Salvaging Pakistan: IMF Deal and the Reform Agenda

By Dr Sohail Mahmood

Finally, on June 30, 2023, Pakistan got a nine-month $3 billion loan in a Standby Loan Arrangement from the International Monetary Fund (IMF). The deal, subject to approval by the IMF board in July, came hours before the current agreement with the IMF expired on June 30 As expected, the country did not complete the $7 billion loan agreement which expired on the same day.

Earlier, in August 2022, the IMF had extended $1.1 billion to Pakistan as part of a $6.5 billion program agreed back in July 2019. This was the 23rd IMF loan agreement that Pakistan had failed to complete which is a record in the institution’s history.

The loan is expected to make the required foreign exchange available to reopen imports, help listed companies to gradually ramp up the partially closed production, and reenergize economic activities in the country. The new program has signaled other donor agencies and friendly countries to extend new financing to Islamabad as they pledged $9 billion at a Geneva meeting in January 2023.

The KSE-100 index had become the world’s cheapest equity benchmark, according to Bloomberg, as concerns regarding political turmoil and a risk of default had sent investors fleeing.

The real concern for Pakistan is the long-term reform agenda of the Government of Pakistan.

Many questions need to be asked now.

  • Will the country be able to get out of the IMF straitjacket any time after the expiry of the current SBA?
  • Will it be able to conduct the required structural reform measures that are desperately needed to stabilize the teetering economy?
  • Will Pakistan get a strong civilian government that can conduct these long-term measures?
  • Can the hybrid political system deliver on the economic front? Will elections be held on schedule?

Unfortunately, evidence suggests that there will not be much improvement in the governance score of Pakistan. Given the increasing footprint of the military on the country’s political, economic, and security spheres, the future civilian government will be handicapped to conduct these tough reform measures.

Meanwhile, the government of Pakistan must conduct the tough reform measures demanded by the IMF.

Firstly, the country must get out of the debt trap as soon as possible. An integrated plan must be formulated to take Pakistan in this direction. Pakistan faces an astronomical external debt servicing requirement of approximately $23 billion during the current 2023-24 fiscal year period which is almost six times more than the State Bank of Pakistan’s $4 billion forex reserves.

As of March 31, 2023, the IMF had issued loans of $155 billion to support weak economies. Pakistan was then ranked fifth on the list of countries with the highest borrowing from the IMF. However, after receiving another $3 billion in the next nine months under the standby arrangement, Pakistan will move to fourth place in this list.

Earlier, in terms of loans from the IMF, Argentina ranked first with $46 billion, Egypt stood in second place with $18 billion, Ukraine came in third with $12.2 billion, Ecuador took the fourth spot with $8.2 billion, and Pakistan was at fifth position with $7.4 billion.

Now with loans worth $10.4 billion, Pakistan will overtake Ecuador to become the world’s fourth-largest IMF borrower.

Pakistan is now the largest IMF borrower in the Asian region.

Secondly, the Government of Pakistan must focus on fulfilling the conditionalities of the IMF immediately. Although the government has already fulfilled most of the IMF’s preconditions, these efforts are still considered insufficient. As part of the new loan, the IMF has attached several strings.

These include the removal of remaining import restrictions, further reduction in energy subsidies, and greater adherence to a market-determined exchange rate.

Additionally, the IMF is asking for a ban on un-budgeted spending, the prevention of new tax exemptions, and streamlining of state-owned enterprises.

Thirdly, a comprehensive plan be formulated to modernize the entire Government of Pakistan’s decision-making apparatus which is both inefficient and ineffective. The state bureaucracy must be reformed and red tape be cut. Also, duplication of functions and uncoordinated decision-making at various levels of government be curtailed. A step in the right direction was when the Sharif Government issued a notification on June 17, 2023, to establish the Special Investment Facilitation Council (SIFC), led by the prime minister and including the army chief as a member. Most surprisingly, SIFC will be managed by the military itself.

The primary objective of the council is to serve as a comprehensive “single window” and streamline bureaucratic procedures. Within a few days of its setting up, the government agreed to lease out four berths of Karachi Port Trust to Abu Dhabi Ports for a period of 25 years. This transaction was completed in record time without going through competitive bidding or the involvement of an independent consultant for price discovery, as has been the practice so far.

Fourthly, inflation is extremely high in Pakistan and is slowing down but still is too high and must be brought down further very soon. Inflation is causing great resentment among the public, and it has become a significant public issue now. Pakistan’s Consumer Price Index (CPI) based inflation slowed down to 29.4 percent on a year-on-year (YoY) basis in June 2023 compared to an increase of 38 percent in the previous month and 21.3 percent in June 2022, says the Pakistan Bureau of Statistics (PBS).On a month-on-month (MoM) basis, it decreased to 0.3 percent in June 2023 as compared to an increase of 1.6 percent in the previous month and an increase of 6.3 percent in June 2022.

Fifthly, Pakistan must document its economy and collect due taxes. The country’s informal “black economy” or undocumented and therefore untaxed is huge by all measures. Some analysts indicate that it is even as high as half the formal economy. India has successfully solved this problem, and so can Pakistan.

Sixthly, the Government of Pakistan is bloated and needs to cut its wasteful expenditures like the mammoth defense budget. Though the PDM government has promised to cut government expenditures, it is doubtful that any meaningful reforms will occur.

Lastly, the country must address two significant issues dragging it down. The hybrid political system cannot work at all. Citizens are afraid to call it out now. Also, the perennial leadership crisis at all levels of government is exceedingly difficult to resolve. Any meaningful reform needs capacity at all levels of the government. Therefore, at best Pakistan will just muddle through which is far better than a collapse.

Dr Sohail Mahmood is member of the Editorial Board of International Affairs Forum, Center for International Relations (CIR), Washington, DC. He also holds a Ph.D. with honors in Political Science from Northern Arizona University, Flagstaff, AZ. He hails from Lahore, Pakistan.


Disclaimer: The views expressed are not necessarily those of The South Asian Times 

Image courtesy of Radio Free Europe

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