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Understanding Pakistan’s IMF bailout (Relevant for GS Prelims & Mains Paper II; IOBR)

Even as Pakistan continues its brinkmanship with India, its sliding economy has required the International Monetary Fund to bail it out for the 13th time in 3 decades. How dire is its financial state, how did it get here?

On Sunday, the International Monetary Fund (IMF) agreed in principle to support Pakistan with a loan of $6 billion, to be disbursed over 39 months. The disbursements will commence after formal approval by the Fund’s management and its Executive Board.

What is the political context of Pakistan’s bailout deal with the Fund?
This is the IMF’s 13th bailout package for Pakistan in the last three decades.

IMF loans almost always come with tough conditions. Despite the reservations he has had in the past, Imran Khan had little choice but to negotiate with the IMF. In September 2013, within three months of being elected, the Nawaz Sharif government accepted a $6.6 billion loan from the Fund, to be disbursed over three years.

And what are the economic conditions in which Pakistan entered into negotiations with the Fund?
The size of Pakistan’s economy is $313 billion. The growth rate has been 3.5% annually over the last 12 years. 

The country has high rates of inflation and huge fiscal and current account deficit. The Pakistani rupee has been devalued multiple times since December 2017, and has lost almost 35% in the last 18 months.

So, how urgent was this bailout for Pakistan?
After coming to power, Khan has reached out to Saudi Arabia, the United Arab Emirates (UAE), and China for help. Riyadh pledged $3 billion in balance of payments support in October last year, and the UAE supported Pakistan with another $3 billion in December. In February this year, China extended $3.5 billion in loans and grants to bolster Pakistan’s forex reserves.

But all this has not helped in addressing the problem. For the week ended May 3, 2019, the net forex reserves with the State Bank of Pakistan, the country’s central bank, were $8.98 billion.

These forex reserves are enough to finance only about two months of imports. Pakistan’s imports in FY 2018 were $56 billion.

What kind of conditions has the IMF put on Pakistan?
Broadly, the IMF will expect the government to expand the tax base, do away with exemptions, and curtail special treatments, given that just about a million people out of the 208 million in Pakistan pay taxes. It will call for spending cuts and levying of user charges in the energy sector, and reducing subsidies.

The IMF will also expect Pakistan to let the rupee ‘float’ — that is, allow its value to be market-determined — and the State Bank of Pakistan to further increase policy rates to bring inflation under control.

Is all of this expected to work?
Pakistan’s record in sticking to agreements with the IMF is not encouraging. It has often failed to meet conditions such as curtailing spending and selling government stake in state-owned enterprises. Pakistan needs to take bold steps to fix its economy and, as it moves in that direction, ensure that its poor do not suffer from the austerity measures that are put in place.

(Source:https://indianexpress.com/article/explained/simply-put-understanding-pakistans-imf-bailout-5729934/)



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