Pakistan Gets Unexpected Economic Relief in a Time of Global Crisis Will Pakistan find some respite from the effects of COVID–19 outside its borders?

By Umair Jamal

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For months, Pakistan has struggled to find an opportunity that could ease the country’s balance of payments crisis. From imposing a stricter tax regime to scaling up its interest rates, the current government has done it all to increase its revenue. Despite all these efforts to uplift the economy, the indicators of Pakistan’s economic growth have remained dismal. 

However, that may not be the case anymore if Pakistan’s economic planners realizes the significance of the opportunity that is being offered to them by global financial markets and other prospects emerging from the COVID-19 crisis. 

The COVID-19 crisis has sent shockwaves when it comes to the pandemic’s economic impact globally. Countries across the world have been forced to recalibrate their financial targets for the coming years as the majority of growth indicators hew negative. 

Pakistan too has been on the same path with a difference that the country didn’t have much to offer to its populace simply due to the existing economic constraints. However, with the COVID-19 situation developing, this means that the loans that the country worked hard to earn from international donors to avoid bankruptcy couldn’t be paid back according to negotiations done during tough circumstances. 

The current government in Pakistan cannot forget the pressure that it had to face at the International Monetary Fund (IMF) a year ago when it asked for a $6 billion loan package. On the one hand, the IMF, armed with leverage against a weak economy, demanded major interventions in Pakistan’s financial decisions. On the other hand, Pakistan was forced to fall in line with Washington’s demands to cooperate in various sectors, particularly Afghanistan and revealing the terms of the financial transactions on the China Pakistan Economic Corridor (CPEC). 

Not more than two years ago, U.S. Secretary of State Mike Pompeo warned that any potential IMF bailout for “Pakistan’s new government should not provide funds to pay off Chinese lenders.” Last year, the IMF ensured that Pakistan shared details of the CPEC loans from China and pushed the country to reduce its reliance on Beijing. Arguably, Washington clearly saw an opportunity to not only force Pakistan’s hand, but also warned Islamabad of the costs of keeping a relationship with China. 

Amid these pressures came the Financial Action Task Force (FATF) situation: a threat that could mutilate the country’s financial policies. Before the breakout of the COVID-19 crisis, the FATF was on its way to conclude Pakistan’s case in mid-2020. 

The case’s result could have gone either way – more economic pain if the country got blacklisted or relief in the form of more time for Pakistan to further consolidate gains against extremist groups and their funding networks. However, amid the COVID-19 crisis, the FATF has extended Pakistan’s deadline for another three months and the next review is expected to take place in September 2020. This not only takes away some pressure from Pakistan’s economy, but it also gives the country more time to consolidate gains made against terror financing. 

To Pakistan’s advantage, all of the above-mentioned pressure points stand neutralized at least for the foreseeable future. With the world completely focused on containing the spread of COVID-19 and Islamabad successfully navigating its ties with states such as China and the United States, Pakistan may not be forced to confront the circumstances that existed in the pre-COVID-19 era. Arguably, the COVID-19 global crisis has placed Pakistan in a position which the country could not have imagined under normal circumstances given the financial and geopolitical vulnerabilities it faces in the region and beyond. 

On April 16, the IMF under its Rapid Financing Instrument (RFI) scheme approved a loan of $1.4 billion for Pakistan. Moreover, Pakistan is also expected to receive around $1.5 billion relief in the form of delay in repayment of loans to bilateral creditors. Pakistan’s currency continues to gain value against the dollar and the hot inflow of cash has also started to move back to the Pakistani market. Add to this situation the unprecedented drop in oil prices, which accounts for a quarter of Pakistan’s total imports. Consequently, Islamabad should be expected to strengthen its fiscal account position in the coming months and save considerable amounts in foreign exchange reserves. 

Additionally, the current circumstances offer an ideal opportunity for Pakistan to renegotiate the terms of the China-Pakistan Economic Corridor (CPEC). Already, Pakistan has requested that China ease payment obligations in major power projects that are part of the infrastructure project. It’s important to note that Pakistan and China have several bilateral loan agreements and the current crisis should make Islamabad’s negotiating leverage more effective when it comes to asking for a better deal that may not have been possible before. Additional support from China will further boost Pakistan’s economic recovery in the months to come. 

Pakistan’s policymakers need to ensure that the opportunity coming their way should not go to waste: the unexpected financial support that the country has received must go into supporting the local economy, job creation, uplifting small businesses, and other growth sectors. Islamabad should be on a war footing to utilize the timeline, circumstances and improved financial means at disposal to support domestic growth. If done successfully, Pakistan can enter the tough phase of paying back international loans with ease whenever it happens. AUTHORS