IMF’s $3 billion bailout deal will not solve Pakistan’s long-term problems, say experts

KARACHI: The International Monetary Fund’s (IMF) $3 billion bailout deal will provide much-needed fiscal space to Pakistan but not solve the country’s long-term problems, financial experts and economists said on Saturday.
Subject to the IMF’s board approval in July, the stand-by arrangement (SBA) provides breathing space to a Pakistani economy staring at default and in dire need of external financing. The staff-level pact was announced a day before Pakistan’s previous $6.5 billion loan program with the IMF expired.
Cash-strapped Pakistan will get $1.1 billion in funds under the new financing arrangement right after the IMF’s board meeting in mid-July. The new deal provides Pakistan more than the $2.5 billion disbursement it expected to receive under the Extended Fund Facility (EFF) program that concluded incompletely on June 30, 2023.
“The SBA provides some much-needed space to the Pakistani economy and will most certainly dampen near-term uncertainty,” Uzair Younus, director of the Pakistan Initiative at the Washington-based think tank, the Atlantic Council, told Arab News.
“However, the economy remains in a precarious situation and the government has to try and sort out some of the major issues in the energy sector, reduce distortion in the exchange rate market, and adopt a policy framework that doesn’t just burn the external financing the country has unlocked to achieve near-term political objectives.”
Economists say the deal will only offer Pakistan short-term respite.
“It will not solve long-term problems of paying on average around $25 billion per year for the next three years,” Dr. Ikram ul Haq, a Lahore-based senior economist, told Arab News.
The new deal came through after Finance Minister Ishaq Dar revised the federal budget the government passed on June 9, 2023. Dar increased Pakistan’s revenue collection target to Rs9.415 trillion ($33 billion) and put total spending at Rs14.480 trillion ($51 billion), increasing the petroleum levy from Rs50 to Rs60 per liter.
Authorities have taken Rs215 billion ($752 million) additional tax measures, cut Rs85 billion expenditures, hiked allocations under the social safety Benazir Income Support Program (BISP) by Rs16 billion, and withdrew amnesty on foreign exchange inflows, while the central bank jacked up policy rate by 1 percent to record high at 22 percent in an emergency meeting.
Economists said the high cost of the IMF bailout package would be borne by the masses rather than the elite.
“The key to success of SBA and next program will be structural reforms that is Waterloo of our elites,” Haq said, adding that “the real victims will be masses who will pay higher indirect taxes and bear high cost of utilities as has happened under previous program.”
For now, the SBA has had a positive impact on local and international investors’ confidence, with Pakistan’s sovereign dollar bond, maturing in 2024, gaining its value as fears of default subsided. 
“Significant upward movement in bond prices demonstrates growing optimism among investors regarding Pakistan’s ability to address its economic challenges and implement necessary reforms under the IMF-supported program,” Tahir Abbas, head of research at Arif Habib Limited told Arab News.
Pakistani analysts and currency dealers expect that the country’s capital markets may rally from next week in response to positive the development, which would unlock further funding from bilateral and multilateral partners.
Malik Bostan, president of the Exchange Companies Association of Pakistan (ECAP) hoped the IMF deal would help Pakistan’s national currency regain its lost value.
“The rupee is expected to recover about Rs5 to Rs10 on the opening day of trading and will further strengthen by Rs10 to Rs20 with the inflow of funds,” Bostan told Arab News. “Those hoarding dollars for gains will not suffer losses if they don’t come out to sell.”