Pakistan’s Vicious IMF Cycle

Governments come and go, but Pakistan’s economic woes – and its love/hate relationship with the IMF – remain constant.

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

The latest plan was agreed after Pakistan ended the Fiscal Year 2021-22 with a $17.4 billion current account deficit, six times larger than the deficit at the end of the previous fiscal year. That signaled the ominous continuation of the country’s perpetual balance of payment crisis. In July, the rupee sank to an all-time low against the U.S. dollar, with the Pakistani currency losing over a third of its value in the first seven months of 2022. The weekend before the IMF extension of funds last month, the State Bank of Pakistan (SBP)’s reserves had plunged to $7.69 billion – the lowest since July 2019, amounting to little over a month of import cover. The 27.26 percent inflation seen in August was the highest in 49 years.

The IMF funds, accompanied by a commitment to economic reform, pave the way for financing from elsewhere. The Asian Development Bank (B), which brought down its growth forecast for Pakistan from 4.5 percent in April to 3.5 percent this month, is expected to give a $1.5 billion loan to the country, albeit at a 2 percent interest rate. Alongside the latest IMF tranche, the UAE also announced a $1 billion investment, while Saudi Arabia confirmed the extension of its $3 billion deposit with the SBP, and another $3 billion for the commercial sector is slated to come from Qatar.

However, almost a month since the IMF plan was announced Pakistan is yet to receive any of these payments. Pressure on the country’s depleting reserves remains, in turn pushing the Pakistani rupee back to the all-time low that it had recovered from over the past month.

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While the financing will eventually materialize, despite the sword of default persistently hanging over Pakistan’s economy, the country continues to stick to its outdated fiscal playbook by replaying the oft-regurgitated and vicious cycle of IMF bailouts, foreign loans, and partial debt repayment.

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“Anyone who takes charge of the government immediately comes to us and asks us to arrange a trip to the U.S. or Saudi Arabia to go looking for loans right away,” Shamshad Ahmed, Pakistan’s former foreign secretary and representative to the United Nations, told The Diplomat.

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

Echoing accusations of a U.S.-orchestrated IMF “debt trap” for Pakistan, China is often accused of the same, usually from the other side. A whopping 30 percent of Islamabad’s overall debt is owed to Beijing, with the much-stalled China Pakistan Economic Corridor (CPEC) contributing to Pakistan’s fiscal predicament through skewed loan agreements. Pakistan’s economic mess, however, is hardly the exclusive doing of foreign powers.

“Nobody forces us at gunpoint to seek loans from them. We go to them because of our own failings. The IMF doesn’t ask us to pile up on imports but not focus on exports,” said economist Farrukh Saleem, an economic adviser to the previous Pakistan Tehreek-e-Insaf (PTI) government.

Pakistan ended the previous fiscal year with a mammoth $48.7 billion trade deficit, signifying a 57 percent increase in 12 months, with a $80.5 billion import bill and $31.8 billion worth of exports.

“Unfortunately, the entirety of the [government’s] focus is on import substitution,” Saleem said. “They put restrictions on imports, instead of enhancing exports, instead of learning from 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 prowl beyond the realm of economics: from the all-powerful military, whose financial appropriations devour the budget while its masochistic security policies pulverize the investment climate, to a corrupt political elite insufficiently invested in the country’s financial wellbeing. It is within this shrinking space that those at the helm of the economy are tasked with waving the wand that will somehow jump-start export-led financial growth.

Given that over half of Pakistan’s already inadequate tax collection is eaten up by debt servicing, successive governments have been handed a similar, albeit identically shunned, handbook of financial remedies. These run the gamut from reforms in state-owned enterprises and distribution companies, to revamps in the circular debt-infested power sector. Many have also urged decentralization along with an active push for the fast-booming information technology industry – led by the tech-savvy youth of the nation – to lead the export drive for the economy.

“For that you need regular supply of electricity, and competitive internet speeds,” Saleem pointed out. “The power sector, like any sector that the government involves itself with, has been destroyed. Massive deregulation and privatization is needed.”

Even so, any functional economy, especially one that seeks a prodigious jump in foreign direct investment, needs stability to create a conducive climate. In addition to Pakistan’s troubling relationship with jihadist groups, a complete dearth of political stability has further pushed investors away from the country. The IMF programs best epitomize this, with the Pakistani political leadership yo-yoing between unequivocal support for the plans and hostile condemnations of them, depending on whether they are in the government or the 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 collective acceptance that programs such as the IMF plan impact the masses, since there is increase in taxation and subsidies are removed. The opposition of the time exploits the economic crises for its own political gains.”

The political polarization in Pakistan, which currently has its three largest parties leading governments in separate provinces and the center, was best illustrated by the PTI-led Khyber Pakhtunkhwa government’s efforts to jeopardize the IMF agreement in August, far from aligning itself with the central government over a national financial need.

“Our institutions, our politicians, our bureaucracy, they’re all shortsighted and do not have the capacity focus on the long-term policies. Every government is focused on their own term and staying in power,” said Shah.

Amid simmering political populism, the Pakistan Muslim League-Nawaz (PML-N)-led central government has decided to replace the outgoing finance minister, Miftah Ismail, with the veteran Ishaq Dar, who led the finance ministry in 1998-99 and then in 2013-17. Dar’s arrival from self-exile on Monday, after five years marred by graft cases, is likely to signal a return to aggressive efforts to fabricate an artificial exchange rate, even as the U.S. Federal Reserve is hiking interest rates, thereby pulling an array of global currencies southwards. On cue, the Pakistani rupee has begun making gains, mirrored by the bullish stock exchange.

While the ambitions of the three governments preceding the current regime were to seek a then-unprecedented completion of elected terms, coupled, where possible, with financial policies that could potentially give them a shot at reelection, the current government that came to power in April aims to unleash the entirety of its populist repertoire in the few months that it has before the scheduled elections in 2023.

That would mean an inevitable reversal of the fiscal restructuring conditions set by the IMF for these months, including overturning taxation policies and quashing a market-determined exchange rate – in effect, throwing all available financial resources at the next elections.

That, in turn, is likely to mean the next government will seek to initiate a 24th IMF program in 2024 – regardless of who wins the election next year.