The IMF (International Monetary Fund) is a multilateral lender with a membership of over 195 countries, from advanced economies to the bottom of the economic ladder. It was created to assisting the member states who are struggling to deal with their balance of payment challenges and recommending changes for economic recovery and sustainable growth.
Since the IMF has more resources and tools, it does a very thorough analysis for the root causes of the economic malaise of every country.
Through its magnifying glasses, it sees through the economy, fiscal and monetary policies to reveal the underlying causes that are not noticed or overlooked by the others. The IMF is like the litmus test that is used by the global lenders for their decisions making for granting aids. The World Bank, the Paris Club, ADP, USAID, IADB, EBRD, etc., they all use IMF as the clearing house for deciding to lend their money to the countries.
Since IMF is a multilateral agency, it is funded by the contributions from its member countries and the country that donates the highest amount influences the most for the aid package.
The USA is the single largest contributor of the funds, thus has the most power in the IMF decision-making processes. According to the US Congressional report, last year, the IMF had $687 billion committed funds and out of it the USA had contributed $117 billion, making it the single largest contributor and thus the major voice in the decision-making processes.
If the IMF declines, it sends a red flag to other lenders that the country’s economy is severely mismanaged, and the leadership of the country is not willing to implement the recommended reforms to bring their house in order.
Also, if there is an impasse between the IMF and the member country, the IMF can decline to release even the promised/agreed tranche of the funds. If this happens, other bilateral and the multilateral donors, including the commercial banks, also decline to lend any money. The best example is of Argentina that after defaulting is having extraordinary tough times to get any financial aid from any source.
According to the Fitch rating/Reuters, besides Sri Lanka, there are three other nations that spend more money on servicing their debts and they all are from Africa, namely Ghana (53% on debt financing), Egypt (44%), and Zambia (41%), while Pakistan is spending about 40% of its revenues towards the interest payments. While the countries that Pakistan compares itself frequently are Bangladesh and India, both are using much less of their revenues in servicing their debt obligations.
Bangladesh is using just 21%, while India is using about 26% of its revenues for the debt payments. But as Pakistan continues to pile up more debt it will have no choice but to spend more revenues for servicing its ballooning debt.
According to some estimates, Pakistan will need about $10 billion loans for the remainder of its fiscal year to circumvent the imminent default. And this amount cannot be funded by any single source. Thus, Pakistan needs not only the IMF’s approved funds but its additional generosity, including assistance from its GCC neighbors, China, and other multi-donor agencies.
The current balance of payments has deteriorated further due mainly to an early January payments Pakistan made to Dubai-based banks. As of now, its foreign currency reserves have dropped to an alarming level of $4.5 billion, to last just for a couple of weeks of its imports. Past weekend, Pakistan also made $328 million payment to China against its new power plants loan.
According to a ministerial source, an additional $500 million payment is ready to be made within the next couple of days. In the 4th week of February, $300 million payment is coming due from the same commercial Chinese bank. Without any ‘booster shot’ from the IMF or from any other lender, Pakistan’s foreign reserves will further decline.
In reality, the IMF’s recommendations for Pakistan are to help it get out of the vicious cycle by going on a ‘crash diet’ before reaching to the point of no returns except to have ‘stroke’. The recommendations are in line with the saying ‘teach a hungry person how to fish and he will never starve’.
During the last meeting with the IMF in Geneva a few weeks ago, Pakistan did not reach an agreement for the 9th review programme for the release of the next tranche of $1.18 billion that has been in limbo since the Q4 of 2022. The IMF is demanding Pakistan comply with the additional conditions and reforms and to be completely transparent with the programme.
The IMF (a week ago, an IMF mission arrived in Pakistan for talks on the ninth review) has put four major demands that include no interference with the exchange rate, increase in electricity and gas rates by eliminating the subsidies and additional tax rate hike to generate substantial amount of the revenues to bring the fiscal deficit close to its original targets. It has also been pointed out that the impact of these economic reforms should mostly be on the affluent sector of society and general public should not be affected.
Another sticky point between Pakistan and the IMF is to have a roadmap to address floods devastations in the future, their aftermath recovery, and a blueprint for reducing their impacts on the economy. Also, to have a complete transparency about the funds that have been donated to Pakistan for the flood- related programmes.
From this backdrop, it is very clear that Pakistan really needs structural reforms to turn the tide away from its economic meltdown in order to have a robust economic recovery that can lead to sustainable growth. Otherwise, the 9th review will not be the last ‘booster shot’ but the needs for the ‘booster shots’ will be getting more frequently!
Thus, now the only way out, like many other countries have done successfully, is by eliminating corruption, improving its law & order, eradicating waste, increasing its revenues, reforming its education, modernizing its manufacturing, producing quality and value-added products, attracting FDI, moving away from its commodity products to value-added exports, and renegotiating its debts with the lenders. If this happens, Pakistan will be on the path of recovery, leading to sustainable growth and prosperity.
Copyright Business Recorder, 2023
The writer is Executive Director, Polykemya International
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