Pakistan’s economy and IMF’s help

Headline : Either way, the news is bad Editorial 20th Apr’19 TheHindu

Pakistan’s economy in free-fall:

Pakistan’s economy is in ruins, with almost every indicator deteriorating substantially.

  • Inflation: Inflation, at 9.4%, is at its highest level in five-and-a-half years and is likely to rise to double digits for the months ahead.
  • Currency depreciation: The Pakistani rupee continues to lose value regularly, which adds to further inflation especially with the oil price on the way up.
  • Fiscal Deficit: The fiscal deficit is about to hit more than 6% of GDP, and even a cut in development expenditure will not stop this, as defence spending and interest payments continue to rise.
  • Exports: Pakistan’s exports have been stuck at around $26 bn for years, despite the 35% devaluation of the rupee over one year.
  • Debt: The government owes power producing companies huge amounts of money, and interest rates are also going up making the cost of business even more uncompetitive.
  • Falling GDP growth: The State Bank of Pakistan recently lowered the expectations of the GDP growth for the current fiscal year to an eight-year low, to around 3.5%, an estimate. The expected growth as per the IMF and the World Bank is a dismal 2.9% for the current fiscal year, and expected to fall further over the next three years.

Economic Mismanagement:

  • A major reason why the economy has taken such a sharp plunge, is the economic mismanagement by the government.
  • On top of that, political leaders have been high on rhetoric and display of pride rather than reaching out to IMF for a major structural adjustment loan.

 

Reaching out to the IMF now:

  • While Pakistan managed to secure some loans from friendly countries to avoid IMF (and thereby also avoid structural reforms to the economic management), it is not sustainable.
  • It is increasingly apparent that Pakistan now has to reach out to IMF.
  • Any IMF help will come with implementation of strict conditionalities and adjustment programme.

Earlier help came easy due to US backing:

  • This will be the 13th IMF rescue package for Pakistan’s governments and its elites in less than four decades.
  • Each time there is an economic crisis in Pakistan created due to mismanagement, the IMF and World Bank saved them, as U.S. supported it due to its geostrategic position and importance to them (especially vis-a-vis Afghanistan).

Now Pakistan isolated:

  • As global power shifts and the region changes, Pakistan’s position and importance in it have also fallen. The US has refused to support Pakistan’s economy especially in light of its support to terrorist groups operating from its soil.

 

IMF help will come with strict oversight on economic management:

  • Under the new IMF programme, Pakistan is expecting to receive between $6-$10 bn.
  • However, the IMF will also ensure austerity, stabilisation and will cut the growth rate further.
  • It will insist on further devaluation of the rupee, causing greater inflation, and will insist on raising utility prices.
  • Thus, things will get worse for Pakistanis (in the short term), including further economic slowdown, fewer jobs and high and rising inflation.

IMF will also force Pakistan to open up on its debt-heavy deals with China:

  • Another major problem in making a deal this time has been the IMF’s insistence that Pakistan reveal the financial deals made with China, including financial loans, as well as the $60 billion China-Pakistan Economic Corridor (CPEC).

 

Conclusion:

  • If Pakistan doesn’t take the IMF loan, it is in a mess as its economy is in deep trouble.
  • If it takes the loan from IMF, it will again be in a mess due to strict conditionalities imposed by the IMF.

 

Importance:

GS Paper II: International Relations

 

Section : Editorial Analysis

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