Will Pakistan’s financial woes come to an end with the SLA bail-out?

Bailout

“The recent staff-level agreement (SLA) came after an eight-month delay in releasing funds from a 2019, $6 billion loan. The United States supported Pakistan throughout the process but also insisted that they implemented the reforms they agreed with the IMF,” reported the Dawn on July 3.

Sources said that foreign minister Bilawal Bhutto-Zardari had at least two telephonic conversations with Secretary Antony Blinken over this issue. The matter was also discussed in face-to-face meetings between the two leaders.

Pakistan embassy in Washington maintained regular contact with officials at the US Treasury and State Department. At the Treasury, they worked with Deputy Under Secretary Brent Nieman, who oversees international financial matters. The embassy also sought the support of key US lawmakers, including Senator Li Graham who met a Pakistani team days before the deal.

Pakistan has been trying to persuade the IMF to release $1.1 billion from the $6.2 billion package that has been delayed since November over issues related to fiscal policy adjustments.

The Americans supported Pakistan’s case this time but insisted that Islamabad should faithfully fulfill the conditions imposed by the IMF. Pakistan has accepted all the conditions and the SLA happened. Media person, Yunis, raised a pertinent question in a press conference. He asked if Pakistan has accepted all the conditions stipulated by the IMF, why then did it not do that all these fourteen months of suspense?

While the country’s financial managers have been able to finalise a staff-level agreement (SLA) after Pakistan agreed to implement IMF-approved changes to the federal budget for FY 2024,  diplomatic sources in Washington said the funds would not be released until the IMF board’s approval, which can take anything from two weeks to two months.

Tryst with IMF

In the last 60 years, Pakistan has turned to IMF for loans no fewer than 22 times. It is perhaps a record transaction that IMF has made over time. Pakistan’s each encounter with the IMF has never been without complications.

Pakistan has been repeatedly approaching the IMF and other world financial organizations for loans. This reflects some deep-rooted malaise in the country’s handling of its economic affairs. One significant thing that has trickled down from the fourteen-month-long exhortation of the IMF for a loan is the non-compliance of Islamabad with the conditions IMF attached to the bailing out exercise. This has been the main cause for the IMF rejecting the application of Pakistan.

IMF’s code is to ensure that borrowing countries implement measures to address structural weaknesses, improve fiscal discipline and promote sustainable economic growth. It could not camouflage its scepticism about Pakistan’s intentions of adhering to the remedial measures it suggests to make it eligible for loans from the IMF.

It has to be noted that Pakistan has not been depending on the IMF for financial assistance. It has been tapping other sources also. In the first five months of the fiscal year 2022-23, Pakistan was able to secure financial support to the tune of US$ 4.172 billion from multilateral lenders such as the Asian Development Bank (ADB) and the Islamic Development Bank (IDB). This is other than the significant flood relief aid amounting to over USD$ 9 billion from various countries and organizations. Though the agencies that funded relief to the victims of massive floods have expressed their doubts and reservation about the proper distribution mechanism of the funds, nevertheless these borrowings or relief aid did provide a breathing time for Pakistan. The fundamental question is that these efforts cannot be considered a sustainable solution to the deep-rooted economic faults that have become almost endemic. 

Rising debts

The reason for Pakistan’s escalation of gross government debts has been its borrowing pattern.  Along with it, the reluctance of the state to reduce spending on subsidising electricity has strained the nation’s financial position. The debts have become a burden on the country’s economy.

Apart from known lending institutions or organizations, Pakistan has debt obligations extending to the private sector also. Its debts in the private sector have risen to nearly US$ 7.8 billion predominantly composed of private bonds in Eurobonds and global Sukuk bonds. China is Pakistan’s closes ally. Chinese financial institutions have provided a considerable portion of Pakistan’s foreign commercial loans. It is said that these commercial borrowings come with stringent conditions not made public. Together with that, these borrowings include a high rate of interest and short repayment periods. China Development Bank recently sanctioned $2.2 billion with a 1.5 percent point increase over the Shanghai Interbank Offered Rate (SHIBOR). 

Power Sector

The power sector is a victim of utter mismanagement, and, hence the biggest source of the country’s financial strain. According to figures available from Pakistani sources, the accumulation of public debt in this sector is because of subsidies and unpaid bills; the accumulation have reached an alarming $14.9 trillion by the end of 2022. Raising the electricity tariff became a stumbling block in long-stretched talks between the IMF and the government in Islamabad. The IMF took serious note of Pakistan’s reluctance to raise electricity tariffs within the recommended range of 11 – 12.50 rupees per unit. 

Conclusion

Apart from technical issues which are at the core of IMF’s loan sanctioning schemes for applicants in general but Pakistan in particular, the organization has also noted the pervasive issues of corruption, bribery, embezzlement, the lavish lifestyle of bureaucracy and military senior echelons and other illicit practices that have penetrated the public institutions of that country deeply. It has eroded the trust of the people in the government as these depravities are hindering effective governance. The negative impact of corruption distorts market mechanisms, perpetuates resource inequality and discourages entrepreneurial activity.  

Pakistan is likely to face the daunting prospect of another financial crisis. The country’s debt cycle is likely to persist even after the conclusion of the Extended Fund Facility (EEF). Tackling corruption, implementing sustainable fiscal measures, and fostering an environment conducive to economic growth are crucial steps for Pakistan’s long-term financial stability. The most urgent step that Pakistan needs to take is to dismantle its state-supported terrorist structure and stop exporting terror of ISI-brand to neighbouring countries. One can easily infer that in case this structure is not dismantled, it has the potential to become the Achilles heel for Pakistani hotheads.