Pakistan’s last IMF programme?

The past few decades have seen a massive overhaul in development thinking. With the wisdom of the Washington consensus by the International Monetary Fund (IMF) and the World Bank questioned, there was radical hope amongst academics and development experts that the 21st century would see a new dawn in development thinking.

Yet, for experts on Pakistan not much has changed. On September 25, the IMF approved a $7 billion funding agreement for Pakistan after a two-month delay with immediate disbursement of about $1 billion, hoping that this would help the country stabilise its economy. Prime Minister Shehbaz Sharif thanked IMF Managing Director Kristalina Georgieva and her team of experts who had been negotiating the 37-month loan programme, which he hoped would be the country’s last.

Pakistan has been a faithful patron of the IMF’s Structural Adjustment Programme, having approached the organisation several times in its 77-year history and having had 22 bailouts since the year 1958. Not only this, but the South Asian country also happens to be the fifth-largest debtor, owing $6.28 billion as of July 2024. Pakistan’s debt proves to be a big burden on its $350 billion economy and requires $90 billion in loan repayments over the following three years, with the next major payment deadline in December.

This agreement comes in the backdrop of a return to economic stability in the past year after a tumultuous period in the country’s history. Pakistan’s change of circumstances – resumption in economic growth, decline in inflation, exchange rate stability and more than doubling of foreign reserves has brought hope to policy pundits who believe that Pakistan might be on the path to economic prosperity.

Given the political and economic uncertainty that the country experienced in the mid-2023s, this reversal in fortune is highly welcome and reflects a commitment on the part of the caretaker and current governments as well as Pakistan’s finance minister, the enterprising former JPMorgan banker, and the State Bank to fix the economy.

Yet, such a picture may indeed be too optimistic. It was only a year ago that the country experienced a 38 per cent inflation rate in May 2023 and saw its foreign exchange reserves falling to precariously low levels – $2.9 billion in February 2023, enough to finance only three weeks of imports. The Pakistani rupee had depreciated 60 per cent against the US dollar over the past two years, and the country’s economic growth rate fell to 2.4 per cent, lower than the population growth rate of 2.6 per cent.

Is the Pakistani economy back on track? The IMF loan, while bringing much-needed economic stability, is not an answer to the country’s woes. Many economists are of the view that, while the loan helps the country in the short run with its debt repayment, if the country has to improve its economy in the long term, then the government needs to pursue and follow through with long-term structural reforms.

Nathan Porter, the IMF’s Pakistan Mission Chief speaks with cautious optimism. While commending the country’s recent economic recovery, he is of the view that without tackling the country’s deep-seated structural weaknesses, this recovery may just prove to be a part and parcel of the larger boom-bust cycles, leaving the economy weaker and more indebted.

The IMF believes that Pakistan’s new programme, under the new Extended Fund Facility Arrangement, is indeed a break from the past. Planned and negotiated meticulously in IMF boardrooms by experts, it has been marketed by the IMF as kickstarting a new approach to economic growth and development upon reassurances from Pakistan that the country would adhere to the programme’s policy conditions. The fiscal policy changes prescribed by the programme are indeed welcome as it aims to implement large tax hikes and abolish significant income tax exemptions, thereby expanding the tax bracket by bringing the country’s retail, agriculture, and export sectors under its remit.

Fundamentally, the country’s federal and provincial governments are to sit together and coordinate through a fiscal pact on spending and work on improvements to the country’s fiscal discipline. Remarkably, in total, through the EFF Programme, the IMF is advocating for Pakistan to levy additional taxes equivalent to 3.0 per cent of GDP. Along with its focus on fundamental issues such as broadening the tax base, rebuilding the credibility of policymaking, entrenching macroeconomic sustainability through continued implementation of sound macroeconomic policies, and improving government transparency and public service provision, it also places significant attention towards reforms aiming to improve energy sector viability and rebuilding climate resilience. Other policy priorities include improving SOEs and reforms targeting the exchange market, social protection, private sector development and those encouraging competition and raising productivity and competitiveness.

While welcoming the IMF programme as bringing much-needed economic stability, many economists are sceptical about its potential to steer the country on a path of economic growth and development. They argue that the programme fails to tackle many key structural issues facing the country’s economy, such as the government’s spending beyond its means, leading to a vicious cycle of domestic and external debt and interest repayments. In an interview with me, Dr Hafiz Ahmed Pasha, the country’s former minister for finance and the former deputy chairman of the Planning Commission, considered the vicious cycles of debt to be the greatest problem plaguing the country’s economy.

The scale of this problem can be noted from the fact that the country devotes almost half of its annual budget to interest payments on its loans, leaving little for investment in other avenues. According to economists, Pakistan’s gross external financing requirements for FY2024 to FY2029 are approximately a gargantuan $146 billion, as reflected by the consistent efforts by Pakistan’s democratic and military leaders to obtain or roll over loans from countries such as China, Saudi Arabia, Qatar and the UAE. Not only this, but Pakistan’s economy also faces significant vulnerabilities and structural problems such as a tough business environment due to the multitude of political problems, red tape bureaucracy, corruption and poor governance.

The state’s ever-expanding role and political scuffles by politicians have done enough to discourage international investment. Economist William Easterly considered Pakistan’s political economy to be one of ‘growth without development’, as the country performs poorly on a number of socio-economic and development indicators as well as experiences serious inequities across rural/urban, provincial, class, and gender lines. Unfortunately, his words cannot be truer almost two decades later.

According to the World Bank, as of 2023 poverty was expected to reach 37.2 per cent, and over one-third of school-age children across the country were found to be out of school in FY2024. Similarly, the UNDP reported the Multidimensional Poverty Index, which complements the orthodox measures of monetary poverty by including the acute, overlapping deprivations in a number of dimensions such as health, education and living standards, to be at 0.197 for the year 2014/2015. Not only this, Pakistan’s poor performance on these indicators seriously inhibits the productive potential of its economy and limits its ability to service its extremely high debt, which further leads to never-ending cycles of debts and bailouts.

Not impressed by the IMF programme, Pakistani economists argue for a home-grown programme that focuses on key problems such as spending on political patronage, labour productivity issues, agricultural sector reforms, and the quality of public services. There is also a pressing need to transform the energy cost structure and to expand the income tax bracket by bringing agricultural landowners under its remit, a politically difficult, yet highly pertinent measure.

If the country wants its economy to follow the examples of successful Asian economies, it also needs to move away from an import-based economy by boosting export competitiveness and creating export-oriented sectors. The economy can further gain by measures that encourage domestic and foreign direct investment, and investment in human capital.

To what extent the government can follow through with the programme’s conditions remains to be seen as the government has promised the IMF a number of measures, some of which are domestically quite unpopular.

As illustrated above, these include increases in energy tariffs, removal of subsidies, expansion of the tax net to encompass a larger part of the country’s agricultural sector, a measure which continues to face great opposition from those who are set to lose under this policy, and tax hikes, the burden of which would fall on the salaried class.

It is too early to tell whether the government will renege on these promises in the face of opposition in an already tense political climate or whether it will continue to show unrelenting commitment to the promised reforms.

Nevertheless, what we already know is that this IMF programme is just a band-aid on deep-seated structural issues the country’s economy faces and which it needs to fix. It is only then that the Pakistani economy finds its footing in the global economy. Until then, it is unlikely that this will turn out to be the last time the country approaches the IMF.

The writer is a graduate of the London School of Economics and Political Science. She tweets/posts @MaheenRasul2 and can be reached at: maheenrasul@gmail.com