Tough road for Pakistan’s 13th IMF loan
islamabad — A regular client of the International Monetary Fund, investors are asking whether Pakistan’s 13th loan programme since the late-1980s will finally break a cycle of financial crashes and bailouts.
Pakistan’s history of taking the lender’s money while dragging its heels on economic reforms suggest otherwise. With Islamabad now formally requesting IMF aid — seeking to raise anywhere between $6 billion to more than $12 billion — it will also face more scrutiny over debt owed to China. US Secretary of State Mike Pompeo has said he will oppose any use of IMF funding to repay loans to Beijing.
“Their conditions will be tougher and we’ll have to pay the price,” said Nadeem Ul Haque, the exdeputy chairman of Pakistan’s Planning Commission and a former economist at the IMF. “We’ve kept postponing solutions and not taking bold steps — the cancer has been in the body since the 1960s.”
Pakistan has regularly failed to meet conditions attached to its previous IMF loans — for example trimming spending and privatising bloated state-owned corporations. The nation has only ever managed to successfully complete one IMF programme, meaning it received all the disbursements as planned, on a $6.6 billion three-year facility that ended in 2016. Even then, a number of requirements, were relaxed.
Economists have pointed to decades of inaction against widespread tax dodging across all levels of society handing the country one of the lowest tax-to-GDP ratios in Asia. In addition, the country has failed to revamp key export industries, such as textiles — which have lost out to regional neighbours like Bangladesh — or fix an energy system straining under more than one trillion rupees ($7.6 billion) of debt. “Pakistan needs to work on structural problems now so they can avoid another IMF programme,” said Kimihide Ando, the chief executive officer of Mitsubishi’s Pakistan unit. “It’s just sheer will. The solutions are known including industrialisation that has been declining in Pakistan.”
The current crisis has been exacerbated by China’s Belt and Road initiative. The projects have meant imports to South Asia’s second-largest economy have surged. In turn Pakistan’s current-account and budget gaps have swelled to more than 5 per cent of gross domestic product and foreign-currency reserves have plunged to the lowest in almost four years. In response authorities have devalued the rupee five times since December and hiked interest rates the most in Asia.
The US is also watching.
“Part of the reason that Pakistan found itself in this situation is Chinese debt,” State Department spokeswoman Heather Nauert told reporters in Washington on Thursday. “This is something that we’ve been tracking fairly closely.”
Elected in July, Prime Minister Imran Khan was reluctant to turn to the IMF. He criticised previous administrations for going to the lender and promised to break the “begging bowl” habit.
Muhammad Aurangzeb, the chief executive officer of Habib Bank, said the IMF aid will provide some “breathing space” but the tough part will be narrowing the twin deficits.
“We see all the signals coming from the new government, including the pronouncements that’s been made by the finance minister, that they are going to make some very, very tough political choices,” he said in an interview in Bali on the sidelines of the IMF-World Bank annual meetings. “And if that is done, then we do have a sustainable path to not get back into an IMF programme.”
There are signs Khan’s government will take a reform programme more seriously after making early concessions. Last week, monetary authorities devalued the rupee the most in two decades after long-standing IMF observations that the currency was overvalued. —