Can Pakistan Escape the IMF's Debt Trap?

 

Pakistan's Economic Woes: A Crisis in the Making

Pakistan’s worsening economic situation is marred by critical factors including high inflation, depleting foreign exchange reserves and weakening currency. The economic crisis has adversely affected its human development indicators, thus ringing alarm bells for policymakers. Likewise, these indicators have completely shattered the confidence and trust of local and foreign investors who are no longer willing to put their stakes at risk in such a precarious time.

IMF Bailout and Its Stringent Conditions

The economic crisis can further deteriorate if the International Monetary Fund (IMF) bailout is not granted until a staff-level agreement is reached. The IMF continues to leverage its upper hand by imposing many harsh and strong conditions to successfully secure a bailout. In addition. It has also sought a guarantee from friendly countries as the final agreement is subject to financial assurances of $3 billion from Saudi Arabia and the UAE. Total liquid foreign reserves stand currently at $9.82 billion with the State Bank of Pakistan holding only $4.24 billion, which is enough to pay for just three weeks of imports.

Fuel Subsidies: IMF's Concerns

Moreover, IMF has raised its concerns over the planned scheme of government to provide fuel to specific consumers at subsidized rates, hence it has asked for a detailed report on fuel subsidies worth $528.5 million. In addition, The State Bank of Pakistan has hiked interest rates to 20 per cent as a prior action demanded by IMF, due to which low and low-middle-income families are facing hurdles to make ends meet.

Import Restrictions and Reduction in Current Account Deficit

Last year, Pakistan moved to restrict imports as the country’s foreign exchange reserves depleted to critical levels. The banks were instructed not to open letters of credit (LCs) due to which imports took a hit and resulted in a lower deficit. As a result, Pakistan’s current account deficit (CAD) reduced massively to $74 million in February 2023 against $230 million in January owing to import restrictions and a nominal rise in remittances. If we talk about a year-on-year basis, the primary reason behind the decline in deficit during the first eight months of the fiscal year 2022-23 was a 24% decline in total imports. However, total exports and remittances also decreased by 19% and 9%, respectively.

The Way Forward

In conclusion, Pakistan cannot progress towards a path of sustainable growth until and unless some drastic reforms are introduced and aggressive measures are adopted by policymakers to curtail imports and boost the volume of exports. Otherwise, Pakistan will remain trapped in this vicious circle of debt servicing and financing by continuously depending on international moneylenders and friendly countries. Let’s all join hands together to drive Pakistan out of this misery forever as it is well said that:

 “Hard times create strong men, strong men create good times, good times create weak men, and weak men create hard times.”