Pakistan’s $7 Billion IMF Deal: A Crucial Step Toward Economic Recovery – OpEd

The International Monetary Fund (IMF) has granted a $7 billion Extended Fund Facility (EFF) for Pakistan, a watershed moment in the country’s economic crisis.

Prime Minister Shehbaz Sharif praised the clearance as a significant boost to Pakistan’s economic prospects. The package is designed to help stabilise the economy, lower inflation, replenish foreign reserves and stimulate private sector development. However, although this bailout provides comfort, it also underscores deeper, structural economic difficulties that Pakistan must solve to avoid future IMF needs.

A Lifeline for Pakistan’s Ailing Economy

The acceptance of the IMF’s $7 billion plan could not have come at a more vital moment for Pakistan. Since 2022, the country has endured a succession of severe catastrophes, including the worldwide economic repercussions of the COVID-19 epidemic, inflation caused by the conflict in Ukraine, and enormous floods that inundated one-third of the country. These exacerbated Pakistan’s fundamental issues, such as widespread mismanagement, dwindling foreign reserves, and an unsustainable budget deficit.

The crisis reached a critical point earlier this year when the rupee saw a record depreciation and foreign reserves fell to just $3.7 billion. Fears of impending default were enormous. However, Pakistan was able to secure a nine-month, $3 billion IMF loan in June 2023, which provided some respite. The new $7 billion EFF extends that lifeline by providing a more comprehensive plan for economic stabilisation.

Prime Minister Shehbaz Sharif expressed his happiness with the approval, noting that the agreement represents the government’s commitment to economic reforms. “The implementation of economic reforms is proceeding rapidly,” Sharif said, adding that recent gains in investment and remittances from Pakistanis living abroad reflect increased trust in the government’s policies. He also praised the country’s diplomatic efforts with Saudi Arabia, China, and the UAE for getting financial pledges, emphasising that their contributions were critical to achieving IMF standards.

Key Objectives of the IMF Deal

The IMF’s $7 billion bailout intends to solve numerous important issues in Pakistan’s economy. The major aims are:

Stabilising state finances: The package aims to strengthen Pakistan’s fiscal condition, which has been teetering on the verge of collapse owing to rising debt payment expenses. Last year, debt payments took up 81% of tax income, leaving little room for development or social investment.

Rebuilding Foreign Reserves: After reserves fell to dangerously low levels early this year, replenishing them is critical to guaranteeing Pakistan’s financial stability and restoring investor confidence.

Reducing fiscal risks from state-owned firms: Pakistan’s massively indebted and inefficient state-owned enterprises continue to deplete public funds. The IMF plan emphasises the importance of reforms that can restructure or privatise these firms to lower the state’s burden.

Creating a suitable environment for private-sector-led growth: The program prioritises structural changes that improve the business climate, encourage private investment, and promote long-term economic growth. To achieve these goals, Pakistan’s government has decided to pursue severe economic policies, such as raising taxes and reducing subsidies. The next fiscal year’s budget plan calls for a 48% increase in direct taxes, a 35% increase in indirect taxes, and a whopping 64% increase in non-tax income like petroleum levies.

Securing the $7 billion deal depended not only on Pakistan’s compliance with IMF terms, but also on obtaining $12 billion in external financial pledges from major allies such as Saudi Arabia, China, and the UAE. These countries have long helped Pakistan satisfy IMF criteria by providing loans and financial guarantees. For example, Pakistan received $5 billion from Saudi Arabia, $4 billion from China, and $3 billion from the UAE. In addition, the International Islamic Trade Finance Corporation provided a $400 million loan, while Middle Eastern commercial institutions such as Standard Chartered made contributions.

A Critical Moment: The Path Forward

While the IMF programme provides some promise, the path to long-term prosperity and financial independence will be difficult. Pakistan’s fundamental flaws, ranging from a small tax base to inefficient public institutions, need deeper, longer-term changes than a single IMF loan can supply.

Currently, just 5.2 million Pakistanis submit income tax returns in a country of over 240 million people, highlighting the government’s inadequate ability to raise domestic revenue. In response, the Federal Board of Revenue (FBR) has made dramatic efforts to broaden the tax base, threatening to cut off non-filers access to vital necessities like power and mobile phone service. These steps, while required to fulfil IMF standards, may deepen public displeasure, particularly among the middle and lower-income classes, which are already battling with inflation.

Furthermore, the influence of climate change remains a major unknown. The terrible floods of 2022, which impacted one-third of the country, serve as a sobering reminder of Pakistan’s susceptibility to environmental calamities. As global food and energy costs increase, worsened by geopolitical tensions such as the Ukraine war, Pakistan’s fragile recovery is vulnerable to another external blow.

Conclusion

Prime Minister Shehbaz Sharif expects that this is Pakistan’s final IMF plan. The $7 billion package’s acceptance is a significant step towards stabilising the country’s economy, but it does not solve Pakistan’s long-standing structural issues. The government’s commitment to change is encouraging, but without broader political and cultural support, the risk of slipping back into a debt cycle remains significant.

Finally, the actual test of the IMF programme will be its execution, rather than its acceptance. If Pakistan can maintain the political stability, economic discipline, and public support required to implement these changes, this might be the final IMF bailout. If not, Pakistan may find itself back at the Fund’s door soon.