Pakistan’s tough measures may revive IMF bailout package but inflation causing explosive situation
Desperate to revive the stalled loan program, the Pakistan government has finally fulfilled tough IMF conditionalities, imposing whopping new taxes. The decision may help the country stave off the threat of default on foreign debt repayment but the political cost of unpopular measures could be high for a fledgling government in the election year.
Pakistan held 10 days of intensive talks with an IMF delegation in Islamabad — from Jan 31 to Feb 9 — but could not reach a deal. The global lending agency has hardened its stance, calling Pakistan to implement on the conditionalities up front. The two sides stayed engaged in virtual discussions to finalise the implementation details of the policies, including tax measures.
The government had no option but to implement the tax measures and reach an agreement with the IMF as the country’s reserves depleted to a critically low level of $2.9bn, which was enough for only 16 or 17 days of imports. The government’s reluctance to take tough but necessary steps for political reasons had stalled talks with the IMF for several months bringing the country to the brink of economic collapse.
It has been critical for the government led by Prime Minister Shehbaz Sharif to see the revival of the stalled IMF loan programme. But that has required taking tough measures that the government has been trying to avoid for political reasons. Not only did the massive subsidy on petroleum products have to go, but some other subsidies too were required to be withdrawn.
There is no indication yet of rival parties coming together to bring down political temperatures and enter into a serious discussion on the schedule and modalities of elections. More importantly, what will happen to the economy in the meantime?
The government is now hopeful about sealing a deal that could pave the way for release of much awaited funds after it has met the IMF’s demand of rationalizing fuel and electricity prices and increasing taxes. The agreement with the IMF on the completion of the ninth review of a $7bn loan programme would not only lead to a disbursement of $1.2bn but also unlock inflows from friendly countries. Pakistan entered the IMF program in 2019, but only half the funds have been disbursed to date as Islamabad struggled to keep the targets on track.
The funding from bilateral donors have also been contingent on the IMF program. Pakistan’s traditional allies — China, Saudi Arabia and the United Arab Emirates, it seems were reluctant to provide fresh assistance in the absence of an IMF programme, which is also critical for other multilateral and bilateral funding.
The deal with IMF may help Pakistan escape the immediate threat of a default, but the country will still not be out of the danger zone. Like many developing countries, Pakistan is also confronted with the spectre of Sri Lanka-like economic collapse, and is among the world’s most vulnerable states. Pakistan’s external debt maturities in the second half (January-June) of FY23 are over $7 bn. This requires financing for payments or rollover from lenders to minimise risks.
A more serious challenge for the government would be to bring down the runaway inflation that is being driven by both internal and external factors. The average 33pc inflation forecast for the first half of this year is likely to affect the majority of Pakistani households already facing hardship.
While low-income households will face the brunt of the rising costs of living, even well-to-do families who have so far been lucky in keeping their heads above the water despite wave after wave of inflation, will find it a challenge to stay afloat. The prices of all essential food items have increased exponentially. The latest measures are likely to prove socially and politically difficult amid a sharp economic slowdown, high inflation, and the devastation wrought by widespread floods last year.”
What is most alarming is that the painful adjustments may still not be enough to get the country out of woods. A weak government with limited political power will find it hard to control an extremely volatile situation. With elections due by October 2023, and former prime minister Imran Khan increasing the pressure, the government has been put into an extremely precarious position.
This bleak scenario also raises the question of whether the announcement of an election date could help stabilise the political situation. There is no indication yet of rival parties coming together to bring down political temperatures and enter into a serious discussion on the schedule and modalities of elections. More importantly, what will happen to the economy in the meantime? There is not only a need for a charter of democracy but also a charter of economy to move the country forward. One can only hope that sanity will prevail.
- Zahid Hussain is an award-winning journalist and author. He is a former scholar at Woodrow Wilson Centre and a visiting fellow at Wolfson College, University of Cambridge, and at the Stimson Center in DC. He is author of Frontline Pakistan: The struggle with Militant Islam and The Scorpion’s tail: The relentless rise of Islamic militants in Pakistan. Frontline Pakistan was the book of the year (2007) by the WSJ. His latest book ‘No-Win War’ was published this year. Twitter: @hidhussain