After two months of intense politicking and unrest, Shehbaz Sharif took charge as the 23
rd Prime Minister of Pakistan. His appointment followed the ouster of Imran Khan after a no-confidence submitted against his government passed, adding his name to the list of past leaders who had to vacate their posts prematurely. Amidst the political turmoil that infested the nation, the Extended Fund Facility (EFF) of the International Monetary Fund (IMF), a lifeline for the economic ailments of the country, was put on hold. In its most recent projections, the IMF revised the current account deficit of the country to 5.3 percent of the GDP and inflation to 12.7 percent in FY2022, making IMF’s support even more crucial for the new dispensation to stabilise the country. The coming months will thus be very challenging for the new administration. Understanding the state of the Pakistani economy and its implications on the neighbourhood necessitates a reading of the effectiveness of the aid packages of the IMF and their success or failure in ushering in long-term sustainable growth.
State of the economy and the 13th IMF bailout
In an interview with
Bloomberg, the former Governor of the State Bank of Pakistan (SBP) Reza Baqir, while acknowledging the uncertainty in the external environment owing to the war in Ukraine and the politically volatile internal politics,
expressed confidence in the strong fundamentals of the economy. But as per the most recent economic outlook by IMF, Islamabad is witnessing the highest current account deficit and its foreign exchange reserves, standing at 11-billion-dollar till the end of March, will only be enough till June. The
trade deficit has also reached till 35-billion-dollar and the value of Pakistani rupee has been on a downward trajectory for the last three years. The investor sentiment is negative as most fear that the country is only months away from a financing crisis.
Understanding the state of the Pakistani economy and its implications on the neighbourhood necessitates a reading of the effectiveness of the aid packages of the IMF and their success or failure in ushering in long-term sustainable growth.
When the Opposition parties submitted the no-confidence motion back in February, Imran Khan announced a slew of populist measures, slashing the price of petrol and other commodities till the Budget Session in June. These subsidies, at an overall cost of 2.1 billion dollar were heavily criticised at the time and violated
two main conditions of the IMF. But the newly appointed PM has decided to keep them in the fear of inviting backlash just a few days after assuming office. This retention will put enormous pressure on the exchequer and exacerbate an already festering situation.
As per Miftah Ismail, the Finance Minister in the new government, the administration will work with the IMF to bring macroeconomic stability in the country. In the backdrop of the political crisis, the 13
th bailout programme was
put on hold. The programme was previously suspended in April 2020 due to the pandemic and then in March 2021 for several months. The Resident Chief of the Fund, Esther Perez Ruiz reiterated IMF’s continued support to Pakistan once a new government is formed. Because of the stalling of the seventh review the country will have to bridge a financing gap of 5 billion dollar, from both the IMF and other bilateral donors, if an impending
balance of payments crisis (BoP) is to be averted. After negotiations for the release of approximately 900 million dollar stalled, other multilateral funding agencies like the
World Bank and the Asian Development Bank also stopped their budgetary support and ‘attached approval with the IMF’s ‘letter of comfort’. In the recent
Bretton Woods Spring Meeting in Washington DC, Islamabad had sent an economic delegation composed of the Finance Secretary, the Governor of the SBP, and the Additional Secretary on external finance where they have met the IMF team on the side-lines. A technical meeting with the IMF has begunbut there are no talks of a review meeting happening any time soon.
| Indicators |
2018/19 |
2019/20 |
2020/21 |
2021/22 |
2022/23 (Projected) |
| Real GDP growth (constant market prices) |
2.5% |
-1.3% |
6% |
4.3% |
4% |
| Current Account Balance as percentage of GDP |
-4.2 |
-1.5 |
-0.6 |
-4.4 |
-5.3 |
| Inflation (end of period consumer prices, annual %) |
5.2 % |
8 % |
8.6% |
9.7% |
12.7% |
| Debt (as percentage of GDP) |
78.0 |
81.1 |
76 |
76 |
74.4 |
Source: IMF, State Bank of Pakistan, World Bank- Pakistan Development Update
In 2019, a year after the PTI government came to power, the
13th IMF bailout package was adopted to bring “sustainable growth” and address the “..structural inequalities” of the country. A total amount of 6 billion dollars, over a period of 39 months was set for the country which would be contingent on fulfilling certain conditionalities. The disbursal of the amount was to be done through quarterly reviews to assess the performance of the country on certain metrics. Till date, half of this amount has been received while the receipt of the remaining seems a little difficult in the current circumstances.
The programme was aimed at reducing the domestic and external impediments to growth, increasing transparency, and enhancing social spending. In the
background of the COVID-19 pandemic, its focus was also on saving lives and livelihoods and ensuring macroeconomic and debt sustainability. As part of the package, Pakistan was
expected to increase taxation to pay off its external debt, work towards increasing its foreign exchange reserves, undertake currency devaluation making it determined on the market, grant more autonomy to the SBP and tighten the monetary policy.
Ishrat Hussain, a former Governor of the SBP extrapolates a
set of six reasons which are common to all the governments that approach the IMF for assistance—financial resources for averting a BoP crisis, easy access to funds from other sources, a ‘seal of approval’ for positive investor sentiment, a tool to shift the blame for politically unpopular decisions, an attempt by some reformist economists to restrain populist policies and a means to get rid of debt relief and rescheduling. The main motive of the executive in running to secure a bailout is to inject short-term liquidity. The adjustments are taken as a short-term palliative to buy time rather than a means to initiate long-term structural reforms. All governments have their own vested interests, and most changes are cosmetic as the party in power is concerned about its hold on the reins of the country. As the benefits of whatever reforms that are adopted become visible in the long term, the time inconsistency factor also comes into play and reduces any incentive to undertake effective reforms.
Effectiveness of the bailouts: a general assessment
After the financial crisis in the mid and late seventies, the IMF announced several special funding facilities, of which the EFF was a major part. The lending conditions attached to the loans have always been a matter of debate and dissension. While a more flexible approach was adopted in 1979, the fund subsequently made the lending conditions more country-specific, with a focus on poverty alleviation and growth and timely evaluation of programmes.
Pakistan was expected to increase taxation to pay off its external debt, work towards increasing its foreign exchange reserves, undertake currency devaluation making it determined on the market, grant more autonomy to the SBP and tighten the monetary policy.
Joseph Stiglitz, in a
stringent critique of the IMF, lambasted at the conditions which according to him are not based on an economic analysis and observation but on an ideology of “free market supremacy and antipathy to government”. According to him, the IMF adopts a ‘cookie cutter approach’ of one-size-fits-all as the conditions are detached from the ground realities because of which the disproportionate impact of the reforms is being felt by the people. The Fund follows a ‘structural adjustment playbook’ and is Eurocentric. The fiscal austerity measures that it mandates have
enormous social costs, the high interest rates make it difficult for countries to service their debts and the initial conditions, the market imperfections, structural rigidities don’t figure in policy formulation.
There is generally no consensus about the
effectiveness of the bailouts. While some feel that regular loans create a condition for moral hazard, increasing the possibility of a subsequent sovereign default by 1.5–2 percent, others find them useful in
preventing extreme financial consequences. The literature on the effectiveness of the bailouts hasn’t shown any clear evidence of a direct improvement in economic growth in the short term or an enhancement in the overall economic condition with the resolution of the BoP crisis. So, understanding why a particular programme failed can be a factor of any number of reasons—the programme design, its failed implementation or the vulnerabilities of the bailed-out countries. According to some, the
growth of bailed out country lowers during the duration of the package but once it gets over, the countries grow faster than they had been but not as faster as they had without participating in the programme. This debate over whether the mechanism of forcing the receiver country to undertake unpopular reforms and an ambiguous understanding of their effectiveness, especially for a country like Pakistan which is overly reliant on it is a cause of concern. IMF programmes have had a
mixed record in Pakistan. Most programmes have been cut short due to the frequent change in governments, with sometimes only half of the agreed amount utilised.
The literature on the effectiveness of the bailouts hasn’t shown any clear evidence of a direct improvement in economic growth in the short term or an enhancement in the overall economic condition with the resolution of the BoP crisis.
Perception in Pakistan
The newly appointed Prime Minister recently reiterated the need for Islamabad to work towards becoming economically independent in the true sense and
detach itself from its reliance on aid and assistance. Over the years, there has been an aversion to selling out the
country’s sovereignty in return for financial aid. In 2019,
Farooq Tariq, a spokesperson and formal General Secretary of the Awami Workers’ Party in an interview with
the Diplomat criticised the conditionalities put up by the IMF and the exorbitant burden it placed on the common man. According to him, it is because of the high military and debt expenses that the country must go back to the IMF every few years. He also criticised the IMF’s positioning of its own people in the top positions. Farrukh Saleem, a former spokesperson of the PTI also termed the bailouts as a
‘straitjacket’ for the economy. A former secretary of the Pakistan’s Ministry of Defence Production said that the IMF doesn’t want Pakistan to develop its conventional forces and match the level of India. The bailout packages are seen as being motivated by geostrategic factors as the influence of the west is more profound. According to
Dawn, the decades of economic mismanagement and coming back to the IMF for rescue has accustomed people to view a bailout no longer as an unwelcome development but as a sigh of relief.
A vicious cycle
Since its inception, Pakistan has spent more years inside an IMF programme than outside of it. A bailout package and the process of undertaking IMF-mandated reforms signifies
‘good housekeeping’ practices and makes it easier for the country to also access aid from other bilateral sources. While concerns about the effectiveness of the IMF conditions in different countries without taking into consideration the regional peculiarities are valid, they are necessary to ensure that the money is being spent where it is supposed to. For Islamabad, an IMF rescue has become a major tool in the arsenal of all subsequent administrations who lack the political will and capacity to undertake effective reforms keeping in mind the welfare of the people and the health of the economy. Every leader takes the money, imposes massive hardships on the population through austerity and demand suppression and then reneges on its commitment through a patchy implementation. While the Supreme Court’s decision to uphold the constitutional values of the country is a bleak strand of light in an otherwise dark alley, the Sharif administration is looking at a difficult time ahead with an urgent need to stabilise the economy and the political climate of the country.
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