Pakistan’s IMF deal offers economic pain relief but no panacea

ISLAMABAD: Pakistan stepped away from the brink of bankruptcy by striking a deal with the International Monetary Fund to resume a $6 billion loan program this month. But experts warn that there is much more work to do, and that political instability poses a major obstacle to a true economic revival.

Islamabad on July 14 reached a staff-level agreement with the IMF to restart their stalled Extended Fund Facility. Pakistan will get a first tranche of $1.17 billion from the IMF in the coming weeks, which could pave the way for securing further loans from other lenders.

Nevertheless, the country is facing heavy foreign exchange pressure, with troubling echoes of the crisis that has gripped South Asian neighbor Sri Lanka this year.

Pakistan needs $41 billion in foreign exchange over the next 12 months, according to Finance Minister Miftah Ismail. "We have to repay $21 billion loans, need $12 billion current-account deficit financing and another $8 billion to maintain foreign exchange reserves," Ismail said during a budget seminar last month.

The agreement with the IMF was finalized at a time when -- due to a combination of political instability and the strong U.S. dollar -- the Pakistani rupee has been hitting all-time lows against the greenback. Ratings agency Fitch downgraded Pakistan's outlook from "stable" to "negative" earlier this week, after which the rupee touched a low of about 225 to the dollar.

Experts say the IMF agreement is a critical step toward unlocking external financing that Pakistan needs to avoid a default.

The deal "provides some level of comfort to the market that the country will have the necessary support from the IMF, and by extension from other multilateral and bilateral creditors, to meet its financing needs in the coming weeks," Uzair Younas, director of the Pakistan Initiative at the Atlantic Council's South Asia Center, told Nikkei Asia.

Younas added that it is important to follow up with policies that moderate growth and minimize the current-account deficit. The government "needs to proactively build buffers and reduce aggregate demand in the economy to slow down the dollar needs in the economy," he said.

Pakistan cannot solve its problems without structural reforms, according to experts.

Pakistan needs to increase exports, widen the tax net, increase energy production and reduce circular debt," said Ahmed Naeem Salik, a research fellow at the Institute of Strategic Studies Islamabad. "If we do not carry out these reforms, then in the future the IMF will be extremely tough on Pakistan and might not extend loans.

At the same time, IMF loans alone will not be enough to meet the country's external financing needs. Pakistan will have to borrow from friendly countries.

Mosharraf Zaidi, chief executive of Tabadlab, a think tank based in Islamabad, agreed that the most crucial next steps for stability will be obtaining loans and grants from Saudi Arabia, China and the United Arab Emirates.

"These three partners have, in the past, been more enthusiastic supporters of Pakistan's economic stability than they are now," Zaidi told Nikkei. He stressed that Pakistan will need to regain the confidence of Riyadh, Beijing and Abu Dhabi.

But the growing threat of political instability could make all of this more difficult for the government of Prime Minister Shehbaz Sharif.

The unexpected victory of ousted Prime Minister Imran Khan's Pakistan Tehreek-e-Insaf (PTI) party in by-elections in Punjab Province has raised fresh questions about the longevity of Sharif's government. The result showed that Khan's politics still resonate with a large segment of the population.

Since his removal in a no-confidence vote in April, Khan has been demanding early national elections, while Sharif appears intent on holding the next vote on schedule in the second half of 2023.

Experts say the Punjab outcome does not alter the economic fundamentals but does cast doubt on the prospects for political stability -- considered a prerequisite for economic stability. "Unlike Sri Lanka, where an economic collapse has triggered political bedlam, the crisis of the Pakistani rupee is a consequence of Pakistani politics," argued Tabadlab's Zaidi.

Younas agreed that the political dynamics in Pakistan are the biggest risk to the economy. "A government gearing up for elections or facing protests from the PTI will find it difficult to impose austerity, given that such decisions erode its political capital," he said.

Younas suggested that it is crucial for the country to reach a consensus on the timing of elections and the need for economic stability. "Populist decisions such as the cut to petrol prices last week will only create further risks, and the government must continue making tough choices to achieve stability, even if this comes at a loss of political capital," he said.

Sharif said his government was passing on lower international prices to consumers by reducing the cost of fuel.

The Institute of Strategic Studies' Salik, on the other hand, argued for holding elections sooner rather than later: "The only way to get out of the political instability amid the economic crisis is to hold general elections in Pakistan as soon as possible."