Back to the IMF

The latest long-awaited IMF bailout looks to be all but secured, with the Fund finally including Pakistan on its Executive Board agenda scheduled for September 25, when it will likely take up and approve the new $7 billion bailout programme for Pakistan. The country had reached an agreement with the multilateral lender on a new 37-month Extended Fund Facility (EFF) back in July, with some attributing the delay in the ratification of the programme to challenges in securing the needed external financing requirements. Now that the government has secured a $12 billion debt rollover from China, Saudi Arabia and the UAE, along with an additional $2 billion to $2.5 billion from Saudi Arabia in the shape of an oil facility and commercial financing from foreign banks to cover the external financing gap, the government appears to be confident that the loan programme will finally be approved. While the road here has been long and hard, things are not likely to get any easier from here on out. At least, not if the government is actually serious about delivering long-term sustainable growth. Constantly relying on friendly countries to roll over debts and extend external financing every few years is not a sustainable strategy and far too many governments have prioritized political gains over the fiscal discipline that progress within the IMF programme requires in the past.

That being said, the IMF’s communications director has noted that the new EFF arrangement follows the successful implementation of the 2023 nine-month Stand-by Arrangement and that consistent policymaking has helped bring about a resumption of growth, decline in inflation and a rise in forex reserves in Pakistan. The decline in inflation is particularly notable, which fell into the single-digit territory at 9.6 per cent in August. This helped pave the way for a substantial 200 basis points (bps) rate cut by the SBP earlier this week, bringing the policy rate down to 17.5 per cent. This will hopefully aid the ongoing revival of growth. However, Pakistan’s challenge has historically been growing in a manner that it can afford. The country’s import-led growth model often results in unmanageable current account deficits and balance of payments crises. In this context, funding from multilateral lenders and other external partners can be seen as a bandage on what is a flawed economic setup and not a permanent solution. Turning the economic scene around on a permanent basis will require changes that help bring more money into the country than exiting it.

While the government may have averted further economic turmoil for now, this might not be a feeling shared by most ordinary Pakistanis for whom the promise of economic stabilization may seem distant. Many are still reeling from skyrocketing power bills and rising prices that have made basic necessities increasingly unaffordable. The recent budget, which included new tax hikes on salaried individuals, has further strained household budgets. While inflation has decreased, the persistent high cost of living casts a long shadow over the economic outlook for ordinary citizens. The government’s task ahead involves more than just managing short-term fiscal needs. To genuinely turn the economic tide, Pakistan must undertake substantial reforms that go beyond superficial fixes and try to create a sustainable economic model that reduces dependency on external funding and addresses long-term growth challenges. This involves broadening the tax base, eliminating inefficiencies in the public sector, and tackling politically influential groups that have historically evaded fiscal responsibility. Without this commitment to fiscal discipline and genuine reform, Pakistan could well see itself standing right back at square one in the near future.