IMF deal may help Pakistan escape default but its economic woes are far from over

The deal with the International Monetary Fund (IMF) that paves the way for the release of the much-awaited $1.17 billion 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 nations Pakistan is also confronted with the specter of a Sri Lanka-like economic collapse, if timely actions are not taken to address the economic challenges. The nuclear-armed country is among the ten most vulnerable states. It may not be in Sri Lankan shoes yet, but it is not very far off either. 

The deal was materialized after the new government met the IMF’s demand of rationalizing fuel and electricity prices and increasing taxes. The tranche is part of a $6 billion loan facility. Pakistan entered the IMF programme in 2019, but only half the funds have been disbursed to date as Islamabad struggled to keep the targets on track. 

It has been critical for the new government led by Prime Minister Shehbaz Sharif to see the revival of the stalled IMF loan programme. But that requires taking all the tough measures that the government has been trying to avoid for political reasons. Not only the massive subsidy on petroleum products had to go, some other subsidies too were required to be withdrawn. Months before its ouster, the Imran Khan government announced a $709 million subsidy programme that further shrank the fiscal space. 

Unfortunately, no Pakistani administration, military or civilian, has made any effort to solve this perennial problem. With a very low tax-to-GDP ratio, the country will remain trapped in perpetual financial crises. What makes the situation even more untenable is the fact that a major chunk of the budget is going towards debt repayment and defence. 

Zahid Hussain

More importantly, the multilateral lending agency has also agreed to consider extending the facility till the end of June 2023 as well as augmenting it by $720 million to expand its size to $7 billion. The IMF deal would clear the way for Pakistan to get financial assistance from other multilateral agencies, like the World Bank and some friendly countries. All that may be good news for a struggling government, but the crisis is far from over with the coming debt-servicing obligations and fast-depleting foreign exchange reserves. 

Pakistan’s external debt-servicing obligations are projected to be $23 billion in 2022-2023. What is most alarming is the component of rising commercial loans. In the next five years, the country will have to repay, on account of amortization and the mark-up amount owed by the public sector, a sum of $49.23 billion. It is an extremely alarming situation with no signs of any fundamental change in the economic outlook. 

Pakistan may not be facing an imminent default, but the prospect is certainly staring us in the face. It could become a reality if timely actions are not taken to stem the rot. The situation has gone beyond the usual patchwork job that successive governments have been doing for so many years. 

It is not just the external debt, but mainly the ballooning internal debt that has brought the country close to bankruptcy. The major problem is that the nation of more than 220 million people has been living beyond its means for a very long time and has been borrowing money even to run the state. Dependence on foreign aid has further crippled the country’s ability to stand on its feet. 

Unfortunately, no Pakistani administration, military or civilian, has made any effort to solve this perennial problem. With a very low tax-to-GDP ratio, the country will remain trapped in perpetual financial crises. What makes the situation even more untenable is the fact that a major chunk of the budget is going towards debt repayment and defence. 

Heavy domestic borrowing at very high interest rates is at the heart of the macroeconomic crisis faced by the country. That has also been the reason for it becoming a permanent client of the IMF. The stringent conditions that come with bailout packages shackle the economic growth too. 

Moreover, perpetual political instability, a deteriorating internal security situation and the higher cost of doing business have discouraged the flow of direct foreign investment into the country. Some external factors, such as the rise in petroleum and commodity prices, may have also contributed to the worsening of the crisis, but it is mainly the policy flaws that are now coming to haunt the country. 

It is certainly not for the first time that the country has been on the brink of a financial collapse. We have many times been in the proverbial ICU in the past and resuscitated, of course with some outside help. The failure to address fundamental structural problems has earned the country the dubious distinction of being the ‘sick man’ of South Asia. 

Even with the IMF and some states coming to the rescue, Pakistan would not be out of the woods without some tough but necessary, fundamental structural reforms. What happened in Sri Lanka must serve as a timely warning. 

- 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