Bailed out

The long wait for Pakistan’s latest bailout has finally ended as the IMF Executive Board approved a $7 billion Extended Fund Facility (EFF) for Pakistan on Wednesday (September 25). The first tranche of $1.1 billion will likely be released by September 30 and the interest rate on the loan is reportedly less than 5.0 per cent. The approval of the loan follows the confirmation of $12 billion in bilateral loans from Saudi Arabia, the UAE and China and external financing of $2 billion. 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. While the conclusion of the bailout will help inject some much needed stability into Pakistan’s economic climate, staying on this course will require implementing tough and unpopular conditions. According to the Asian Development Bank’s (ADB) Asian Development Outlook (ADO) report, Pakistan’s growth forecast still remains at a sluggish 2.8 per cent while inflation is expected to remain as high as 15 per cent for fiscal year 2025. The ADB also highlights that Pakistan’s large external financing needs make it highly vulnerable to any shortfall in external inflows and that the country’s vulnerability to climate-induced disasters, such as the 2022 floods, also complicate its economic trajectory.

As such, the path ahead remains somewhat uncertain and rests on the ability of the incumbent and any future governments to implement reforms and manage fiscal risks. One of the main challenges will also be shedding the country’s import-led growth model which has often resulted 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. Selling these reforms politically will also be a hard task and one that has eluded most, if not all, of the country’s governments thus far. The spectre of political instability and the ever-present possibility of change at the top in Islamabad also cloud the country’s future economic trajectory.

All this being said, the achievement of the bailout itself should not be scoffed at. Getting here required making some extremely unpopular choices with regard to tax hikes and utility bills increases. Sadly, this is unlikely to buy the government any leeway with an increasingly frustrated people. The majority of Pakistanis are still struggling to pay their bills and put food on the table. The last budget brought new tax hikes for the salaried classes, compounding the pressure on household budgets from higher electricity and gas tariffs. To make matters worse, the economy’s sluggish growth is not supporting the pace of job creation that our young and rapidly growing population requires. The economy is not something that can be turned around overnight, but the government will need to bring some improvement in the financial picture for ordinary Pakistanis going forward.