Pakistan is struggling hard to save the economy from collapse and an image that it is a state poised to fail. It is not long ago that the Paris based global money laundering and terror financing monitoring agency, Financial Action Task Force (FATF), found compliance gaps and placed Islamabad in its grey list. Pakistan was added to the list for glaring deficiencies in the country’s anti-money laundering and counter terrorist financing system. Pakistan managed to come out of the ‘increased monitoring’ process by the FATF in October 2022 after 4 years of monitoring. However, in less than one year, Islamabad failed to meet the IMF conditionality to claim its remaining trache of Extended Fund Facility of the IMF worth USD 6.5 billion. The country again landed up on the brink of default.
Nevertheless, the IMF gave assistance to Pakistan through its Stand-By Arrangement (SBA) to help avert an impending default. But again analysts are keeping their fingers crossed whether Islamabad could meet the conditionality of the IMF programme. While granting new USD 3 billion assistance, the IMF listed various monitoring requirements for Pakistan, numbering more than 50. These monitoring and reporting requirements mainly target data of State Bank of Pakistan, Ministry of Finance, Federal Bureau of Revenue for performance related to its conditionality. Surprisingly, some of the monitoring programmes are even on daily basis.
The 120 page IMF report while assessing Pakistan’s macro-economic outlook, stated: “There will be a need for more IMF programs (loans) in order to face structural challenges in economy.” While slapping stringent conditions it stated that Pakistan is facing several “extra-ordinary challenges”, calling them as exceptionally high and asserting that it is not easy and simple to bring the economy back on track. The SBA document noted that the power and gas sectors’ financial viability led to “unsustainable spillovers” onto the budget.
The IMF programme primarily aims at fiscal adjustments in FY 24 budget, return to market determined exchange rate and continuance of structural reforms to strengthen energy sector viability, among others. The Fund cautioned that resolving structural challenges, including long-term balance of payment pressures, will require continued adjustment and credit support beyond the programme period.
Critics point out that since 2008, Pakistan has been continuously under IMF supervision, willingly or unwillingly. Over these 15 years, there have been four programmes including the current SBA in the last 11 years. It is the 23rd programme that Pakistan signed with the IMF. So far, only one programme (2013-16) could be fully implemented, albeit on the back of a host of waivers against key conditions.
In 2008, the IMF’s report noted that circular debt had risen from PRs.51 billion to PRs.189 billion in less than five months, mainly in energy sector, equal to 1.5% of GDP. Again after 5 years, the IMF staff report found that Pakistan’s energy crisis threatened the broader economy. Pakistan witnessed crippling load-shedding leading to long and unpredictable blackouts, reaching 16 hours per day in some areas which had been disruptive for businesses. It noted that the energy sector was burdened with structural problems, price distortions, insufficient collection, theft, untargeted subsidies, inadequate supply and poor governance. The problems linger on even today.
The IMF stated in 2013, “beyond adjusting tariffs and reducing costs to reach full-cost recovery, we are implementing a plan to resolve the difficult legacy of circular debt arrears.” Further, it vowed to fire a “professional audit firm” to make a comprehensive report on why this debt continued to climb. Based on the findings of the report, the IMF said that it will design a roadmap to prevent the accumulation and recurrence of payable arrears. But the circular debt continued to increase.
Again in 2019, the IMF staff report observed that new arrears were accumulated over FYs 2018 and 2019, reaching PRs 800 billion, 2% of GDP, just in two years. The total stock of circular debt by then had reached 4% of GDP.
Now the latest IMF staff report says the energy sector’s long and protracted crisis has become acute with continued over-accumulation of unsustainable payment arrears and the stock of the circular debt has crosses PRs.2.5 trillion.
Coupled with the depreciation of Pak currency, interest payment had increased by 460%, while tax revenues have grown only by 360% since 2008. Considering the grave situation, the IMF imposed conditionality on Pakistan which may not have parallel examples internationally. The IMF is enforcing them firmly despite devastating floods last year and not considering relaxation even on humanitarian grounds.
Analysts point out that energy sector is badly managed all these years. China being Pakistan’s largest economic partner is also a cause of concern as its companies are known for muscle pulling tactics to recover their dues. China has invested over USD 25 billion, mostly in the form of loans, in Pakistan through the China Pakistan Economic Corridor (CPEC) primarily in energy sector out of a promised USD 60 billion investment. The concerns are that Pakistan may utilize the IMF assistance to repay the Chinese companies debts, which the IMF won’t appreciate.
The IMF is putting all its weights to rein the continuous worsening of the economic crisis the country is facing and to bring some relief for the people. Ahead of the approaching national elections, its staff met representatives of Pakistan’s major political parties – Pakistan Muslim League-Nawaz, Pakistan People’s Party and Pakistan Tehrek-e-Insaf, and explained the objectives and policies of the SBA, even though all the politicians were blaming the Fund for country’s poor economic conditions over the years. The IMF was seeking continuation of policy agenda, even after the election.
There’s no quick fix to Pakistan’s economic problems but the IMF arrangement can help it overcome the crisis, says US Principal Deputy Assistant Secretary of State for South and Central Asia Elizabeth Horst. Ms Horst acknowledged that the coming days would be very tough for the people of Pakistan, but they have to go through this difficult phase to improve the economy. Islamabad could convince the FATF by simply passing the required legislation in compliance. Through lobbying efforts, it could also convince FATF about implementation of these legislations along with propaganda in media. However, fault lines in meeting forex crisis cannot be window dressed. The so called energy projects under CPEC continue to bleed the economy and the IMF monitoring would continue without any relaxation. The conditionality of the IMF need to be complied with, if Pakistan wants to bounce back. However, there is a lot of consternation in Islamabad against it, despite knowing that the country has come on the end of the road.
