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Why IMF loan can't save Pakistan in the long run

Pakistan expects dollar inflow by Feb but most of it will go towards debt repayment

Pakistan Food shortage is acute in Pakistan which is facing dwindling forex reserves | Reuters

As it teeters on the edge of economic collapse and loan default, Pakistan is desperately at the mercy of the International Monetary Fund (IMF). Just days after Islamabad succumbed to IMF demands, which will, in all probability, backfire on the Shahbaz Sharif-led government politically, talks resumed between Pakistan and IMF officials on Tuesday.

The aim is to complete the ninth review under the $7 billion Extended Fund Facility. But, the Pakistan delegation led by Finance Minister Ishaq Dar does realise this isn't a cakewalk as he has, for long, sought some leniency from the IMF on tax rises and subsidy slashing, which the agency mandates for the revival of the loan facility.

All attempts to coax the IMF, including requesting the US to use its diplomatic influence to convince the IMF, have ended in vain. No friendly country has offered less painful bailouts too. This left Islamabad with no option but to heed its demand.

"We're at the end of the road. The government has to make the political case to the public for meeting these (IMF) demands," former World Bank economist Abid Hasan told AFP. "If they don't, the country will certainly default and we'll end up like Sri Lanka, which will be even worse."

The IMF is currently asking Pakistani authorities to take additional taxation measures worth ₹600 billion through a mini-budget.

What's left

As per reports, the foreign exchange reserves of the State Bank of Pakistan (SBP) are currently hovering around $3.678 billion, and this just covers three weeks of imports.

But, now that the government removed the cap on the official exchange rate, the Pakistan Rupee (PKR) has plunged to 262.6 to a dollar, an unprecedented 13.7 per cent rupee depreciation. The current situation of the rise in dollar value will also likely ease the pressure on forex reserves.

But, this has come as a huge blow to Pakistan, a wave of price hikes and inflation has struck already-ailing Pakistan. Fuel prices shot to an unprecedented level and inflation is high.

The IMF tranche

While the ruling elite in Pakistan views the IMF loan as a saviour, financial analysts predict doom in the economy if the reforms proposed by the agency are accepted. "The choice, many of them say, is between the ‘tough conditions’ of the IMF or certain default; an inflation rate of 35pc rather than 70pc," read an opinion piece that appeared in the Karachi-based Dawn.

With the government bowing to IMF demands, the shares have picked up in Pakistan. The government too expects dollar inflow from February, not only from the IMF but from Saudi Arabia, UAE and China. It also expects the post-flood relief packages pledged by other countries.

That said, these funds will go towards external debt payments which amount to $8bn, due by June.

"The current loan package is set to end on June 30, and if there’s no new snag, we will get up to $3 billion in funding from the lender. This may take care of our immediate balance-of-payments needs but will not be sufficient to cope with a similar payments crisis the next fiscal year and beyond. It is, therefore, advisable that the government seek to increase the size of IMF funding and the programme, and extend its duration," according to an editorial in Dawn.

Meanwhile, the IMF has approved loans of $4.7 billion to Bangladesh for disbursal starting immediately. This makes the country the first to secure such funds ahead of Pakistan and Sri Lanka. 

Currently, Bangladesh is witnessing a sharp widening of its current account deficit, depreciation of its currency and a decline in its foreign exchange reserves. The country will receive $3.3 billion under the IMF's extended credit facility and related arrangements, with an immediate disbursement of about $476 million.

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