Daily Times

Pakistan has long faced economic challenges marked by fiscal mismanagement, political instability, and an ongoing balance of payments crisis. Over the years, the International Monetary Fund (IMF) has repeatedly stepped in to offer bailouts to prevent Pakistan from defaulting on its debt obligations. In recent times, the negotiations between Pakistan and the IMF have taken centre stage due to the gravity of Pakistan’s economic woes and the impact of the conditions imposed by the IMF on the country’s future. However, what began as assistance has now turned into an economic coup.

In June 2023, Pakistan secured a $3 billion short-term Stand-By Agreement (SBA) with the IMF to stabilize its faltering economy. According to some, this was a much-needed lifeline, as the country was grappling with critically low foreign exchange reserves, rising inflation, and a mounting fiscal deficit. However, in my opinion, it was yet another display of our leadership’s incapability and unwillingness to overcome challenges. Before this, the IMF had suspended Pakistan’s previous $6 billion Extended Fund Facility (EFF) program in 2022 due to non-compliance with the agreed-upon conditions, forcing Islamabad to scramble for a new deal.

The SBA agreement came after months of arduous negotiations, during which the IMF emphasized the need for structural reforms in Pakistan’s economic policies. The primary aim of the bailout was to avert a looming sovereign default and help the country meet its external debt obligations while stabilizing macroeconomic fundamentals.

The leadership hasn’t realised that if the IMF program fails, Pakistan will likely face severe consequences.

IMF bailouts are rarely free of stringent conditions, and the package for Pakistan was no exception. To ensure that Pakistan reduces its fiscal imbalances and avoids similar crises in the future, the IMF imposed several conditions that include:

One of the new demands is that Pakistan must secure a $12 billion loan rollover from friendly nations, and on top of that, close a $2 billion financing gap. The government is working hard to convince its allies to agree to this rollover, while also pushing Saudi Arabia for an additional $1.2 billion loan. But so far, they haven’t succeeded, which is why Pakistan’s name didn’t make it to the IMF agenda scheduled for September 18th.

Now, here’s where it gets interesting. Everyone knows the IMF is heavily influenced by the US, and with America being China’s traditional rival, they are using the IMF to tighten the screws on Pakistan, targeting projects funded by China, especially the massive CPEC initiative. Earlier, the IMF forced Pakistan to halt payments to Chinese power projects, which now total more than Rs. 525 billion. And now, the IMF has added another bold condition: the government must not establish any new Special Economic Zones (SEZs) or Export Processing Zones (EPZs), and existing zones won’t be given any new benefits once their current incentives expire. In essence, the IMF is directly stopping Pakistan from expanding its CPEC-related economic zones.

This condition isn’t limited to one area-it applies to all four provinces, and while the federal government has shown partial agreement, Khyber Pakhtunkhwa (KP) has outright refused. KP’s financial advisor, Muzammil Aslam, defended rejecting the condition, arguing that industrial expansion is a provincial matter, and for an underdeveloped province like KP, setting up new industrial zones is critical for growth. He made it clear that KP will not bow to the IMF’s “ridiculous” condition under any circumstances.

Apart from the above, the IMF has called for stringent fiscal discipline to reduce Pakistan’s fiscal deficit. This includes cutting down on government expenditures, increasing tax revenues, and curbing subsidies that are deemed unsustainable, particularly in the energy sector. Also, the IMF has emphasized broadening the tax base and ensuring tax compliance. Measures such as increasing income and sales taxes and reforming tax collection mechanisms are part of the agreement.

One of the most pressing issues has been the energy sector, where inefficient state-owned enterprises, circular debt, and costly subsidies have contributed to fiscal deficits. The IMF has demanded the rationalization of energy prices, which means removing subsidies on electricity and fuel, leading to higher utility bills for consumers.

To control inflation and stabilize the currency, the IMF has pushed for a more restrictive monetary policy. This includes raising interest rates, which Pakistan’s central bank implemented to stem the depreciation of the Pakistani Rupee and contain inflationary pressures.

The lender has highlighted the need for structural reforms in governance, improving transparency, and addressing corruption within state-owned enterprises and government institutions. It seems it has now decided that it must lead the country on this front too.

These conditions are justified given Pakistan’s long history of dependence on the international lender and its inability to pay debts. The most important underlying condition that came with the current bailout package is the IMF’s complete control. I have mentioned previously that the Ministry of Finance is losing control, but now I’m certain that it is no longer In the driving seat.

This means that this economic coup comes at a heavy price for ordinary citizens. One of the most visible effects of IMF-mandated reforms has been the rise in inflation. With the removal of subsidies on essential commodities such as fuel and electricity, prices have skyrocketed, putting immense pressure on household incomes. Inflation in Pakistan has already exceeded 35%, one of the highest in South Asia. This has eroded purchasing power and increased the cost of living for millions of people.

The devaluation of the Pakistani Rupee has been another consequence. To meet IMF conditions, Pakistan had to abandon its practice of artificially propping up the currency. As a result, the rupee has lost significant value against the US dollar, exacerbating inflation further by making imports more expensive.

The economic slowdown triggered by fiscal tightening and austerity measures has led to job losses, particularly in sectors like manufacturing and services. With higher borrowing costs due to elevated interest rates, businesses face difficulties in accessing capital, which stifles investment and expansion.

As prices rise and jobs become scarcer, inequality is expected to widen further. The middle and lower-income groups bear the brunt of inflation and reduced public spending on welfare programs, exacerbating poverty levels in an already economically vulnerable population.

It is of course not without its profound political consequences, affecting the stability of its political landscape. The economic hardships resulting from the IMF conditions have fueled public discontent. This is also accompanied by geopolitical ramifications, continued dependence on external financial assistance also limits Pakistan’s sovereignty in policy-making and can lead to tensions between domestic and international priorities.

The leadership hasn’t apparently realised that if the IMF program fails, Pakistan will likely face severe economic, social, and political consequences. The risks of sovereign default, economic recession, and rising social unrest are all real threats.

The writer is Foreign Research Associate, Centre of Excellence, China Pakistan Economic Corridor, Islamabad.