Home Latest News IMF Reaches Pakistan as its Economy Nears Default

IMF Reaches Pakistan as its Economy Nears Default

Authorities hope revival of stalled bailout will help address economic crisis, as citizens struggle under rampant inflation, energy shortages

by AFP

Saul Loeb—AFP

A delegation of the International Monetary Fund (IMF) reached Pakistan on Monday to commence discussions for the revival of a stalled bailout program that Islamabad hopes will help it address a major economic crisis that has seen the rupee plummet, inflation soar and energy in short supply.

Prime Minister Shehbaz Sharif dithered on imposing taxes and slashing subsidies—as demanded by the IMF—fearing backlash ahead of elections due in October. However, he appears to have changed course in recent days, as Islamabad is left with little choice but to bow to pressure to avoid bankruptcy because “friendly” nations have expressed unwillingness to offer less painful bailouts.

Last week, the government loosened controls on the rupee to rein in a rampant black market in U.S. dollars, a step that caused the currency to plunge to a record low. Artificially cheap petrol prices have also been hiked. “We’re at the end of the road. The government has to make the political case to the public for meeting these [IMF] demands,” former World Bank economist Abid Hasan told AFP. “If they don’t, the country will certainly default and we’ll end up like Sri Lanka, which will be even worse.”

Sri Lanka defaulted on its debt last year and endured months of food and fuel shortages that sparked protests, ultimately forcing the country’s leader to flee overseas and resign. In Pakistan, time is of the essence, with Nasir Iqbal from the Pakistan Institute of Development Economics warning the economy had already “virtually collapsed” due to mismanagement and political turmoil.

The IMF delegation commenced its discussions with a meeting between Finance Minister Ishaq Dar and mission chief Nathan Porter on Tuesday morning, as the nation panics over mounting inflation and financial concerns arising from last year’s unprecedented floods, which submerged a third of the country. Currently, the world’s fifth-biggest population has less than $3.7 billion in foreign exchange reserves—barely enough to cover three weeks of imports.

The central bank has stopped issuing letters of credit, except for essential food and medicines, causing a backlog of thousands of shipping containers at Karachi port stuffed with stock the country can no longer afford. Industry has been hammered by the imports block and massive rupee devaluation. Public construction projects have halted, textiles factories have partially shut down and domestic investment has slowed.

In downtown Karachi, dozens of day laborers, including carpenters and painters, wait with their tools on display for work that never comes. “The number of beggars has increased and the number of laborers has decreased,” said 55-year-old mason Zafar Iqbal. “Inflation is so high that one cannot earn enough.”

At a petrol pump, a widow with her son said every few hundred rupees of fuel for their motorcycle was precious, with the pair only eating two meals a day. “The cost is so high that we eat our breakfast late and the second meal at around seven, with nothing in between,” said Ulfat.

Pakistan is locked in an endless cycle of servicing external debt. State Bank Governor Jamil Ahmed last month said the country owed $33 billion in loans and other foreign payments before the end of the fiscal year in June. A diplomatic offensive has seen $4 billion rolled over by lending nations, with $8.3 billion still on the negotiating table.

Meanwhile, Pakistan is battling severe energy shortages—with capacity drained by poor infrastructure and mismanagement—compounding the misery of businesses and citizens. Last week the whole country was plunged into a day-long blackout because of a fault in the national grid that followed a cost-cutting measure.

State petroleum minister Musadik Malik told reporters in Islamabad that imports of Russian oil would start in April, paid for in currencies of “friendly countries” in a mutually beneficial deal.

The tumbling economy mirrors the country’s political chaos, with ousted prime minister Imran Khan heaping pressure on the ruling coalition in his bid for early elections while his popularity remains high. Khan, who was ousted last year in a no-confidence motion, negotiated a multi-billion-dollar loan package from the IMF in 2019. But he reneged on promises to cut subsidies and market interventions that had cushioned the cost-of-living crisis, causing the program to stall.

It is a common pattern in Pakistan, where most people live in rural poverty, with more than two dozen IMF deals brokered and then broken over the decades. “Even if Pakistan avoids default, the underlying structural factors that triggered the current crisis—one exacerbated by poor leadership and external global shocks—will still be in place,” tweeted political analyst Michael Kugelman, the director of the South Asia Institute at the Wilson Center in Washington. “Barring difficult, large-scale reforms, the next crisis could be just around the corner.”

Related Articles

Leave a Comment