Will Pakistan's economy be saved by the IMF deal?

Wednesday, the board of
the International Monetary Fund approved a $3
billion support programme for Pakistan, which includes the immediate
disbursement of approximately $1.2
billion to help stabilise the South Asian nation’s economy.

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Pakistan and the fund
reached an agreement at the staff level last month, securing a short-term
accord with more funding than anticipated for the 230 million-person nation
facing a severe balance of payments crisis.

The bailout had been on
hold since December, when the IMF refused to release a key $1.1 billion part of the loan because the country wasn’t complying
with a 2019 deal made between the IMF and former Prime Minister Imran Khan. Fears that the country
would go bankrupt have been around for a long time, so the release of funds is
a big relief for the government.

However, the agreement
with the international lender entails stringent expenditure restrictions and
structural reforms that are likely to worsen the economic hardships of a great
number of common people.

Why
was an intervention by the IMF required?

Pakistan’s economy has
been in serious trouble as it has been hit by a balance of payments crisis
while attempting to service a massive amount of external debt and devastating
inflation.

Prior to the bailout,
the country’s foreign reserves hovered around $4 billion, which was sufficient
to cover a month’s worth of imports, although Pakistan prohibited some imports
to conserve dollars.

In order to pay back
foreign loans plus interest, experts predict the country would need at least
$20 billion over the next two years.

Earlier this year, the
Pakistani rupee fell to an all-time low against the U.S. dollar following the
removal of an exchange cap, as the financially constrained nation attempted to
access the crucial IMF bailout.

According to Khizar, an
economist based in Lahore, the lack of foreign exchange could have caused
severe shortages of petroleum, food, and other products. Now, things are likely
to better as the currency stabilises and inflation declines gradually over the coming
months.

The global rating
agency Moody’s lowered Pakistan’s sovereign credit rating by two levels to
‘Caa3’ in February, citing the country’s deteriorating liquidity as
“significantly increasing default risks.”

According to the local
newspaper Express Tribune, more than 750,000 Pakistanis departed the country in
2022, a three-fold surge from the previous year.

To make matters worse,
the devastating flooding of last year caused an economic loss of approximately
$30 billion from which Pakistan has not yet fully recovered.

 What
are the IMF’s requests?

Islamabad has revised
its 2023-24 budgets and raised its
policy rate to 22% in recent weeks in response to IMF demands since its
mission started in Pakistan in February.

To comply with the
IMF’s fiscal adjustments, the Washington-based international lender also
convinced Pakistan to impose new taxes
totaling over 385 billion Pakistani rupees ($1.34bn). The IMF has recommended
that the central bank keep up its aggressive measures to curb inflation and
keep a stable foreign exchange framework.

Already, the
modifications have contributed to Asia’s highest inflation rate of 38% year
over year, which was recorded in May.

Meanwhile, the energy
industry has been a focal point of the IMF discussions due to its massive debt
load of nearly 3.6 trillion Pakistani rupees ($12.58bn).

Pakistan has issues
“particularly in the energy sector,” the IMF warned, predicting
higher electricity prices as a result.

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