Delay In IMF Program Likely To Exacerbate Pakistan's Economic Woes

Delay In IMF Program Likely To Exacerbate Pakistan's Economic Woes
The current economic condition of Pakistan has become increasingly dire due to the ongoing political instability, necessitating prompt and decisive measures by policymakers. The economic downturn has negatively impacted various human development indicators, such as poverty, education, health, gender equality, and environmental sustainability.‎ This economic scenario is characterized by high inflation rates, a depreciating currency, and critically low levels of foreign exchange reserves. Additionally, the high cost of conducting business has further exacerbated the already bleak economic forecast. Moody's Investor Service has issued a cautionary report indicating the potential for a default, citing upcoming repayments totaling $7 billion.‎

The potential for a further deepening of the economic crisis exists in the event of a delay in the International Monetary Fund's (IMF) bailout, given the historical low of foreign exchange reserves. The current amount of foreign reserves is $9.82 billion, with the State Bank of Pakistan possessing $4.24 billion. This amount is sufficient to cover just three weeks' worth of imports.‎

The current account deficit is anticipated to increase significantly from its present value of $3.86 billion due to removing import limitations that have persisted for several months. The economic condition is further worsened by a significant increase in food and fuel prices, a weekly inflation outlook of 45.4%, and currency depreciation.‎

The economic challenges faced by Pakistan have engendered a contentious discourse regarding the underlying causes of the crisis and the potential for foreign allies to provide once more assistance in alleviating the nation's fiscal woes.‎

The disbursement of the IMF loan, which amounts to approximately $1.1 billion, is conditional upon the implementation of stringent reforms by the recipient country. These reforms include but are not limited to the augmentation of tax revenue, the curtailment of subsidies, the maintenance of a market-based exchange rate, the reinforcement of central bank autonomy, the revision of corporate tax policies, the amelioration of state-owned enterprise governance, and the enhancement of efficacy and regulation in the power sector, all of which are aimed at addressing a trust deficit.‎

These actions might reduce disposable income, reduce investment and consumption, and increase inflation. The IMF funding delay might also undermine investor confidence and dim the nation's growth prospects, exacerbating the economic predicament. Because of the economic crisis, people experiencing poverty may struggle to access basic essentials, including food, healthcare, education, and housing.‎

The IMF program's bailout tranche for 2023 may provide some relief. Still, it is essential to ensure that economic change costs are properly distributed and that social safety measures are strengthened to safeguard the most vulnerable.‎

Although Pakistan and the IMF have finished their technical negotiations, the staff-level agreement remains in limbo. The government's efforts to borrow directly from banks continue to worry the IMF since they have the potential to significantly increase the budget deficit in addition to starting another debt cycle. The IMF has also asked for information regarding fuel subsidies totaling $528.5 million, which the government just announced. According to reports, the original proposal was rejected, and now Saudi Arabia and the United Arab Emirates must provide $3 billion in financial guarantees before the agreement can be finalized.‎

The government works tirelessly to build up its political capital, but the time it takes costs them more. The IMF has additionally tied the staff-level agreement to promises of foreign aid from friendly nations. It also wants to ensure that the deficit in Pakistan's balance of payments for the fiscal year ending in June is adequately covered. The delay also makes it more difficult for Pakistan to access outside financing, which adds to the pressure.‎

Following the policy directives issued by the IMF, the State Bank of Pakistan augmented the interest rates to 21%. As the higher interest rate slows down economic activity, the measure is likely to result in significant financial hardships for millions of Pakistani citizens, who now face difficulties meeting their basic needs, particularly procuring three meals daily.‎

Unfortunately, these measures will probably have a severe effect on the socioeconomic situation in the nation, especially for the lower and middle classes. The government must ensure that the reforms are effective and equitable and do not worsen the plight of society's most marginalized groups. Through these initiatives, Pakistan can prosper economically and sustainably.‎

A change in the geopolitical landscape, a worldwide economic collapse, and political uncertainty all threaten Pakistan's stock market mood. The near-term economic outlook has significantly deteriorated due to fiscal adjustments and exchange rate depreciation, and inflation expectations have continued to rise.‎

Inherent structural problems in Pakistan are a significant barrier to sustainability. Due to a lack of domestic industry, import restrictions have also significantly negatively influenced the economy. A lack of raw materials and intermediate inputs puts large manufacturing facilities in danger of closing down.‎

The proposition of export-led growth is not a straightforward remedy, as it necessitates investment in research and development to achieve price and quality competitiveness. The nation's textile associations have attributed their economic challenges to the government while disregarding opportunities to enhance their inefficiencies without government protection.‎

According to the IMF agreement, Pakistan has agreed to implement taxes totaling $599 million to lower fiscal deficits and boost income. These actions are anticipated to boost revenue and lower budget deficits. However, these policies will likely worsen socioeconomic conditions because they will boost inflation, cut disposable income, and affect investment and consumption.‎

Even though the IMF program provides essential assistance, it will not be sufficient to guarantee long-term stability and inclusive growth without structural reforms like tax and social protection reforms. Investor confidence has been badly impacted, inflation has grown, and growth prospects have been hampered by delaying the IMF program. To obtain rescue funding and lessen the socioeconomic effects of the crisis, Pakistan must move promptly.‎

The economic predicament of Pakistan, characterized by elevated inflation rates, sluggish growth, and a reduction in foreign reserves, necessitates a ‘Comprehensive Reform Program’ that tackles immediate stabilization concerns and long-term structural challenges. The International Monetary Fund emphasizes the necessity of broadening social safety nets, enhancing the efficacy of state-owned enterprises, and improving governance.‎

The writer works as a Researcher with the Arms Control and Disarmament Center at the Institute of Strategic Studies Islamabad.