What Pakistan’s IMF bailout means for it and the neighbourhood

On Sunday, May 12, the International Monetary Fund (IMF) announced that it will be giving Pakistan a total $6 billion in funding over the next three years. The IMF said Pakistan will use the money for development, debt relief, poor financial infrastructure, and more efficient spending policies.

Head of the IMF Mission to Pakistan Ernesto Ramirez Rigo said, “Pakistani authorities and the IMF team have reached a staff-level agreement on economic policies that could be supported by a 3-month Extended Fund Agreement (EEF) for about US$6 billion.”

The IMF Executive Board still needs to approve this deal before Pakistan can get the funding.

The IMF says the funds will go towards ensuring a structural reform of Pakistan’s economic policies. Moreover, the organisation says it will give the money in phases on the condition that Pakistan implements the required policies.

“Pakistan is facing a challenging economic environment, with lackluster growth, elevated inflation, high indebtedness, and a weak external position,” said Rigo.

He added that years of “uneven and procyclical economic policies” have resulted in weak institutions and structure within the government.

Pakistan-IMF talks

Pakistan joined the IMF on July 11, 1950 and has approached it for monetary aid 12 times in the last 20 years.

The country has outstanding loans worth $4,153 million with the IMF as of March 2019.

This is the 13th time Pakistan is receiving bailout funding from the IMF despite Pakistani Prime Minister Imran Khan pleading to approach other countries for financial support.

Khan has previously taken issue with IMF’s austerity and push towards privatisation, claiming that his country needs more spending than the IMF is willing to give. Hence, he wanted to approach the Chinese or Middle Eastern partners instead.

However, after Pakistan requested support from the IMF, Rigo arrived in Islamabad for talks between April 29 and May 11.

Conditions apply

He said, “The programme aims to support the authorities’ strategy for stronger and more balanced growth by reducing domestic and external imbalances, improving the business environment, strengthening institutions, increasing transparency, and protecting social spending.”

Rigo says Pakistan needs to correct the extent of informality in its economy and allow the private sector to flourish. It also needs to strengthen its taxation policy by eliminating exemptions and special treatments, and improving the tax collection administration.

Khan expressed concern about the Pakistani public being heavily taxed. But Tribune reported that he has since softened his position.

For inclusive growth, the IMF recommends that Pakistan alleviate poverty by spending on development, the Benazir Income Support programme, and subsidies.

Rigo added that the State Bank of Pakistan (SBP) needs to work independently and focus on reducing inflation and establishing a market-based exchange rate.

Taking charge

So, on May 5, Khan appointed Dr Reza Baqir, ex-IMF economist, as the governor of the SBP. Baqir is an alumnus of Harvard University and University of California Berkeley and has 19 years of experience working with the IMF.

As IMF’s Chief of Debt Policy Division, Baqir also has extensive experience revitalising economies like Pakistan’s. He said Pakistan should not devalue its currency or increase interest rates any longer.

Rigo is hoping that the Pakistani national budget will reflect all of these needs and aim for a deficit of 0.6% of the GDP. The IMF projects a 2.9% growth of Pakistan’s GDP in 2019.

“The IMF team is grateful to the Pakistani authorities for open and constructive discussions and their hospitality,” he said.

Pakistani Finance Minister Abdul Hafeez Shaikh said that he hopes this is the last time Pakistan will need IMF’s help in restructuring its economy.  

Why India and China should care

Although India has similar reasons for its deficit, it has only approached the IMF twice, reports Mint. Sri Lanka and Bangladesh have also availed of IMF bailout funding less frequently than Pakistan has.

However, Pakistani dependency on foreign funds does not bode well for India. Khan has already said he prefers to approach the Chinese for financial help. This means that Pakistan and China’s alliance could strengthen in the future.

China and Pakistan already have strong economic relations in the China Pakistan Economic Corridor (CPEC), a part of China’s Belt and Road Initiative. The CPEC runs through Pakistan-administered Kashmir and is a means for China to bypass India for trade. Hence, China has invested heavily in the CPEC.

Bloomberg Quint, however, explains that China might not entirely benefit from its financial lifeline to Pakistan.

On May 12, five gunmen stormed the Zaver Pearl-Continental Hotel that is located in the centre of the CPEC. The BBC reported that the militants claimed they targeted the hotel in retaliation to increased Chinese investments that don’t help the general public.

Moving forward, China might have security concerns should it choose to continue its economic support to Pakistan.

Moreover, increased Chinese influence might not necessarily signal trouble for India. Experts say that a strong, foreign influence over Pakistan might help temper the country’s dealings with India.

Srinath Raghavan, a military historian and senior fellow at Centre for Policy Research, told Mint, “China, because of its investments in Pakistan, would at least have a stake in stability, if not peace. Moreover, China has demonstrated in the past that it could have a restraining effect on Pakistan.”

Rhea Arora is a Staff Writer at Qrius