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Deal-or-default; Is it endgame for Pakistan?

By Abdul Khaliq 

(3 February 23):

The IMF mission is currently in Pakistan on 10-day long visit to discuss the stalled ninth review of the country’s current funding programme. The loan talks revived after govt finally bows to IMF command. Pakistan secured a $6 billion IMF bailout in 2019, which was topped up with another $1 billion last year, but the lender of the last resort then stalled disbursements in November 2022 due to Pakistan’s slow progress on so-called economic reforms.

Amidst increasingly acute balance of payments crisis and desperation to secure external financing, with less than three weeks’ worth of import cover in its foreign exchange reserves, Pakistan is finally ready to swallow the bitter pill of the IMF’s “stringent” conditions to revive the loan programme. The analysts have termed the technical level talks the “toughest” ever as the Fund has refused to show any leniency in its conditions set for the revival of the loan facility.

At the onset of talks with IMF, the govt. has been forced to increase liguefied petroleum gas (LPG) price by 30% and a minimum of Rs6 per unit average increase in electricity rates. This was on top of an earlier hike in petroleum rates by up to 16% and the removal of an exchange rate cap that led to over 14% depreciation of Pak currency. As a result, the Pakistani rupee has lost almost 20% of its value against US $ within a week after the removal of price caps imposed by the government.

Pakistan’s economic situation has become so precaurious that even bilateral and multilateral development partners have refused to provide financial help. Friendly countries had been holding back their promised additional support; about $2bn from Saudi Arabia, $1bn from the UAE and about $2bn from China on top of recent rollovers, mainly because of an stalemate between the finance ministry and the IMF. Debt experts fear that the debt-trapped Pakistan is in real troble, facing the endgame; deal or default.

According to reports, the mission has asked Pakistan to implement fiscal measures to meet budgetary targets, introduce reforms in power and energy sectors, review subsidies to farming and export sectors and implement privatisation programme. With no other choice in hand, the govt is ready to withdraw energy subsidies to big export industries, besides cutting non-salary, non-essential civil and security costs as part of harsh reforms required to obtain the Fund`s consent for an economic bailout.

The shattered economy, fiscal situation, galloping inflation, depreciation of the Pak Rupee;  all point towards a government rapidly becoming dysfunctional, arrived at a point, where it no longer enjoys any functional depth with all options exhausted. Even if IMF program is restored, most economists believe, it would take years for the country’s devastated economy to stand up.

With Pakistan’s debt-to-GDP ratio in a danger zone of 70%, and between 40% to 50% of government revenues earmarked for interest payments this year, only default-stricken Sri Lanka, Ghana, and Nigeria are worse off. The choice, many analysts believe, is between the ‘tough conditions’ of the IMF or certain default; entailing inflation rate of 35% in fist case and more than 70% in case of default.

The negotiation with IMF are underway at a point when Pakistan’s total external debt and liabilities have reached $127 billion (41% of GDP), sovereign bonds have lost more than 60% of their value, exports declines to 7%, remittances drops to 11%, and foreign direct investment reduced to 59%. Amid this scenario, Pakistan’s external debt repayment obligations have reached to $73 billion in 3 years (FY23-25) as per the latest published IMF country report, compared to prevailing foreign exchange reserves of $4-5 billion.

Per Ministry of Finance Pakistan On average pays over $1 billion monthly as debt repayment and interest on its public debt. Parralel to this another major head has become large since 2017, that is, external debt rollovers. These numbers that have grown 9 times from $1.3 billion in 2015 to around $12 billion in 2022 (both public and private).

With the government’s total capitulation to the International Monetary Fund’s (IMF) demands for a successful review, the galloping inflation rate is expected to rise even further. Annual inflation, measured by the Consumer Price Index (CPI), has spiked to a decades-high level of 27.55% in January 2023, highest since May 1975. According to data released by the Pakistan Bureau of Statistics (PBS), inflation in urban and rural areas increased to 24.38% and 32.26% year-on-year, respectively. The inflationary trend was driven by a double-digit increase in almost all sub-indices, especially food and transport, prices of which have rapidly increased.

Pakistan’s textile industry, accounting for around 60% of its exports, has come on a verge of closure. With the state unable to fund imports, containers of essential food items, raw materials, and medical equipment are held up at the port. Banks have refused to issue new letters of credit for importers. With this there is severe shortage of wheat in the country. The price of wheat flour, a key staple in the diet of Pakistanis, has skyrocketed amid the ongoing crisis. Citizens can be seen standing in long lines in hopes of getting subsidized bags of flour that are in short supply. The world’s 8th biggest producer of wheat, Pakistan is now importing 75 lakh tonnes of it to plug the shortage.

Under the prevailing circumstances, as Inflation-battered populace turning towards free meal centres long queues outside welfare organisations’ centres providing free meals have already been getting longer for the past couple of months as people struggle to provide food for their families. Since the hike in fuel prices will not stop until the IMF is satisfied, with it will come a further increase in commodity and energy prices.

The irony of the fact is that Pakistan’s ruling elite still refuses to realise the gravity of the situation and is not ready sacrifice the privilges, it is enjoying since decades. Instead of cutting its own perks it is once againg bent upon shifting the burden of the IMF conditions on working classes. The delima is country is sinking but its debt-addict ruling elite thinks they will swim out of these troubled waters because the world can’t afford to see them sink. But the world, this time, doesn’t seem in a mood to bail out Pakistan until and unless its ruling elite is ready to help itself.

With last year’s devastating floods, the ailing economy, fresh wave of terrorism and on-going deep political instability, things in Pakistan are heading towards a flashpoint, which may unleash terrific economic, social and political turmoil in near future.

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