With no IMF deal Pakistan is struggling to prevent default

In a last-ditch attempt to revive the IMF deal, the finance minister has made drastic changes in the budget. The adjustment appears to have met the Fund’s conditionalities. But with less than one week left for the current loan program to expire, the time is running out for an agreement. 

Although the government is hopeful of a positive outcome of the ongoing negotiations, there has not been any indication of approval from the lending agency yet. The revival of the facility is critical for Pakistan to prevent an imminent default situation. The finance minister, however, insists that there is no danger of the country defaulting on its foreign debt repayment obligations even if the IMF deal doesn’t come through. But he has not specified what that alternative plan is. 

This is one of Pakistan’s most critical moments with the country facing an economic meltdown.  But there seems to be no realization of the gravity of the situation. The government has delayed taking the tough but necessary measures needed to pull the country out of the crisis. Instead, Dar attributed the IMF’s tough stance to geopolitics. He is still not willing to admit his own blunders which have widened the trust deficit with the lending agency.

Pakistan signed the current 36-month $6 billion Extended Fund Facility in July 2019, which, was extended by nine months to June 30, 2023, and its size increased to $6.5 billion. Over the past four years, the program has been derailed at least four times, including on two occasions during the tenure of the current coalition government. 

No country is willing to dole out free money. Even if it happens, it will give the country only brief respite and will not resolve the basic structural problem needed to take the economy forward.

Zahid Hussain

It is apparent that the government and particularly its finance minister have no idea where the country is heading. Some economists compare the prevailing Pakistani situation to that in Sri Lanka and Ghana, two countries that defaulted. Pakistan may not have formally defaulted but are certainly close to it with no IMF deal yet. The real issue is whether the government is prepared to tackle tough times ahead. As a renowned economist has warned, the Pakistani economy is in a “tailspin, going from crisis to catastrophe and now the system is becoming unhinged.”

The country is facing stagflation, with a rapidly falling economic growth rate and runaway inflation. Increasing unemployment has created very serious economic and social problems. Taking hard decisions are avoided because of political reasons, thus jeopardizing the country’s future. 

We have several examples of countries which have faced similar or even worse financial crises but were able to turn their predicaments into opportunities by first accepting the reality and then taking tough reform measures to completely turn around their faltering economies. We could have turned the present crisis into an opportunity. But that is not going to happen. Taking hard decisions are avoided because of political reasons, thus jeopardizing the country’s future.

The finance minister is mistaken if he thinks that he can get money from friendly countries. No country is willing to dole out free money. Even if it happens, it will give the country only a brief respite and will not resolve the basic structural problem needed to take the economy forward. 

Pakistan reportedly paid $1bn to China in mid-June against a reportedly due amount of $1.3bn. The State Bank of Pakistan (SBP) last week announced that it has received $1 billion from China, without sharing any other details about the nature of this inflow. The finance minister informed a National Assembly Committee that a $300m loan from China Development Bank, maturing on June 26 will be refinanced before June 30.

The government is hopeful about the rollover of $4bn of bilateral Chinese loans while it is also willing to extend the tenure of the maturity of the bilateral loans. Islamabad owes $3bn to Saudi Arabia and $2bn to UAE. Finance ministry officials believe the total $9bn bilateral loans could be rolled over through better negotiations with these countries. But such stopgap arrangements cannot resolve the basic structural problem. 

In the middle of the financial crisis, the government has set up a Special Investment Facilitation Council (SIFC) — of which the army chief will be a member and the military will play a key role — to attract foreign investment. It has set an immediate task to increase Foreign Direct Investment (FDI) to $5 billion.  But given the current political chaos and economic instability, such grand targets seem unrealistic. The country needs bold decisions and not hollow rhetoric.  

Unfortunately, the current administration, which has barely two months of its constitutional life left, neither has the will nor the capacity to undertake the tough reform measures required to stabilize the economy and prevent the country from defaulting. Tough times ahead for a country of 240 million people. 

- 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