The Board of the International Monetary Fund on Wednesday approved a $3 billion bailout for Pakistan that includes immediate disbursements of about $1.2 billion to stabilize the South Asian country’s economy.
Pakistan and the fund agreed last month on a staff-level short-term pact that provided more than expected funding to the country of 230 million, which is mired in an acute balance of payments crisis.
The bailout has been on hold since December, when the IMF refused to release a critical portion of the $1.1 billion loan because the country failed to meet a 2019 agreement between the IMF and former Prime Minister Imran Khan kept.
The release of the funds comes amid long-standing fears that the country could default, giving the incumbent government some much-needed relief.
However, the agreement with the international lender also means strict spending conditions and structural reforms that are likely to further aggravate the economic hardship of many ordinary citizens.
Here’s what you need to know:
Why was the IMF rescue package necessary?
Pakistan’s economy was in dire straits and was hit by a balance of payments crisis as the country attempted to service large external debts and quell inflation.
Before the bailout, the country’s foreign exchange reserves were around $4 billion, an amount good enough to cover a month’s imports, although Pakistan had banned some imports to save dollars.
According to analysts, the country will need at least $20 billion over the next two years to repay foreign loans and interest.
Earlier this year, the Pakistani rupee fell to an all-time low against the US dollar after an exchange rate cap was removed as the financially strapped country sought to unblock the vital IMF bailout package.
Inflation in Pakistan hit an all-time high of 38 percent in May [File: Akhtar Soomro/Reuters]Lahore-based economist Ali Khizr told Al Jazeera that “the currency and inflation could spiral out of control” if the government and IMF hadn’t struck this deal.
“The lack of foreign exchange could have led to massive shortages of fuel, food, medicine and other goods. Now the situation is likely to improve as the currency stabilizes and inflation slowly falls in the short to medium term,” Khizr said.
In February, global credit rating agency Moody’s downgraded Pakistan’s credit rating by two notches to “Caa3” on the grounds that the country’s increasingly fragile liquidity “significantly increases the risk of default”. According to local media outlet Express Tribune, more than 750,000 people left Pakistan in 2022, triple the year-earlier figure.
To make matters worse, last year’s disastrous floods caused around US$30 billion in damage to the economy, from which Pakistan still has not fully recovered.
What is the IMF asking for?
Islamabad has taken a number of steps requested by the IMF since its mission arrived in Pakistan in February, including revising its budget for 2023-24 and raising its key interest rate to 22 percent in recent weeks.
The Washington-based international lender also tricked Pakistan into raising more than 385 billion Pakistani rupees ($1.34 billion) in new taxes to meet IMF budget adjustments. The IMF said the central bank should remain proactive to bring down inflation and maintain an exchange rate framework.
The adjustments have already resulted in record inflation of 38 percent yoy in May, the highest in Asia.
Meanwhile, reforms in the energy sector, which has racked up nearly 3.6 trillion Pakistani rupees ($12.58 billion) in debt, have been a cornerstone of IMF talks.
The IMF said it would like Pakistan to implement the policy consistently to deal with challenges “particularly in the energy sector” where it expects electricity prices to rise.
It is estimated that the 2022 floods caused $30 billion in damage [File: Zahid Hussain/` Photo]
How was the reaction?
Prime Minister Shehbaz Sharif said the deal was “a major step forward” in his coalition government’s efforts to stabilize the economy and achieve macroeconomic stability.
“It strengthens Pakistan’s economic position in addressing immediate to medium-term economic challenges,” he said. The country’s finance minister, Ishaq Dar, said things were now moving “in the right direction”.
According to analysts, approval of the IMF bailout package will help Pakistan as it could embolden other international financial institutions to help Islamabad deal with economic challenges.
The IMF loan approval came a day after Saudi Arabia deposited $2 billion with Pakistan’s central bank. The United Arab Emirates also deposited $1 billion in the central bank on Wednesday, according to Finance Minister Dar.
On Thursday, Pakistan’s dollar-denominated government bonds rallied on the back of the IMF deal.
How will the bailout affect the upcoming elections?
While the IMF bailout package offers some leeway to deal with the country’s economic turmoil, it’s unclear whether the announcement will improve Sharif and his PML-N party’s chances in the voting booth.
“The [bailout] will help the government make up for the loss of popularity due to high inflation and negative growth over the last year. “It bodes well for the government,” economist Khizr said.
“However, their popularity will remain low due to poor economic management and loss of purchasing power,” he added.
Ever since former Prime Minister Khan was ousted in April 2022 in a no-confidence vote led by the Pakistan Democratic Movement (PDM) – a governing coalition of more than a dozen parties including Sharif’s PML-N – the country’s political crisis has gone from the rain in the eaves.
In March, a poll published by polling firm Gallup found that around 62 percent of the country’s people blamed the PDM for Pakistan’s economic woes.
Meanwhile, around 61 percent of the 2,000 respondents expressed a positive opinion of Khan, who also won a majority of by-elections at the national and provincial levels last year, cementing his popularity in the country.
However, Khan’s political future also seems uncertain after violent protests, including attacks on military installations, erupted following his brief arrest on May 9. Thousands have been arrested, many without formal charges, and military courts have been announced to try the alleged perpetrators.
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