ADNAN AAMIR
Pakistan has made a formal request to the International Monetary Fund for a new loan package in the range of $6 billion to $8 billion under the Extended Fund Facility (EFF). The South Asian country has also asked the IMF to dispatch a review mission in May to finalize details of the new deal.
Last week, Pakistan's delegation, led by Finance Minister Muhammad Aurangzeb, attended the annual spring meetings of the IMF in Washington. The country is still waiting for the release of the final tranche of a $1.1 billion loan from the fund under the Stand-by Agreement (SBA), which was concluded this month. Now Pakistan needs another program to remain afloat for the next three years.
A political outsider, Aurangzeb was inducted into the government to secure a deal with the IMF. However, the fund is proving a tough negotiator.
In the World Economic Outlook Report 2024, the IMF named Pakistan as one of six countries facing serious conflicts this year, saying these conflicts would take a toll on their economic output. The troubled countries included Iraq, Somalia and Sudan.
Although the State Bank of Pakistan held foreign exchange reserves of $8 billion, or about a month and a half of import cover, as of as of April 12, experts stress that it is in dire need of an IMF deal.
"Pakistan badly needs an EFF because it needs to pay $75 billion in the next three years," said Abdul Rehman, a capital markets and energy expert based in Lahore. "An IMF deal is tantamount to giving a clean bill of health to Pakistan's economy, which can [then] borrow more loans from bilateral, multilateral and other commercial creditors," Rehman added. "If Pakistan could not get the deal, then the country will default and the economy can shrink by 10% in size, triggering massive unemployment and inflation."
"IMF's approval stamp will help [Pakistan] roll over its debt and make timely payments," Yousuf M. Farooq, director of research at Chase Securities, a brokerage in Karachi, told Nikkei Asia.
One immediate impact of a deal with IMF may be the devaluation of the Pakistani rupee, as the fund requires that a borrower's currency value not be controlled artificially. Massive devaluations are often a condition of IMF programs globally, and they have previously accompanied some of its loans to Pakistan.
Experts say, however, that a massive fall in the rupee is not expected. "Major adjustments like devaluation were already done for the [IMF deal] in 2023," Farooq said.
Moreover, Pakistan has to pass a budget for the next fiscal year before June 30. The government will face a huge challenge in formulating a budget if an IMF deal does not go through before then.
However, Yousuf Nazar, a London-based economist formerly with Citigroup, believes a deal before June 30 is unlikely. He said that the IMF may want Pakistan to take specific actions to reduce the budget deficit before it approves the next loan.
"In a best-case scenario, Pakistan might get a staff-level agreement before the budget, but the loan tranche will be released after the fund's board approval after the budget," Rehman, the capital markets expert, said.
While the Pakistani delegation was lobbying for a larger program, IMF officials said at a media briefing last week that the fund is focused on economic reforms in Pakistan, not on a larger deal.
Experts believe Pakistan will be able to secure a deal from the IMF, but that alone will not be enough to meet Pakistan's annual financing needs of roughly $25 billion. "Even if the [loan amount] is enhanced to $8 billion, net inflows [after repayment of outstanding IMF loans] could be only a few billion. Pakistan has no option but to put its house in order," Nazar, the economist, told Nikkei.
Chase Securities' Farooq believes Pakistan needs to bring untaxed sectors within the tax net, deregulate and move toward a free market, get rid of government-owned entities and fix the power sector to move forward. "Being under the IMF umbrella would help the country [to make these reforms]," he added.
Rehman agrees, saying, "Pakistan should not think of the requirements by IMF as a compulsion, but [as] an opportunity to reform the economy."
While the government negotiates with the IMF and implements the needed reforms, people will continue to suffer, experts say. "Pakistan's problems are far from over, and it may take years for Pakistan to resume [economic] growth," Nazar said.
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