Islamabad, Pakistan – The Pakistani government has tabled a 170 billion rupee ($643m) finance bill to help the cash-strapped country secure funds from the International Monetary Fund (IMF) to stave off default.
Thank you for reading this post, don't forget to subscribe!Presented before Parliament on Wednesday evening by Finance Minister Ishaq Dar, the measures include raising the general sales tax by a percentage point to 18 percent and follow hikes in the price of fuel and gas earlier this week as part of efforts to meet the global lender’s conditions for the release of a $1.1bn loan tranche, originally due in November 2022.
The bill will be put up for debate in Pakistan’s Senate, the upper house of Parliament, on Friday. Dar said he expected it to be approved by early next week.
It comes after an IMF delegation visited Pakistan late last month to discuss the ninth review of a $6.5bn bailout programme that Pakistan entered in 2019.
While the government failed to sign a staff-level agreement with the IMF team after 10 days of negotiations, it is expected that the bill’s approval will result in the IMF unlocking the $1.1bn installment, as well as Pakistan’s allies providing it with much-needed external financing.
Pakistan was able to secure the previous tranche of $1.17bn in August last year after the IMF approved the seventh and eighth review of the package, with the central bank possessing at the time more than $8bn in foreign reserves.
The delay in completing the ninth review, however, has sent the country’s economy spiralling down further – foreign reserves have dwindled to $2.9bn, covering less than just three weeks of imports.
Devastating floods last year that caused damage worth more than $30bn – and that forced millions from their homes and destroyed infrastructure and crops – have only compounded hardship in a country mired in financial and political crises.
With inflation at 27.5 percent, the country’s highest in nearly 50 years, experts see difficult days ahead for Pakistan’s population following the imposition of new taxes and austerity measures.
Ratings agency Fitch on Tuesday also predicted a gloomy outlook, downgrading Pakistan’s rating to CCC – and said inflation could touch 33 percent in the next few months. The World Bank, in its global outlook report issued in January, revised growth projections from four percent in June last year to two percent for the current fiscal year, citing the “precarious economic situation, low foreign exchange reserves and large fiscal and current account deficits” among the primary reasons.
Sajid Amin Javed, a senior economist associated with the Sustainable Development Policy Institute in Islamabad, said the negotiations between the government and the IMF involved known issues that Pakistan had already agreed upon when entering the programme.
“A country goes to the IMF when it has no other option. It tells the lender of its needs, and the lender then asks what the government will do to fix its economic problems, before agreeing to give the money. The country then writes a letter of intent to IMF, committing to undertake reforms,” Amin told Al Jazeera.
The reason why Pakistan and the IMF continued to debate and argue over the sticking points, said Amin, was because of “Pakistan’s own waste of time”.
“Why do we have to wait for IMF to tell us that [the] rupee should be determined on [the] market rate?” Amin asked. “You don’t need an Einstein to tell you that for a country which has exponentially more imports than its exports, its reserves are so dangerously low, why do you want to keep rupee inflated artificially?”
The Pakistani rupee has dropped more than 15 percent against the United States dollar since the removal of an exchange cap opposed by the IMF in a bid to revive the bailout. Pakistan’s central bank in the past has used its foreign exchange reserves to keep the Pakistani rupee propped up for extended periods of time. Official statistics, meanwhile, show that the country’s total import bill between July 2021 and June 2022 surpassed $80bn, with exports totalling $31bn in the same period.
For Amin, the overarching problem behind the failure to implement the IMF programme sooner was the lack of political stability in the country.
“All the delays, reversals, and hesitation in this programme, it is all due to political instability,” he said. “We should not do politics on economy and reforms. Otherwise you will have to suffer the consequences.”
In April 2022, the government of Prime Minister Imran Khan, chief of the Pakistan Tehreek-e-Insaf (PTI) political party, was removed through a parliamentary vote of no confidence.
Weeks before his removal, Khan decided to reduce fuel prices, which were on the rise globally amid the Russia-Ukraine war.
“When the PTI saw that it was going to lose the vote of no confidence, it took myopic economic decisions to ensure they leave a minefield for the incoming government, forcing them to feel the heat,” Amin said.
Asad Sayeed, a Karachi-based economist associated with the research firm Collective for Social Science Research, also called the fuel-price decision a “complete, utter violation of the IMF agreement”.
Sayeed went on to say that Dar, who became finance minister in September, undertook similar actions that went against what the IMF had asked Pakistan to do.
“He came in with the mind to reduce inflation. He decided to control the dollar rate in the market and suppress imports. What he did was perhaps not as stark as what the previous government did, but it equally hurt the country’s economy,” Sayeed told Al Jazeera.
But Hammad Azhar, a former energy minister and senior PTI leader, defended the decision to reduce fuel prices following the start of the war in Ukraine.
“When we gave the subsidy, we had arranged financing for it which we showed to IMF. Plus, we were also arranging oil from Russia, which meant reduced load on our economy,” Azhar said. “But we were pushed out of government. If the incoming government thinks it was such a problem and it caused a rupture of trust, why didn’t they reverse it immediately?”
Sayeed said the new government of Prime Minister Shehbaz Sharif “delayed decision-making” from November 2022, when the latest package disbursement was suspended, until this month.
“This meant all the price adjustments will also be steeper, and more painful. All these inflationary impacts will impact their own voters,” he said. “The situation could have been made relatively smoother, less volatile if they had agreed to implement steps earlier. But they will have to do it now, and it will be akin to political suicide.”
Pakistan is scheduled to have its general elections in October this year. Amin pointed out that a government lacking an electoral mandate would typically find it hard to implement painful measures.
“A government can make tough economic decisions knowing it will not have to worry about losing political currency,” he said. “They don’t have to worry about upcoming elections or pleasing its constituents.”
Pakistan first entered an IMF programme in 1958, just 11 years after independence. It has since gone back to the lender another 22 times.
For Alia Moubayed, a senior official at financial firm Jefferies and its chief economist for Pakistan, the country’s history with the IMF is “undoubtedly complicated and controversial”.
“Pakistan is at a critical point, facing extreme financial stress again,” she told Al Jazeera. “Governance failures in my view are at the core of Pakistan’s problems, and IMF programmes alone cannot fix them without a strong local ownership and commitment to long-standing structural reforms. The IMF is necessary, but not sufficient to address such problems.”
Amin, however, sees a silver lining in these troubling times for the country, and believes that if Pakistan wants to emerge from the crisis, it must own the reforms it desperately needs.
“We have run out of options,” he said. “Our global partners are also refusing to bail us out like they used to in [the] past and nudging us to seek recourse from [the] IMF. We should be thankful to them. If somebody gives us money, we will again ignore the commitments made to IMF. So this lack of help from our friends is the big help we needed.”
