Pakistan’s tragedy of errors: IMF et al.

Pakistan's tumultuous relationship with the International Monetary Fund (IMF) can be described as a series of unfortunate mistakes that have had increasingly damaging consequences. Over the of 60 years, Pakistan has approached the IMF a staggering 22 times, earning it a dubious distinction. While the nation has often faced rejection due to its reluctance to comply with the IMF's conditions for bailout packages, it has managed to secure financial assistance totalling US$ 4.172 billion from other multilateral lenders such as the Asian Development Bank (ADB) and the Islamic Development Bank (IDB) in the first five months of the fiscal year 2022-23. Additionally, the country has received substantial flood relief assistance exceeding US$ 9 billion from various countries and organisations worldwide. Pakistan's borrowing patterns, combined with an unfavourable increase in gross government debt and its reluctance to reduce spending on subsidised electricity, have discouraged the IMF and its allies from providing fresh loans or restructuring existing ones. Furthermore, successive governments in Pakistan have overlooked the detrimental long-term consequences of implementing subsidy programmes and the resulting budget deficits caused by excessive government spending. Table 1: IMF’s History of Lending Commitments until February 2020 (in thousand SDRs)

Facility	Date of Arrangement	Expiration Date	Amount Agreed	Amount Drawn	Outstanding
Extended Fund Facility	Jul 03, 2019	Oct 02, 2022	42,68,000	10,44,000	10,44,000
Extended Fund Facility	Sep 04, 2013	Sep 30, 2016	43,93,000	43,93,000	37,93,000
Standby Arrangement	Nov 24, 2008	Sep 30, 2011	72,35,900	49,36,035	0
Extended Credit Facility	Dec 06, 2001	Dec 05, 2004	10,33,700	8,61,420	0
Standby Arrangement	Nov 29, 2000	Sep 30, 2001	4,65,000	4,65,000	0
Extended Fund Facility	Oct 20, 1997	Oct 19, 2000	4,54,920	1,13,740	0
Extended Credit Facility	Oct 20, 1997	Oct 19, 2000	6,82,380	2,65,370	0
Standby Arrangement	Dec 13, 1995	Sep 30, 1997	5,62,590	2,94,690	0
Extended Credit Facility	Feb 22, 1994	Dec 13, 1995	6,06,600	1,72,200	0
Extended Fund Facility	Feb 22, 1994	Dec 04, 1995	3,79,100	1,23,200	0
Standby Arrangement	Sep 16, 1993	Feb 22, 1994	2,65,400	88,000	0
Structural Adjustment Facility Commitment	Dec 28, 1988	Dec 27, 1991	3,82,410	3,82,410	0
Standby Arrangement	Dec 28, 1988	Nov 30, 1990	2,73,150	1,94,480	0
Extended Fund Facility	Dec 02, 1981	Nov 23, 1983	9,19,000	7,30,000	0
Extended Fund Facility	Nov 24, 1980	Dec 01, 1981	12,68,000	3,49,000	0
Standby Arrangement	Mar 09, 1977	Mar 08, 1978	80,000	80,000	0
Standby Arrangement	Nov 11, 1974	Nov 10, 1975	75,000	75,000	0
Standby Arrangement	Aug 11, 1973	Aug 10, 1974	75,000	75,000	0
Standby Arrangement	May 18, 1972	May 17, 1973	1,00,000	84,000	0
Standby Arrangement	Oct 17, 1968	Oct 16, 1969	75,000	75,000	0
Standby Arrangement	Mar 16, 1965	Mar 15, 1966	37,500	37,500	0
Standby Arrangement	Dec 08, 1958	Sep 22, 1959	25,000	0	0
Total	2,36,56,650	1,48,39,045	48,37,000

Source: International Monetary Fund Beyond bilateral debt to China and colossal debts to multilateral institutions, Pakistan also owes a hefty US$ 7.8 billion in private debt, mostly comprising private bonds in Eurobonds and global Sukuk bonds. The major chunk of its foreign commercial loans is owed to Chinese financial institutions. A number of caveats are usually asserted with these commercial borrowings, specifically steep rates and short repayment windows. The China Development Bank has recently extended a 3-year loan to Pakistan, of US$ 2.2 billion at a 1.5 percent hike over the Shanghai Interbank Offered Rate (SHIBOR). The private sector balance sheet is also subjected to tremendous pressure with external debt to the tune of PKR 5121 billion, as of March 2023. A significant portion of the challenges faced by Pakistan and its contentious relationship with the IMF stems from its liabilities in the power sector and the mishandling of circular debt. The accumulation of public debt in the power sector due to subsidies and unpaid bills has reached an alarming US$ 14.9 trillion by the end of 2022. Despite the introduction of a Circular Debt Management Plan (CDMP) aimed at addressing the issue, the IMF has been critical of Pakistan's reluctance to raise electricity tariffs within the recommended range of PKR 11-12.50 per unit and provide detailed information on Chinese financial involvement in the China Pakistan Economic Corridor (CPEC). The IMF's rejection of Pakistan's CDMP proposal and its characterisation as “unrealistic” have severely affected the country's efforts to secure IMF assistance.

A significant portion of the challenges faced by Pakistan and its contentious relationship with the IMF stems from its liabilities in the power sector and the mishandling of circular debt.

Pakistan is still in negotiations with the IMF to secure a crucial tranche of US$ 1.1 billion from the Extended Fund Facility (EFF) signed in 2019. The country has implemented measures such as market-determined exchange rates, fuel price hikes, and fiscal reforms as advised by the IMF, but it continues to face challenges in obtaining IMF approval. These measures have contributed to a record-high inflation rate of 27.5 percent year-on-year in January 2023. Additionally, corruption has long been a persistent issue in Pakistan, with bribery, embezzlement, and other illicit practices undermining public institutions and eroding trust in the government. Corruption has distorted market mechanisms, perpetuated resource inequality, and hindered entrepreneurial activity. It has also had a negative impact on foreign investments and international cooperation, further exacerbating the country's challenges in securing the IMF bailout. Looking ahead, Pakistan faces the daunting prospect of another financial crisis, as its debt cycle is expected to persist even after the conclusion of the EFF programme. With dwindling foreign exchange reserves, the country may need to seek additional loans from institutions such as the World Bank and the Asian Development Bank, potentially leading to another IMF programme to address inflationary pressures. (Note – For a more detailed analysis, please see ORF Occasional Paper No. 403 “Debt ad Infinitum: Pakistan’s Macroeconomic Catastrophe”)

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Soumya Bhowmick is an Associate Fellow with the Centre for New Economic Diplomacy at the Observer Research Foundation

• Neighbourhood
• Economics and Finance
• India
• Neighbourhood
• Pakistan
• Budget deficits
• debt cycle
• financial crisis
• Government debt
• IMF
• Pakistan
• Power Sector
• private debt
• public debt

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