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Pakistan seeks long-term IMF bailout to fix broken economy

Haroon Janjua in Islamabad
March 25, 2024

Prime Minister Shehbaz Sharif's coalition government has its work cut out as economic turmoil forces it to tackle deep-rooted structural problems.

Shopkeepers fixing price tags at a market in Karachi
Amid soaring inflation, many Pakistanis have seen surging costs of essential items and a sharp decline in real wagesImage: Rizwan Tabassum/AFP

Pakistan has long been in a state of grave economic turmoil.

Political instability, corruption, mismanagement, the COVID-19 pandemic, a global energy crisis and climate change-induced natural disasters have all taken a heavy toll on the economy.

Prime Minister Shehbaz Sharif's newly-formed government is currently seeking another bailout from the International Monetary Fund (IMF) to tackle the country's acute balance-of-payments crisis.

"We couldn't survive without yet another IMF program," Sharif told a meeting in the Pakistani capital, Islamabad, last week that was broadcast live.

His comments came a day after the IMF agreed a provisional, or staff-level agreement, with Pakistan, which, if approved by its board, would disburse the last tranche of $1.1 billion (€1.02 billion) under an existing $3 billion standby arrangement that expires on April 11.

The US-based lender has already said it will formulate a medium-term program if Islamabad applies for it.

The Pakistan government has not officially stated the size of the additional funding it is seeking under the long-term bailout.

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What's needed to revive the economy?

Many of Pakistan's over 240 million people are struggling to make ends meet, with the nation's poor particularly badly hit.

Amid soaring inflation, hovering at around 30%, many Pakistanis have seen surging costs of essential items and a sharp decline in real wages.

Foreign exchange reserves are also running low, at just $8 billion, roughly enough for eight weeks of imports.

The February general election produced a shaky coalition government, which now has the challenging task of tackling deep-rooted structural problems to pull the $350-billion economy out of its misery.

"If the government gets a long term IMF loan and comply with the terms of the deal, then the economy can revive," Mohammed Sohail, CEO of Topline Securities, a Karachi-based brokerage firm, told DW. 

The IMF's programs, however, usually require a raft of unpopular belt-tightening measures and structural reforms.

In Pakistan's case, these could include scrapping popular subsidies on gas and electricity and broadening the tax base, as well as selling loss-making state-owned enterprises.

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The government has already put up for sale Pakistan International Airline, the national flag carrier, which has long been accused of being bloated and poorly run.

"Privatization is definitely needed and long overdue in my opinion," Safiya Aftab, an economist and policy analyst, told DW. "What is often missed in rhetoric on privatization and job losses, etc. is that we all, including the poor, pay for state-owned enterprises that are doing nothing and running at a loss.

"We pay because the government covers their losses through budget allocations and by incurring debt," she added.

"Privatization of the airline and other loss-making firms will work in favor of Pakistan as it will reduce government losses," agreed Sohail. "We saw a similar situation with banks in the late 1990s and after privatization banks started giving back to the government."

On track toward a military oligopoly?

But there's also been criticism of how authorities are pursuing the privatization drive.

"While the IMF's demand for privatization makes sense, what is happening in Pakistan may not be what the global financial institution is asking for," said Osama Malik, a legal expert, referring to the setting up last year of a body called the Special Investment Facilitation Council, which the government said would make investment faster and easier.

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Malik alleged that the council was under the de facto control of the military, pointing to the inclusion of Pakistan's army chief in the body.

"We have recently seen prime leisure and tourism facilities owned by the federal government handed over to a newly incorporated company owned by the military. This kind of 'privatization' may create a military oligopoly in a country where the armed forces already have a huge stake in various corporate enterprises," he said.

Economic recovery expected to be slow

Painful reform measures could cause more distress for people in the short term, economists have warned.

"Restrictions on imports have an impact on manufacturing, in particular, while cuts in the public sector development programs mean that there is less activity in the domestic economy," said economist Aftab.

She predicted that economic recovery would be slow and it would take a few years for growth to return. "The IMF program will not bring significant progress in the short run. But it will bring down the current account and fiscal deficits, which should help stabilize inflation," she said. 

"The IMF program is not really about boosting growth, it's about achieving stabilization."

Edited by: Srinivas Mazumdaru

Haroon Janjua
Haroon Janjua Journalist based in Islamabad, focusing on Pakistani politics and societyJanjuaHaroon