Pakistan’s latest IMF bailout: Plus ça change

Despite a tortuous process, the IMF has finally provided much-needed support to Pakistan, which was on the verge of default. Pakistan’s failure to complete the previous EFF program due to policy implementation slippages did not deter the Fund’s executive board from approving a nine-month USD 3 billion standby arrangement (SBA). The news of the approval has been well received by the markets, with Pakistan’s credit default swap (CDS) and Eurobond pricing showing a sharp recovery from near default levels. However, the improvement is not sufficient to regain access to international credit markets, indicating that although imminent implosion may have been postponed, much work still needs to be done to avert future defaults.

This is Pakistan’s 24th IMF facility, and it seems almost inevitable that negotiations for a 25th program will take place once this one concludes. The previous EFF program mirrored the saying “plus ça change, plus c’est la même chose” (the more things change, the more they stay the same) as it only served to address a balance of payments (BOP) crisis and increase the country’s debt burden without implementing meaningful reforms to tackle underlying structural weaknesses. Pakistan saw minimal progress on most benchmarks compared to when it first joined the program in 2019. Despite the Fund being given a firm commitment by Pakistani authorities to broaden the tax base, ensure the progressivity of the tax system, and undertake deep rationalization of expenditures, few of these policy benchmarks were achieved. 

If the past is to provide a guide for future performance, there is little reason for optimism that the latest program or the one following it will do much to navigate Pakistan out of the debt trap. As has happened with several earlier programs, ambitious performance targets set by the Fund are enthusiastically agreed to by the government, and innumerable plausible and implausible excuses are then found to flout the agreement. 

The IMF’s failure to create conditions for poverty reduction and sustained inclusive growth in Pakistan, despite prolonged lending, may be attributed to a lack of consideration for the country’s complex political and societal realities. 

-Javed Hassa

While the primary responsibility lies with the borrower, it is worth questioning whether the lender of the last resort inadvertently encourages recidivist behavior. Having entered the 24th program, the IMF’s role beyond short-term BOP bailouts to facilitate “structural adjustment” may be misplaced for Pakistan. The borrower has shown little inclination to take ownership of the structural reforms associated with the loans. Moreover, while the Fund emphasizes the focus on poverty alleviation, every program dictates terms that only worsen the welfare of the lower and middle classes. The privileged groups benefit from each new facility in perpetuating their rent-seeking grip on the system and display reluctance to undertake significant reforms toward a more competitive and equitable society. Facilitated by the IMF’s accreditation, the injection of funds allows them to maintain the status quo without implementing substantial changes.

The IMF’s failure to create conditions for poverty reduction and sustained inclusive growth in Pakistan, despite prolonged lending, may be attributed to a lack of consideration for the country’s complex political and societal realities. It may also be due to the difficulty of monitoring and ensuring compliance with program requirements, considering the informal methods that the borrower can employ to not adhere to the program’s fundamental tenets. For instance, while the Fund demands proper functioning of forex markets and the elimination of multiple parity rates for the Pakistan Rupee, the authorities continue to exert informal controls on imports, leading to the persistence of multiple exchange rates. Similarly, the Fund’s imposition of the much-trumpeted autonomy of the State Bank of Pakistan (SBP) has failed to achieve its primary mandate of anchoring inflation, as the central bank has refused to proactively undertake necessary monetary policies, possibly due to political compulsions.

To address these challenges, the conditionalities attached to loans by the Fund may need to be simplified for better monitoring, with Pakistani authorities held more strictly accountable to independent economic agents. For instance, the IMF could make bailout loans conditional on access to international credit markets within a certain time frame of loan approval. The structural changes that Pakistan would have to undertake to convince the markets will have to be geared toward ensuring that the country can repay its creditors. Both fiscal and monetary policies undertaken to ensure market access will need to be designed and owned by Pakistani authorities. It would be less dependent on geopolitical considerations that often drive the financing assurances from friendly countries that the Fund currently relies on for financing its programs.

The cold calculus of fiscal and monetary discipline required for market access is likely to foster greater ownership by Pakistani authorities and encourage the implementation of necessary and sustainable structural changes that are driven by independent creditors. The Fund may need to acknowledge that its programs can achieve little beyond compelling Pakistan to accept the discipline imposed by the markets. 

The IMF, by doing less, may achieve more!

– Javed Hassan has worked in senior executive positions both in the profit and non-profit sector in Pakistan and internationally. He’s an investment banker by training. Twitter: @javedhassan