Besides political instability, multiple shocks like climate change, Covid-19 pandemic, ongoing conflict in Ukraine and global economic slowdown have brought Pakistan’s economy to its knees. The country confronts a severe balance of payments crisis with reduced foreign exchange buffers—with less than three weeks of import cover—to purchase essential imports like food, fuel and other items. Dealing with the worst floods in recent memory—which have affected over 9.4 million acres of crops and 33 million of its people—Pakistan’s economy is likely to register growth of only 2% in 2022-23 (July to June) from 6% in the previous fiscal. To cope with the mounting economic pressures, Pakistan secured an IMF package of $6.5 billion, but disbursements were suspended last November due to limited progress on loan conditionalities like fiscal consolidation. Although the Fund has changed its earlier stance of prescribing one-size-fits-all conditions, it remains a bank at the end of the day that wants its loans serviced. Naturally, it advocates balancing the budget through swingeing cuts in expenditures, higher taxes and raising subsidies on energy prices and a market-based exchange rate (there has already been a massive devaluation of the Pakistani rupee) when the need is to spend more to support growth. Despite the difficulty in implementing such conditions, the Shehbaz Sharif-led government has signaled its willingness to resume negotiations. All eyes will therefore be on the outcome of the Fund mission that will visit Islamabad from January 31 to February 9.
Prima facie, Pakistan’s challenges in implementing the Fund package post Covid and the flooding disaster have been daunting. Public finances are stressed as tax revenues have plunged while expenditures are much higher to support health programmes and social safety nets for the poor. Higher borrowings are imperative for financing these burgeoning expenses domestically and from abroad. The upshot is a massive and growing burden of public debt amounting to 78.9% of GDP in 2021-22. In 2022-23, Pakistan hopes to reduce this burden through fiscal consolidation, but the mounting burden of debt servicing leaves less for other developmental priorities to bolster faltering economic growth. Debt servicing will alone preempt a massive 80% of net federal tax collections in 2022-23, according to Sushant Sareen’s insightful analysis of Pakistan’s budget for the Observer Research Foundation. In this milieu, how can the country implement IMF conditionalities? Budget 2022-23 hoped to achieve a small primary surplus as a share of GDP, which excludes interest payments, as a necessary condition to reduce the share of public debt. But this is a tall order as a primary deficit of 2.8-3.6% of GDP is in prospect. Ahead of the meeting, IMF has requested more information regarding the Budget.
Despite the difficulties in meeting conditionalities, the Sharif-led regime has no choice as it needs the imprimatur of the Fund to access international loans to meet its external financing requirements of $31 billion to meet its current account deficit and debt service to avert default in 2022-23. S&P Global Ratings has downgraded Pakistan’s credit score several notches below junk grade in December. Double-digit food inflation is raging which is impacting living standards of the population. Unemployment among the youth is rising. There are rolling power blackouts. Shipping containers are piling up in ports with buyers unable to secure dollars, all of which exemplify the deepening economic crisis.