Pakistan is in the midst of yet another economic crisis, leading to its 13th visit to the International Monetary Fund (IMF) for assistance. Despite previous bailouts, the country has failed to make significant changes to curb government spending or increase revenue. The current crisis, worsened by last year’s floods and ongoing political instability, has led Prime Minister Shehbaz Sharif’s government to negotiate for a $6.5 billion loan. However, there are concerns that meaningful cost-cutting measures will not be implemented before the upcoming national elections.
In 2013, former Prime Minister Nawaz Sharif agreed to an IMF loan of $6.6 billion, but failed to implement policies such as tax base expansion and state-owned company privatization. The latest bailout program began in 2019 under former Prime Minister Imran Khan, but has gone off-track multiple times, with each new finance minister seeking to renegotiate. The current finance minister, Ishaq Dar, took office in September, and was expecting IMF talks in October, but they did not resume until late January.
The 9th review of the IMF loan program is focused on restoring sustainability and strengthening the fiscal position. Discussions may include increasing fuel, electricity, and gas prices, as well as introducing new taxes. The IMF is also looking to restore the viability of the power sector and reduce debt accumulation in the energy sector. Despite initial steps, such as loosening currency control and raising fuel prices, the rupee fell 15% in January, the largest monthly drop in 34 years. The IMF’s requests are considered tough and difficult to fulfill.
Pakistan’s foreign-exchange reserves have rapidly declined, now only covering a month of imports, compared to the global standard of three months. The country’s credit ratings were downgraded to junk last year, and its consumer prices are at a 50-year high. With economic growth cut in half to 2% after the floods, any IMF-related price hikes will only add to the inflation rate.
The upcoming election adds another layer of complexity, as politicians have a history of lavish spending to attract voters. Sharif’s government, a coalition of 13 political parties, has already shown resistance to austerity measures. It took two months for the government to partially lift fuel subsidies, but has not fully complied with IMF demands. The power minister has stated that electricity prices will not be raised, despite energy challenges such as frequent power outages and an aging transmission network.
Pakistan’s options for funding are becoming limited, as Gulf nations are refusing to lend until the IMF program is followed. Saudi Arabia is considering providing $2 billion in financing, but with conditions for economic reform similar to those of the IMF. The country has secured $1 billion from the United Arab Emirates and is expecting China to roll over a $1.2 billion loan. China holds a significant portion of Pakistan’s foreign debt, with over $30 billion owed, triple the amount owed to the IMF and more than the World Bank or the Asian Development Bank.