WORLD NEWS | IMF bailout: Will Pakistan succeed?

Islamabad [Pakistan]March 11 (ANI): Amid heightened political uncertainty and worsening economic woes, the key question now for Pakistan is whether it can craft an International Monetary Fund (IMF) bailout package.

Although crisis-affected countries have fulfilled most of their IMF loan conditions, problems remain with regard to their external financing needs.

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Over time, this is important to free up $1.1 billion of the $6.5 billion IMF bailout deal. The relief program ends at the end of the current fiscal year, which is June 30, 2023.

Pakistani politicians are adept at misleading their own people, as evidenced by Pakistani Finance Minister Ishaq Dar’s claim last week that external financing guarantees were not a condition of the IMF’s approval of bailout funds.

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In contrast, the fact is that “all IMF program reviews require firm and credible assurance that sufficient resources are available to ensure that the borrowing member’s balance of payments is adequately financed for the remainder of the program”, the IMF said. Escher Perez, the organization’s resident representative, told Reuters.

The IMF’s next tranche of bailouts will depend on Pakistan’s ability to move quickly to fully finance its balance of payments deficit in 2022-23.

The IMF has been in talks with Islamabad since early last month to clear its Ninth Review, but Pakistan has found the IMF’s conditions not only difficult to meet but also politically unpopular.

Still, Islamabad accepted the bitter fruit of the IMF’s conditionalities, as it was already on the brink of default and economic collapse.

Pakistan is taking a number of measures, including raising GST and GST, reducing subsidies, adjusting energy prices and artificially capping the exchange rate, to meet the conditions of the release of the IMF bailout package. But these measures have brought a lot of inconvenience to ordinary people in the country.

First Islamabad unveiled a supplementary budget on February 15, approving a new tax on electricity users, including farmers, to raise an additional PKR 170 billion in revenue to meet IMF conditions.

It also approved the cessation of electricity tariff subsidies for zero-rated industries from March 1, as well as the Kissan package, to meet other conditions of the IMF’s previous action.

Second, it hiked petrol prices to PKR 272 per liter after a rise of PKR 22.20. The hike in high-speed diesel by PKR 17.20 and kerosene by PKR 12.90 will put a financial burden on people already struggling with rising inflation.

Inflation continues to increase, with inflation expectations approaching 30%. Given that the Central Bank of Pakistan raised the benchmark interest rate by 300 basis points to 20% on March 2, 2023, pushing borrowing costs to their highest level since 1996.

This will certainly keep inflation in check, but hinder capital formation, which the Pakistani economy desperately needs at a time when growth forecasts for 2023 and 2024 range from low levels of 3-3.35%.

Earlier on February 5, Islamabad removed the cap on the Pakistani rupee’s exchange rate against the US dollar to meet IMF conditions, which caused the Pakistani rupee to depreciate to a record low on January 26, reaching 276.58 in the interbank market Pakistan Rupee to US$1. After a slight improvement, PKR fell again to 275 on March 7.

Pakistan’s foreign exchange reserve situation remains fragile. After falling $170 million to $2.92 billion in the first week of February, it remained at a precariously low $3.2 billion in the second week of the same month ended Feb. 10.

The current level of reserves is a serious concern for Islamabad, given the State Bank of Pakistan’s foreign exchange reserves of $18 billion in 2022. Such low foreign exchange levels testify to the impediments to the import of basic products such as food and medicines, in addition to the intermediate goods needed for manufacturing.

The impact of falling reserves is also detrimental to Pakistan’s economic recovery. While the country has taken steps to curb dollar outflows by restricting imports, many businesses have either scaled back or closed operations after being unable to open letters of credit (LC) amid a foreign exchange shortage. This is affecting industrial production and growth prospects.

In this context, experts wonder how Pakistan can assure the IMF of its ability to meet external financial needs. Although Pakistan’s finance minister said on March 4 that the country will receive $1.3 billion in financing support from Industrial and Commercial Bank of China Ltd (ICBC) in the coming days, the issue is still far from resolved.

Meanwhile, Pakistan is also seeking confirmation from Saudi Arabia to secure an additional $2 billion in deposits and a $950 million loan program from the World Bank and the Asian Infrastructure Investment Bank (AIIB).

This may help the country assure the IMF of its external financing capacity during the bailout period. But from the perspective of Pakistan’s fiscal requirements, the amount to stabilize its balance of payments is minimal.

Pakistan’s current account remains fragile. In December 2022, the current account deficit (CAD) widened by almost 59% month-on-month, but fell by 78% compared to Covid-19 2021.

For the full fiscal year 2022, the country’s Canadian dollars are $17.4 billion. Despite the sharp contraction of the Canadian dollar, the current coalition government is still in deep trouble.

The country’s exports and imports have both fallen recently, but imports remain about twice as high as exports. This is why Pakistan cannot meet its external financing needs.

Remittances might help, but at the time, the country couldn’t count on it. They take time to build up, and given current recession expectations in the global economy, they may not materialize due to lower expected labor demand.

All in all, the country is on the brink, and the solution it seeks to meet IMF conditions will have unfathomable adverse effects on the economy.

Pak News Daily Dawn columnist Mohiuddin Aazim so aptly described the future that awaits Pakistan: “At the insistence of the International Monetary Fund, the Federal Government and the State Bank of Pakistan did something last week that will deepen the current political and administrative Chaos, weakening the economy and increasing the misery of 230 million Pakistanis. But they have to. Beggars cannot be picky.” (Ani)

(This is an unedited and auto-generated story from a Syndicated News feed, the content body may not have been modified or edited by LatestLY staff)