Pakistan’s Economic Crisis Deepens After Failed IMF Negotiations

Pakistan, grappling with serious economic crisis, and the International Monetary Fund (IMF) have been unable to reach a ‘staff-level’ agreement regarding the imperative USD 1.1 billion bailout package aimed at averting the imminent financial default. Despite 10 days of negotiations (January 31-February 9), the discussions between the Pakistan government and the IMF remained inconclusive.^[1] The IMF stated that negotiations with Pakistan will continue virtually in the coming days. Pakistan has been forced to agree upon with the IMF’s tough conditions to receive the USD 1.1 billion tranche.^[2] As a result, the government will be pressured to increase fuel prices, reduce subsidies, and impose taxes to meet the IMF demands. All these measures will exacerbate miseries of the local population in Pakistan and may also deepen the political crisis.

According to a media reports, during the policy-level discussions, the International Monetary Fund (IMF) expressed its concerns regarding the projections put forth by the Ministry of Finance of Pakistan regarding the inflow of external financing from multilateral, bilateral creditors, and commercial loans.^[3] The IMF loan is crucial for Pakistan’s economy as the foreign exchange reserves held by the State Bank of Pakistan dwindled to USD 2.91 billion on February 3.^[4] On February 10, Finance Minister, Ishaq Dar, announced that the government had received the Memorandum of Economic and Financial Policies (MEFP) from the IMF concerning the ninth review of the USD 7 billion loan program.^[5]

Dar indicated that a staff-level agreement with the lender remains pending. The MEFP serves as a crucial document that outlines all the necessary conditions, steps, and policy measures that form the basis for the declaration of the staff-level agreement between Pakistan and the IMF. There have been reports and statements from the government officials that the IMF put forth extremely tough conditions to resume the bailout program. Dar claimed that upon completion of the IMF review, Pakistan would be granted a disbursement of USD 1.2 billion in the form of ‘Special Drawing Rights’.^[6] Many experts believe that the current economic crisis in Pakistan is the result of decades of flawed policymaking and not a one-off event.

During his presser, Dar also outlined the policy measures agreed upon between the government and the IMF, stating that taxes amounting to PKR 170 billion would be levied. He emphasised that the government would make efforts to ensure that the taxes do not significantly impact the general population.^[7] The ruling Pakistan Democratic Movement (PDM) coalition has been reluctant to implement the IMF’s ‘tough’ conditions and even delayed the 9^th review for over four months.^[8] It is noteworthy that Dar is responsible for deepening the economic crisis in Pakistan. He indulged in unnecessary conflicts with the IMF and delayed the financial program agreed upon by his predecessor, which was the result of extensive negotiations, instead of hoping to replace the lender with ‘friendly countries’.^[9]

The present economic situation in Pakistan would not have been so dire had the PDM government met the IMF demands on time. Consequently, the IMF is now forced to introduce new and politically challenging conditions to the Shehbaz Sharif-led government. The multi-party alliance fears that the forced implementation of the IMF demands will adversely impact PDM’s political future in the upcoming elections in Punjab and Khyber Pakhtunkhwa provinces.^[10] However, the coalition government is not left with any option but to concede to the IMF conditions as Pakistan nears the default crisis amid the country’s forex reserves fell below USD 3 billion last week.^[11]

Considering the desperate circumstances, Pakistan has accepted the fact that it is imperative to conclude the IMF’s ninth review to unlock the disbursement of USD 1.2 billion tranche and to secure funding from friendly countries such as China, Saudi Arabia, United Arab Emirates, etc, and other multilateral lenders.^[12] Given the pressing need for financial assistance and an urgent relief from the ongoing economic crisis, it is unsurprising the IMF’s uncompromising stance led Prime Minister Shehbaz Sharif to acknowledge that the lender’s conditions were “beyond imagination”.^[13] However, he admitted that Pakistan had no other option but to accept the IMF conditionality. Sharif said, “You all know we are running short of resources,” adding the country was “facing an acute economic crisis”.^[14] These remarks triggered a significant fall in both the value of the Pakistani rupee and financial bonds.

The severe consequences of Dar’s actions or lack thereof over the past four months will be borne by the public who are already grappling with rising inflation and unemployment crisis. Additionally, Dar was unable to preserve the political influence of his party, Pakistan Muslim League-Nawaz (PML-N), which was the primary reason he was recalled from London to Islamabad to assume the role of finance minister.^[15] Dar does not have a choice anymore but to make difficult decisions to fix Pakistan’s economy. The situation continues to worsen, with foreign exchange reserves enough to cover only two weeks’ worth of imports, and a scarcity of essential commodities.^[16] However, the decision to comply with the IMF’s conditions would be a formidable challenge for Pakistan. foreign exchange reserves enough to cover only two weeks’ worth of imports, and a scarcity of essential commodities.^[16] However, the decision to comply with the IMF’s conditions would be a formidable challenge for Pakistan.

[1] https://www.reuters.com/world/asia-pacific/pakistan-imf-agree-more-talks-delaying-bailout-2023-02-10/

[2] https://www.voanews.com/a/bailout-talks-between-imf-pakistan-end-without-deal-/6956454.html

[3] https://www.bbc.com/news/world-asia-64449037

[4] https://www.reuters.com/world/asia-pacific/crisis-hit-pakistans-macro-economic-indicators-2023-02-10/

[5] https://www.dawn.com/news/1736375/pakistan-agrees-to-imf-conditions-staff-level-accord-still-pending-dar

[6] https://tribune.com.pk/story/2400424/dar-says-mefp-draft-received-from-imf

[7] https://www.brecorder.com/news/40225863

[8] https://www.reuters.com/world/asia-pacific/pakistan-secure-3-bln-external-financing-two-weeks-finance-minister-2022-12- 02/

[9] https://www.thenews.com.pk/latest/1039270-someone-competent-should-have-replaced-me-as-finmin-says-miftah-taking- to-dar-again

[10] https://www.aljazeera.com/news/2023/1/26/pakistan-poll-panel-announces-april-elections-in-two-provinces

[11] https://www.dawn.com/news/1736321/rupee-gains-even-as-sbp-reserves-dip-to-29bn

[12] https://english.alarabiya.net/News/saudi-arabia/2023/01/10/Saudi-Arabia-eyes-boosting-investment-in-Pakistan-to-over- 10-billion