Politics of a bailout: Lessons for Pakistan from the Sri Lankan crisis

Pakistan is witnessing economic and political crises, food and fuel inflation, depleting forex reserves, and increasing debt repayments. Islamabad is under immense pressure to avert a default by unlocking US$ 1.1 billion from its IMF package, before the programme expires on 30 June. After some reluctance, Pakistan has finally agreed to share its budget details with the International Monetary Fund (IMF). But enduring negotiations and increasing IMF conditionalities hint that this stalemate is far from over. Not long ago, even Sri Lanka faced a similar situation. Although, Sri Lanka has a long road ahead to stabilise the economy, its success with the bailout offers some crucial insights for Pakistan.

Domestic politics 

Political will and consensus in Sri Lanka have in part contributed to the successful IMF negotiations. The Rajapaksas’ reluctance to approach the IMF had earlier invoked some criticism from the Opposition. With the government reversing its course in March 2022, there was consensus among all major players over reaching out to the IMF. Political leaders had realised that Sri Lanka had no option but to seek a bailout. Essentially, the country defaulted on all of its external commitments, within a month of approaching the IMF. The IMF conditionalities urged for tax hikes, debt restructuring, increase in revenues, reduction in expenditure, and elimination of subsidies and sector-specific tax exemptions. The Opposition differed with IMF on taxes and tariffs and the reforms bore significant political costs. But, with just one seat in the Parliament and less legitimacy, President Ranil Wickremesinghe was willing to take the political risk. Ultimately, leading to reforms and the subsequent bailout.

The IMF conditionalities urged for tax hikes, debt restructuring, increase in revenues, reduction in expenditure, and elimination of subsidies and sector-specific tax exemptions.

On the other hand, political instability and lack of political will are impacting Pakistan’s IMF negotiations. Pakistan is negotiating to resume the 2019 IMF package, which was put on hold after Imran Khan violated IMF’s conditions. The IMF now demands that Pakistan promote market-based exchange rates, boost tax bases, end tax exemptions for export sectors, increase fuel prices, and seek support from friendly nations. However, as Pakistan heads to elections this year, it has shied away from taking these tough decisions. The political crisis and Imran Khan’s popularity have only hampered the political will for such measures. The government has thus responded half-heartedly. It has increased tax rates, and policy interest rates and cut down on government expenses. But, it has  refused to revise tariff prices and lifted subsidies on fuel for only one year. This hesitancy has contributed to Pakistan’s stalemate with the IMF.

Regional partners and China

The IMF had also urged Pakistan and Sri Lanka to reach out to their respective lenders to restructure debts and seek their assurances. Sri Lanka had to restructure debts with its major creditors—China, Japan, and India. And Pakistan requested its top lenders —China, Saudi, and the United Arab Emirates (UAE) for assurances of US$ 8 billion to ensure its debt repayments are met till December 2023. In the case of Sri Lanka, China’s assistance has been passive. It offered humanitarian assistance worth US$ 74 million but shelved requests for loan restructuring and aid worth US$ 4 billion. This is for the following reasons: China was unhappy with Sri Lanka's approach to the IMF, as it sees the IMF as a Western institution that has to be superseded to facilitate its global rise. Second, IMF assistance would result in haircuts and debt restructuring, which would impact Chinese lending and returns. It was also speculated that restructuring of loans would set a precedent for other countries that have borrowed from China. However, with other countries assisting Sri Lanka, China was obliged to do the same. But its assistance came half-hearted; only one of two major Chinese banks agreed to Sri Lanka’s debt restructuring, and China offered a two-year moratorium period to Sri Lanka against the prescribed period of 10 years.

Japan offered humanitarian assistance worth US$ 104 million, provided assurances of debt restructuring in early January, and also convinced the rest of the Paris Club to restructure Sri Lanka’s debts.

Regional partners like Japan and India played a crucial role in Sri Lanka’s debt restructuring. Japan offered humanitarian assistance worth US$ 104 million, provided assurances of debt restructuring in early January, and also convinced the rest of the Paris Club to restructure Sri Lanka’s debts. On the other hand, India acted as a first responder to Sri Lanka’s economic crisis. It offered an assistance of US$ 4 billion through credit lines, currency swaps, loan deferrals, short-term loan facilities, grants, and humanitarian supplies. It also played a vital role in seeking international assistance. It urged the QUAD countries to assist Colombo and convinced the G20 countries to address the debt vulnerabilities of Sri Lanka and other highly indebted countries. India also co-chaired and participated in Paris Club meetings, despite not being a member of the Club. This largely facilitated Sri Lanka’s IMF bailout. With Pakistan, Beijing has assisted the country to fulfil some of the Fund’s conditionalities, but has stayed away from promoting its cause with the IMF. This is due to Beijing’s dilemma. China sees IMF as a Western competitor, and the IMF has consistently questioned China’s opaque lending tactics and intentions. The IMF has even asked Pakistan to rework and scrutinise its unreasonable loans, projects and Independent Power Producers (IPP) payments to China. But Beijing does not want Islamabad to default either—as it would affect its already delayed Chinese IPP payments and the Belt and Road Initiative projects. China has, therefore, restricted its role to bilateral assistance, such as refinancing loans worth US$ 700 million, rolling over US$ 1.3 billion, and providing a 2-billion deposit.

The IMF has even asked Pakistan to rework and scrutinise its unreasonable loans, projects and Independent Power Producers (IPP) payments to China.

Regional partners’ responses towards Pakistan have also been lukewarm. Unlike Sri Lanka, regional partners did not promote their cause in multilateral groupings and institutions, and there was no first responder to help Pakistan either. There also seems to be some trust deficit towards Islamabad. While Saudi announcedUS$ 2 billion, and the UAE offered assistance of US$ 1 billion, these funds have not yet been released. These partners are demanding more economic and fiscal reforms before releasing the funds.

The US and its geopolitics

The United States (US) holds a significant say in the IMF and has a vital role to play in these negotiations. With Sri Lanka, the US has displayed significant political will with the bailout negotiations. This proactive response is on par with its Indo-Pacific strategy. Through this assistance, it intends to support and supplement India’s initiatives and assistance in South Asia; re-entrench its influence in Sri Lanka; push back against China and Chinese debt trapping and provide a viable alternative. The US has, thus, promoted the IMF deal as a “Get Well, Stay Well” plan that will strengthen democratic institutions in the country and promote values-based order. It has bargained for a fair bailout and even criticised China’s half-hearted efforts to assist Sri Lanka. On the other hand, the US has not displayed any significant political will to assist Pakistan despite the latter’s multiple requests. The US has indicated that Pakistan has no option but to implement and abide by the IMF’s prescriptions. It has only offered technical assistance to ensure that Pakistan becomes investment-friendly and recovers quickly. But at large, the US has been reluctant to assist the country in ending the stalemate with the IMF. This is for the following reasons: The US has not come up with a concrete Pakistan policy since its withdrawal from Afghanistan. Second, as the US continues to further its partnership with India, it has been wary of a close relationship with Pakistan. Finally, Pakistan’s increasing proximity to China has come at a cost for its relations with the US—thus, impacting the prospects of such assistance.

The US has indicated that Pakistan has no option but to implement and abide by the IMF’s prescriptions.

As the IMF package expires on 30 June, Pakistan is quickly running out of choices. Going ahead, there are two options for Pakistan: approach China as plan B or request IMF for a new loan. While China might be an easy alternative for Islamabad, it will be a short-term remedy and will come with some strings and risks attached. But if Pakistan has to approach the IMF, it will have to address structural issues and also tolerate the political costs that come along with it. In case, Pakistan chooses the latter, it will have to draw some lessons from Sri Lanka. And it will need to have the domestic consensus and assistance from regional partners and the US, to begin with.

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Aditya Gowdara Shivamurthy is a Junior Fellow with Strategic Studies Programme at the Observer Research Foundation

• Neighbourhood
• Economics and Finance
• China
• India
• Neighbourhood
• Pakistan
• Sri Lanka
• budget details
• debt repayments
• Economic Crises
• Food Inflation
• fuel inflation
• geopolitics
• IMF
• IMF package
• Sri Lanka

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