From UPSC perspective, the following things are important :
Prelims level : IMF
Mains level : Pakistan economic crisis, Debt trap
Pakistan’s foreign exchange reserves have been depleting during the last one year and is heading towards a default risk as Sri Lanka did.
Pakistani economy is said to have been crippling since the discontinuance of US ‘military’ aid which it had used
What is the news?
- The Pakistani rupee has been on free fall; from 150 in April 2021 to 213 against the dollar on 21 June, an all-time low.
- This would mean high oil and electricity prices, to outrage the people who are already to the streets due to ousted PM Imran Khan.
- The government-International Monetary Fund (IMF) talks have remained complicated.
Options available for Pakistan
- Pakistan is under deep Balance of Payment (BoP) crisis (as was India in 1991).
- Pakistan has exhausted all credit options as SL did.
- Even the China Pakistan Economic Corridor (CPEC) is at standstill.
- Even the Saudi’s and so called ‘caliphate’ of Turkey has not come to Pakistan’s rescue.
Only option left: IMF bail out
- The immediate future of Pakistan’s economy would depend on IMF resuming its support.
- Despite an intense discussion between the two, there has not been a consensus until now.
What is IMF bail-out?
- Bailout is a general term for extending financial support to a company or a country facing a potential bankruptcy threat.
- When a country asks the IMF for a loan, the country is facing a major economic crisis.
- In particular, it does not have enough foreign currency (‘dollars’) to pay for imports and the repayments on its loans. In short, the country cannot pay its international bills. So, it need a bailout.
- The IMF will give the country an aid, which is ‘cash’ in the sense that it does not have to be spent on a particular project. This money can be used to pay its bills.
- But, the IMF will impose certain conditions. The basic condition is to spend less – both domestically and internationally.
- This belt-tightening is not easy – people lose jobs, prices rise, etc. And, one has to repay the loan.
- These conditions are necessary to ensure that the money is being spent where it is supposed to.
Pakistan and IMF: A track record
- Pakistan’s relationship with the IMF has remained complicated. It sees conditions laid as a breach of sovereignty.
- Though Islamabad has been negotiating with the IMF repeatedly, there has been an economic nationalism, mostly jingoistic, against approaching the IMF in recent years.
- Imran Khan, the former PM made statements and fuelled the sentiments against the IMF.
- After becoming the PM in 2018, he preferred approaching friendly countries (China and Saudi Arabia) and avoiding the IMF.
- The new government is now back to the IMF; it expects the IMF to release the payments, expand the support programme, and give a longer rope to repay.
Conditions laid out by IMF for recent bail-out
- The IMF is willing to support Pakistan but has some conditions regarding macroeconomic reforms.
- It wants Pakistan to be transparent about its debt situation, including what Islamabad owes to China, as a part of the CPEC.
- Terror-financing in Pakistan is the most favored type of investment!
- The IMF may agree to support after a few more promises by the government.
- But the relief may be less than what Pakistan would hope for.
A vicious cycle
- Since its inception, Pakistan has spent more years inside an IMF programme than outside of it.
- Every leader took the money, imposed massive hardships on the population through austerity and demand suppression and then reneges on its commitment through a patchy implementation.
- Radical fanaticism and anti-India sentiments are successful tools of public appeasement.
Will Pakistan pursue macroeconomic reforms?
- In Pakistan, budgets have remained populist.
- The economic governance declined due to corruption, lack of financial institutions’ independence, and the export decline.
- The subsidies in the energy sector — fuel, oil and electricity — remain high to appease the public.
- With the present coalition government facing elections, they are less likely to take any further bold decisions.
Will “friendly countries” support Pakistan without preconditions?
- Saudi Arabia and China have been supporting Pakistan. MBS has already pulled his hands.
- Riyadh’s support is not unconditional.
- It can ask Pakistan “to return the money at any time if the two countries have divergent views regarding their relationship or ties with a third country, or some other issue.”
- China has been another significant source for Pakistan. Islamabad has been regularly seeking loans from China within and outside the CPEC projects.
- However, since the attack on Chinese citizens by Baloch Fighters, China appears to have been disgusted with Pakistan.
- CPEC is also at a standstill.
FATF clearance is no panacea
- During the latest Financial Action Task Force (FATF) meeting, there was an understanding that Pakistan has met its requirement.
- The FATF has agreed to explore the possibilities of removing Pakistan from the grey list.
- However, even when Pakistan was on the grey list, the IMF had been holding talks with Islamabad.
- The big two — China and Saudi Arabia — were not constrained by Pakistan’s listing in the FATF.
- So, the relaxation is less likely to open gates for big investments.
Will Pakistan go the Sri Lankan way?
- The situation was similar in Sri Lanka — the falling value of rupee, declining foreign exchange reserves, differences with the IMF, and rising fuel prices.
- All of them led to public protests in Sri Lanka against the government.
- The economic and energy crises in Pakistan have not snowballed into a political storm as it had happened in Sri Lanka.
- The dope of “threats to Religion” works effectively there.
- The experiment of Pakistan (as a separate nation) has failed on various fronts.
- To conclude, Pakistan’s economic and energy situation is serious and demands bold decisions.
- The situation will worsen in the short term before it gets better, but this has been Pakistan’s history in the last 75 years.
- With a relief from the IMF, after a protracted negotiation, a few band-aids, and the US intervention, Islamabad may muddle through this time as well, until the next crisis.