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Pakistan Readies to Commit to Tough IMF Conditions

Prime Minister Shehbaz Sharif says country has no other choice, as foreign exchange reserves drop to just $3.1 billion

by AFP

Saul Loeb—AFP

Prime Minister Shehbaz Sharif on Friday said the government will have to agree to bailout conditions from the International Monetary Fund (IMF) that are “beyond imagination,” as Pakistan battles a spiraling economic crisis.

An IMF delegation landed in Pakistan on Tuesday for last-ditch talks to revive vital financial aid that has been stalled for months. The government has, thus far, held out against tax rises and subsidy slashing demanded by the IMF, fearful of backlash ahead of elections due in October. “I will not go into the details but will only say that our economic challenge is unimaginable. The conditions we will have to agree to with the IMF are beyond imagination. But we will have to agree with the conditions,” Sharif said during a meeting of the Apex Committee in Peshawar.

The national economy is in dire straits, stricken by a balance of payments crisis as it attempts to service high levels of external debt, amid political chaos and deteriorating security. Foreign exchange reserves dropped again this week to $3.1 billion, which analysts said would be enough to cover less than three weeks of imports, while the rupee is at a record low against the U.S. dollar.

The world’s fifth-biggest population is no longer 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. Data on Wednesday showed year-on-year inflation had risen to a 48-year high, leaving Pakistanis struggling to afford basic food items.

“Poor people will not be able to survive,” warned citizen Samina Bhatti, as she shopped at a market in Islamabad. “Petrol is so expensive, what will they do, will they start traveling on foot? A daily wage earner can’t afford the rent on his home,” she added.

Years of financial mismanagement and political instability have damaged Pakistan’s economy, worsened by a global energy crisis and devastating floods that submerged a third of the country. With the prospect of national bankruptcy looming, Islamabad in recent weeks began to bow to pressure prompting the IMF’s last-minute visit.

The government has 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, and hiked petrol prices by 16 percent. But the IMF wants further hikes to artificially cheap petrol, electricity and gas prices, designed to help low-income families, and the withdrawal of tax exemptions for the export sector and a boost to the pitifully low tax base.

“Accepting IMF conditions will definitely increase prices, but Pakistan has no other choice,” analyst Abid Hasan told AFP. “Otherwise, there is a fear of a situation like Sri Lanka and Lebanon,” he warned. Rejecting conditions and pushing Pakistan to the brink would have “political consequences” for the ruling parties, but so will agreeing to IMF measures raising the cost of living, he said.

Pakistan had sketched out a $6.5 billion dollar loan package with the global lender, which has so far paid out roughly $4 billion. The next instalment on the negotiating table is unlikely to induce an economic turnaround on its own. However, friendly nations Islamabad usually approaches for help have indicated they may open their books once the IMF is on board.

The tumbling economy mirrors Pakistan’s political chaos, with former prime minister Imran Khan heaping pressure on the ruling coalition in a 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.

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