Pakistan’s Vicious IMF Cycle

On August 29, the International Monetary Fund (IMF) released the last remaining $1.1 billion in funding for Pakistan, following a combined seventh and eighth review of the extended funding facility provided to the country. The $6 billion bailout agreed in 2019 conditioned IMF lending to market-determined exchange rates and rebuilding official reserves to reduce public debt, ensure fiscal growth, and increase the country’s per capita income. The bottom line, extended until June 2023, is the 23 IMF program that Pakistan has received in its 75 years of existence.

The latest plan was agreed after Pakistan ended the 2021-22 fiscal year with a $17.4 billion Current account deficit, six times greater than the deficit at the end of the previous fiscal year. That signaled the ominous continuation of the country’s perpetual balance of payments crisis. In July, the rupee sank to a record low against the US dollar, with the Pakistani currency losing more than a third of its value in the first seven months of 2022. The weekend before the IMF funds extension last month, the reserves of the State Bank of Pakistan (SBP ) had collapsed to $7.69 billion – the lowest since July 2019, amounting to just over one month of import coverage. the 27.26 percent the inflation observed in August was the highest in 49 years.

Funds from the IMF, coupled with a commitment to economic reform, pave the way for financing elsewhere. The Asian Development Bank (ADB), which reduced its growth forecast for Pakistan from 4.5 percent in April to 3.5 percent this month, it is expected to give a $1.5 billion loan to the country, albeit at an interest rate of 2 percent. Along with the latest IMF tranche, the UAE also announced a billion dollar investmentwhile Saudi Arabia confirmed the extension of its $3 billion deposit with the SBP, and another $3 billion for the commercial sector it is expected to come from Qatar.

However, nearly a month since the IMF plan was announced, Pakistan has yet to receive any of these payments. Pressure remains on the country’s depleting reserves, which in turn pushes up the Pakistani rupee back to the historical low from which it had recovered during the last month.

While the funding will eventually materialize, despite the sword of flaw Lingeringly weighing on Pakistan’s economy, the country continues to stick to its outdated fiscal playbook by reproducing the vicious and oft-regurgitated cycle of IMF bailouts, foreign loans, and partial debt repayment.

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“Anyone who takes over the government immediately comes to us and asks us to arrange a trip to the US or Saudi Arabia to seek loans immediately,” said Shamshad Ahmed, Pakistan’s former foreign secretary and UN representative. United, to The New York Times. Diplomatic.

“I wish the rulers knew the basics of the economy: the loan is not capital, but a liability. And the loan that the IMF gives to countries like ours is designed to trap us in endless debt at the behest of the United States,” he added.

Echoing accusations of a US-orchestrated IMF “debt trap” for Pakistan, China is often accused of the same thing, usually from the other side. a great 30 per cent of Islamabad’s total debt is owed to Beijing, and the much-stalled China-Pakistan Economic Corridor (CPEC) contributes to Pakistan’s fiscal situation through biased loan agreements. Pakistan’s economic mess, however, is not the exclusive work of foreign powers.

“Nobody forces us at gunpoint to ask them for loans. We go to them because of our own failings. The IMF is not asking us to accumulate imports but not to focus on exports,” said economist Farrukh Saleem, economic adviser to the former government of Pakistan Tehreek-e-Insaf (PTI).

Pakistan ended the previous fiscal year with a gigantic $48.7 billion Trade deficit, which means an increase of 57 percent in 12 months, with an import bill of $80.5 billion and an export value of $31.8 billion.

“Unfortunately, the entire [government’s] the focus is on import substitution,” said Saleem. “They put restrictions on imports, instead of improving exports, instead of learning from the countries where this policy has failed: India, Argentina, Mexico, Zimbabwe and so many others. [The large part of] what we import has no substitution: how would you substitute fuel, coal or LNG?

Many of Pakistan’s fiscal demons lurk beyond the realm of the economy: from the all-powerful military, whose financial allocations gobble up the budget while your masochistic security policies pulverize the investment climate, at a corrupt political elite insufficiently invested in the financial well-being of the country. It is within this shrinking space that those at the helm of the economy are tasked with waving the magic wand that will somehow fuel export-led financial growth.

Since more than half of Pakistan’s already inadequate tax collection is eaten debt service, successive governments have been handed a similar manual of financial remedies, although equally rejected. These run the gamut, from reforms in state-owned companies and distribution companies, to renovations in the debt-ridden circular sector. energy sector. Many have also urged decentralization along with an active push for the fast-growing information technology industry, led by the nation’s tech-savvy youth, to lead the economy’s export drive.

“For that, you need a regular supply of electricity and competitive internet speeds,” Saleem said. “The electricity sector, like any sector in which the government is involved, has been destroyed. Massive deregulation and privatization is needed.”

Still, any functioning economy, especially one seeking a prodigious jump in foreign direct investment, needs stability to create a supportive climate. In addition to Pakistan’s worrying relationship with jihadist groups, the complete lack of political stability has further alienated investors from the country. The IMF programs best epitomize this, with the Pakistani political leadership oscillating between unequivocal support for the plans and hostile condemnation of them, depending on whether they are in government or in opposition.

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“There is extreme political polarization in our country,” former finance minister Salman Shah told The Diplomat. “There needs to be a collective acceptance that programs like the IMF plan have an impact on the masses, since taxes are increased and subsidies are eliminated. The opposition of the time exploited the economic crises for their own political gains”.

The political polarization in Pakistan, which currently has its three main parties at the head of the governments in separate provinces and the centerwas best illustrated by the efforts of the PTI-led Khyber Pakhtunkhwa government to endanger the deal with the IMF in August, far from siding with the central government out of 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. Each government is focused on its own mandate and staying in power,” Shah said.

Among simmering political populism, the Pakistan Muslim League-Nawaz (PML-N)-led central government has decided to replace outgoing finance minister Miftah Ismail with veteran Ishaq Dar, who led the finance ministry in 1998-99 and then in 2013. -17. of giving arrival of self-exile Monday, after five years marred by corruption cases, is likely to signal a return to aggressive efforts to fabricate an artificial exchange rate, even as the US Federal Reserve. rising interest ratesthereby attracting a number of global currencies to the south. On cue, the Pakistani rupee has started making profitreflected by him bullish stock market.

While the ambitions of the three governments that preceded the current regime were to seek an unprecedented completion of elected terms, along with, where possible, financial policies that could potentially give them a chance at re-election, the current government that came to power in April intends to unleash his entire populist repertoire in the few months that remain before the elections scheduled for 2023.

That would mean an inevitable reversal of the fiscal restructuring conditions established by the IMF for these months, including the reversal of tax policies and the annulment of a market-determined exchange rate, in effect throwing all available financial resources into the upcoming elections.

That, in turn, likely means the next government will look to start a 24th IMF program in 2024, regardless of who wins the election next year.

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