told The Media Line that “Pakistan has principally agreed to implement IMF conditions as it has no other option.”
Pakistan has agreed to increase electricity and gas prices to increase the country’s solvency. The IMF has also demanded that Pakistan amend its laws to make the assets of government officials publicly available and to “establish an electronic asset declaration system for transparency and accountability,” the Finance Ministry source said.
The first round of technical talks, concerning ways for Pakistan to cut expenditures and generate revenue, concluded on Friday. Policy-level discussion to decide the fate of the IMF’s frozen $1.1 billion loan to Pakistan will take place until Feb. 9.
Ahead of negotiations to revive the debt program, Pakistan has already implemented some of the IMF's conditions, increasing the prices of petroleum products and further devaluing its currency against the US dollar.
Pakistan has been stuck in an economic quagmire for the last several months, caught between the depreciating rupee, rising energy prices, and the highest inflation rate in its history.
The Pakistani rupee is currently selling at a rate of 278 per dollar, having fallen in value by almost 15% over the month of January.
Meanwhile, inflation in Pakistan reached its highest level in the last 20 years. According to official data, the inflation rate in January was 27.6%. “The food inflation rate increased to 42.9% in January 2023 after the increase in the prices of chicken, wheat, rice, flour, and vegetables,” a Bureau of Statistics report found.
With the devalued rupee, high energy costs, and spiraling inflation, Pakistan is dealing with what is considered the worst period of political and economic chaos since former Prime Minister Imran Khan was removed from power in April 2022 by a no-confidence vote.
“The rising inflation, rapid price increase in petroleum products, decline in purchasing power of common people, inability to pay utility bills and all other related problems indicate the ailing economy of the country,” Uzair Younus, director of the Pakistan Initiative at the Atlantic Council’s South Asia Center and a leading expert in political and economic development assessment, told The Media Line. “Now, unless the root cause of this economic sickness is addressed, the trouble will continue to worsen.”
Younus described a tale of two Pakistanis: most Pakistanis are seriously suffering while a wealthy elite is benefitting from the country’s instability and inequality.
“The first vital solution for economic miseries is to withdraw all privileges given to the elite classes and allocate it to the low-income people, so they can get the comforts to avail basic supplies,” Younus said.
But he was skeptical that such a change could happen, at least not peacefully. “Pakistan’s powerful establishment neither has the desire nor the capacity to undertake the changes needed to change the economic trajectory of the country,” he said. “They are the beneficiaries of the status quo, handouts, and subsidies. To change course, the status quo will have to lose its privileges and perks, something they won’t give up voluntarily.”
In any case, Younus said, the type of holistic changes needed to genuinely reshape the Pakistani economy will not result from the IMF negotiations. “Even if this IMF deal is agreed to, Pakistan’s economy will be back at this point by June,” he said.
Tahir Abbas, director of investment research at Arif Habib Limited, one of the largest securities brokerages, investment banking, and research firms in Pakistan, was more optimistic that the IMF deal might address the structural problems in the Pakistani economy.
“The resumption of the IMF program, although still a bitter pill, whereby immediate measures would undoubtedly invite the inflationary readings to become adverse, needs to be undertaken to fix some structural flaws in the country’s economic conditions,” Abbas told the Media Line in an interview.
Economist Saddam Hussein, who works as a researcher at the Pakistan Institute of Development Economics, told The Media Line that the IMF loan was unlikely to be more than a temporary solution.
“At this point, amid a tough economic situation, Pakistan is walking on a tightrope. In other words, the Government of Pakistan has landed at a double-edged sword, where it seems to be lose-lose,” Hussein said.
The most likely possibility, if the loan goes through, would be that Pakistan could “secure some breathing space,” Hussein said. He acknowledged the possibility of a better outcome for Pakistan, in which the IMF agreed to release not just the $1.1 billion loan but the next loan as well, amounting to a total of about $2 billion. Such an outcome, Hussein said, would likely depend on US diplomacy.
Hussein predicted that the IMF’s insistence that government officials publicly declare their assets would be met with backlash. “The bigger elephant in the room is state resources being used by civil servants for almost nothing – the monetary value is many times more than their assets,” he said.
Along with the economic crisis, Pakistan is also struggling with the aftereffects of last June’s devastating floods that caused up to $40 billion in damages, devastating the national economy both directly and indirectly.
Flood waters submerged approximately one-third of the country, washed away crops, and destroyed more than 1.7 million homes, thousands of miles of roads and railway tracks, and countless other pieces of infrastructure. Household food security also has been affected by the flood, mainly due to the loss of food storehouses.